[Senate Hearing 108-861]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-861

 
               NATIONAL FLOOD INSURANCE REPETITIVE LOSSES

=======================================================================

                                HEARING

                               before the

                    SUBCOMMITTEE ON ECONOMIC POLICY

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                                   ON

         CERTAIN MEASURES TO ADDRESS REPETITIVE LOSS PROPERTIES

                               __________

                             MARCH 25, 2004

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


   Available at: http: //www.access.gpo.gov /senate /senate05sh.html


                                 ______

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire        THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina       DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island      JON S. CORZINE, New Jersey

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

              Mark A. Calabria, Senior Professional Staff

               Jennifer Fogel-Bublick, Democratic Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                 ______

                    Subcommittee on Economic Policy

                    JIM BUNNING, Kentucky, Chairman

              CHARLES E. SCHUMER, New York, Ranking Member

ELIZABETH DOLE, North Carolina       ZELL MILLER, Georgia
RICHARD C. SHELBY, Alabama

                    Steven Patterson, Staff Director

          Carmencita Whonder, Democratic Legislative Assistant

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        THURSDAY, MARCH 25, 2004

                                                                   Page

Opening statement of Senator Bunning.............................     1

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................     2
        Senator statement........................................    34
    Senator Hagel................................................     3
    Senator Dole.................................................     4
    Senator Corzine..............................................    34

                               WITNESSES

Barbara A. Mikulski, A U.S. Senator from the State of Maryland...     6
    Prepared statement...........................................    35
Doug Bereuter, A U.S. Representative in Congress from the State 
  of
  Nebraska.......................................................     9
    Prepared statement...........................................    54
Earl Blumenauer, A U.S. Representative in Congress from the State 
  of
  Oregon.........................................................    12
    Prepared statement...........................................    59
Anthony S. Lowe, Administrator, Federal Insurance and Director, 
  Mitigation Division, Federal Emergency Management Agency, U.S. 
  Department of Homeland Security................................    14
    Prepared statement...........................................    60
William O. Jenkins, Jr., Director, Homeland Security and Justice 
  Issues, U.S. General Accounting Office.........................    16
Chad Berginnis, Chair, Association of State Floodplain Managers, 
  Inc............................................................    26
    Prepared statement...........................................    64
William Stiglitz, III, Independent Insurance Agent, Hyland, 
  Block, Hyland Insurance, Louisville, Kentucky on Behalf of the 
  Independent Insurance Agents of America and the National 
  Association of Professional Insurance Agents...................    28
    Prepared statement...........................................    71
Greg Kosse, Associate General Counsel, Kentucky Farm Bureau 
  Mutual Insurance Company on Behalf of the Property Casualty 
  Insurers Association of America................................    30
    Prepared statement...........................................    75
Steven M. Feldmann, Director of Community Affairs, The Fischer 
  Group, Crestview Hills, Kentucky on Behalf of the National 
  Association of Home Builders...................................    31
    Prepared statement...........................................    78

              Additional Material Supplied for the Record

Letter to Senator Hagel from Fredric H. Alley, Director of 
  Development, City of North Platte, Nebraska dated March 3, 2004    82
Letter to Senator Hagel from James D. Whitaker, Mayor, City of 
  North Platte, Nebraska dated March 3, 2004.....................    83
Letter to Senator Dole from Jeffrey K. Aiken dated November 26, 
  2003...........................................................    84
Letter to Senator Dole from Beth Midgett, Property Manager, 
  Midgett Realty dated March 12, 2004............................    88
Letter to Senator Dole from F. Douglas Salvia dated March 19, 
  2004...........................................................    90
Letter to Committee from Christopher C. Swenson dated March 5, 
  2004...........................................................    93
Statement of the National Association of REALTOR' 
  dated March 25, 2004...........................................    94


                        NATIONAL FLOOD INSURANCE
                           REPETITIVE LOSSES

                              ----------                              


                        THURSDAY, MARCH 25, 2004

                               U.S. Senate,
                   Subcommittee on Economic Policy,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Subcommittee met at 10:03 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Jim Bunning (Chairman of the 
Subcommittee) presiding.

            OPENING STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. I would like to welcome all of our 
witnesses to the hearing of the Economic Policy Subcommittee. I 
am very happy that we have a distinguished U.S. Senator and two 
of my former House colleagues. Three of my fellow Kentuckians 
and three very distinguished witnesses here for today.
    For the last few years, we have continually passed one year 
reauthorizations of the National Flood Insurance Program. One 
year we were not able to pass the reauthorization until after 
it had expired. This situation has created an uneasiness in our 
housing markets. Our House colleagues have gone a long way 
toward eliminating that uneasiness. We hope to finish the job 
very soon.
    We hope to hear from all of our witnesses on what they 
think about the House Bill 253. Specifically, do you think any 
improvements can be made and what those improvements would be? 
I think our House colleagues did a very good job and created a 
very good product. But we can make it a little better. I think 
we can tweak it here and there. I have been working with 
Chairman Shelby, Senator Sarbanes, Senator Hagel, Senator Dole, 
and other Senators to try to put a bill together, working off 
the House draft. I know they have been in touch with the staff 
of the House Financial Services Committee. I am hopeful that we 
will be introducing a bipartisan bill in the very near future. 
Hopefully, your testimony today will help us see what we are 
missing with our bill so we can continue to move this process 
forward.
    It is very important that we both renew and reform this 
program. Renewal will bring stability but we should not waste 
the opportunity to reform. We have the opportunity to help a 
great deal of homeowners by giving them mitigation assistance, 
which will help save the taxpayers money by getting those 
homeowners off the repetitive loss list. This bill can be a 
great win-win for our country.
    For too long we have repeatedly paid out claims at 
subsidized rates without helping homeowners shore up their 
properties to protect against future floods. This bill creates 
a program to do just that. If homeowners refuse the mitigation 
assistance, their rates will increase to reflect the greater 
risk that they are to the program. I believe this is a common 
sense approach to that problem.
    I know my colleagues from Maryland are going to talk about 
their State's experience with Hurricane Isabel. I hope to work 
with you to see if we can fix some of the concerns you will 
raise. I think we can. We have had some major flooding problems 
also in Kentucky. A few years ago, one of my old towns in my 
old Congressional district, Falmouth, Kentucky, was almost 
completely wiped off the map. So, I am very sympathetic to the 
plight of victims or Hurricane Isabel.
    Thank you all for coming and I look forward to your 
testimony.
    Senator Sarbanes, would you like to make a statement?

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman. First, 
I want to thank you for scheduling this important and timely 
hearing. I want to welcome Congressmen Bereuter and Blumenauer 
before us today, and also commend them for moving a flood 
insurance reform bill through the House of Representatives.
    I am also delighted that my colleague from Maryland, 
Senator Mikulski, is here with us this morning testifying. I 
appreciate the strong leadership and interest that she has 
shown on this issue. Actually, Senator Mikulski and I toured 
some of the areas affected by Hurricane Isabel, and that gave 
us obviously a very deep appreciation for the losses suffered 
by our constituents and the impact upon their lives.
    The National Flood Insurance Program provides flood 
insurance to over 4.3 million properties throughout the 
country. It is an extremely important program helping to ensure 
that families devasted by floods can rebuild, replace, or 
relocate. Congressmen Bereuter and Blumenauer have addressed 
the important issue of repetitive loss properties, which every 
statistic shows is a matter of major concern, and I am pleased 
to hear you say how we look forward to taking the House bill 
and building upon it in order I think to add some additional 
dimensions which I would anticipate the Congressmen would be 
supportive of, and we are very appreciative to you for the very 
forthcoming way in which we have been able to work together to 
address some of the problems.
    We had a devastating flood in Maryland last year. Many of 
the properties which were damaged by the floods were covered by 
the National Flood Insurance Program, which was established in 
1967, in order to, and I quote now from the House and Senate 
Reports, ``provide the necessary funds promptly to assure 
rehabilitation or restoration of damaged property to pre-flood 
status or to permit comparable investment elsewhere.'' That was 
the Congressional statement of what the flood insurance program 
was meant to accomplish.
    Unfortunately, many flood victims in our State have been 
offered settlements that come nowhere near close to restoring 
pre-flood conditions or meeting contractor estimates for repair 
and rehabilitation. Furthermore, many flood victims have found 
the process of trying to recover on their flood insurance 
policies to be time consuming, confusing, and frustrating.
    I am very greatly concerned about how the flood insurance 
program is being administered and the adequacy of the coverage.
    We have heard from numerous flood victims that they are not 
being adequately reimbursed. There are inaccurate guidelines 
for the price of repairs. FEMA rules or adjuster practices 
consistently lead to flood insurance payments significantly 
lower than what is needed to restore families to their pre-
flood conditions.
    People covered do not realize the limitations contained in 
their flood insurance policies, the exclusions that exist, 
which result in a significant gap between the coverage and 
their damages. These are not made clear to policyholders in 
FEMA publications or in the flood insurance policy itself. I 
know Chairman Bunning has been working closely with your staff 
to include provisions in the legislation to address toward 
these problems.
    We have had a careful study done in one jurisdiction in our 
State, Baltimore County, by the former Maryland Insurance 
Commissioner, Steve Larsen, that goes through detailing the 
range of problems that exist in this area. It is not clear how 
to file claims. It is not clear what kind of training the 
adjusters have. Flood victims are under the pressure of a time 
limitation, so they sign off on claim forms when they do not 
really think that they should but they are afraid they are 
going to go beyond the deadline, and similar problems of that 
sort.
    I am very frank to tell you I think FEMA needs to start 
down the path of comprehensive review of the adequacy of 
coverage provided under the standard flood insurance policy. 
That would address the future problems.
    I think they should go back with the flood victims to make 
sure they have been treated fairly. FEMA should review their 
claims to determine whether they were based on inaccurate FEMA 
price guidelines or software that does not correspond with the 
real world in terms of the cost of repairs.
    And I urge them to readjust the claims just as a matter of 
fairness. They should be able to go back and review the 
problems. We are going to have Director Lowe testify following 
this panel. I think he is scheduled next, and we intend to 
question him very closely about this matter. If it was all done 
properly, then there is no need to readjust the claims, but in 
many instances we are convinced that people have suffered an 
injustice, and I intend to press the Federal Insurance 
Administrator, Mr. Lowe, in the next panel.
    I appreciate our witnesses being here before us. I 
certainly appreciate the leadership which Senator Mikulski has 
taken on this very important matter to our constituents. Again 
thank you, Mr. Chairman, for moving ahead on this matter.
    Senator Bunning. Senator Hagel, would you like to make your 
opening statement?

                STATEMENT OF SENATOR CHUCK HAGEL

    Senator Hagel. I do not have an official statement, Mr. 
Chairman, other than to say thank you, Senator Sarbanes for 
your leadership on this issue. I am particularly pleased this 
morning to be on the panel to listen to our distinguished list 
of leaders on this issue, and in particular, my distinguished 
colleague from Nebraska, who is wrapping up his 26th year in 
the House of Representatives and has said it is just about time 
I go get a real job.
    [Laughter.]
    He has announced his retirement and we are very proud of 
Doug Bereuter. This is just but one of many examples, as you 
know, Mr. Chairman, because you served with Doug in the House, 
of his leadership on so many issues in the House. I am very 
proud to be with you this morning, and with my colleagues, in 
particular Doug Bereuter, to move this further down the road to 
get to a resolution, as you have suggested. That is important 
for our country and every State represented here this morning. 
This is a critical issue for all of us. Thank you again for 
your leadership, and Senator Sarbanes, thank you.
    Senator Bunning. Thank you.
    Senator Dole.

              STATEMENT OF SENATOR ELIZABETH DOLE

    Senator Dole. Thank you, Mr. Chairman.
    Each year, hundreds of thousands of families lose cherished 
possessions and oftentimes even their homes in flooding. Our 
Government stepped in to help these families several years ago 
with the founding of the National Flood Insurance Program. 
Today, this much needed program covers approximately 4.4 
million homes in the United States, totalling $637 billion in 
coverage. Before the program was started in 1973, flood 
insurance was far more expensive than the average family could 
afford. In fact, most insurance companies did not even offer 
the coverage since families with a high risk of flooding were 
the ones most likely to purchase the coverage, and the 
companies found the risk to be unacceptable.
    In the years since 1973, the National Flood Insurance 
Program has grown and provided security and relief to countless 
families across the Nation. This is particularly important in 
my home State of North Carolina, where flood losses are far too 
frequent. In the past 7 years, North Carolina has been hit by 
three different hurricanes, Fran in 1996, Floyd in 1999, and 
Isabel just a few months ago in 2003. In fact, Mr. Chairman, I 
was able to visit in Harlowe and Sealevel, North Carolina with 
victims of Hurricane Isabel. One man, Kurt Michel, told me how 
a wall of his home literally fell out as the water just came 
rushing and pouring in. He and his wife Jeannette swam out of 
the home with his daughter, Hannah, on his back. I met Brooke 
Stalnecker, whose home had been totally flattened. It looked 
like a war zone, and whose living room wall lay on the ground 
with the family photographs still attached.
    The National Flood Insurance Program serves a critical role 
in North Carolina covering families like these, more than 
100,000 families in fact, and it is designed to respond as soon 
as disaster strikes. It is a program we desperately need to 
retain and improve.
    While we can point to countless positive stories about the 
program, in the last 6 months, since Hurricane Isabel hit North 
Carolina, like we have already heard, I have heard some real 
problems. I am told that 28 families just on Hatteras Island in 
North Carolina still have not received compensation for the 
damage 6 months ago. I have received a number of letters from 
people who complain they believe they were low-balled on the 
repair estimates and made to feel that if they appealed they 
would get less. These reports are distressing. These letters 
mention that when previous hurricanes hit the coast homeowners 
reported they had been treated much better by the National 
Flood Insurance Program. It is my hope we can address these 
problems which have caused some North Carolinians very great 
distress.
    In addition, I believe we can continue to make improvements 
to our mitigation efforts. In my time as the President of the 
American Red Cross, we took a leadership role and worked as a 
full partner in FEMA's efforts to develop and implement a 
National Mitigation Strategy. We co-sponsored FEMA's biennial 
National Mitigation Conferences. Mitigation not only prevents 
or greatly minimizes damage, but mitigation also saves lives.
    This year, Congress has the responsibility to reauthorize 
and improve the National Flood Insurance Program. In this 
process, it is my hope that additional steps can be taken to 
reduce exposure to repetitive losses in a responsible way that 
will not harm the families who depend on the program. I want to 
thank all the witnesses who have taken time to join us here 
today to share their considerable knowledge with us. All have 
been leaders in efforts to reform the National Flood Insurance 
Program next year.
    Let me just say, Congressman Bereuter, that we appreciate 
your service and we are certainly going to miss you when you 
leave the Congress. I have had the pleasure of working with you 
and traveling with you in the past when my husband was in the 
Congress.
    Congressman Bereuter and Congressman Blumenauer, you have 
both put forward a thoughtful approach to reduce exposure to 
repetitive loss properties, which drain money and resources 
from the program. This proposal emphasizes the involvement of 
State and local agencies in mitigation efforts, and it has my 
full support.
    I certainly want to recognize my good friend, Barbara 
Mikulski, for her strong interest in this issue. Both North 
Carolina and Maryland were hit hard, and you have been a 
tireless advocate, and we are so pleased that you are here 
today.
    One issue which has been missing from the National Flood 
Insurance Program has been predictability. Folks in North 
Carolina have asked me to support a longer reauthorization than 
the current one year reauthorizations Congress has approved in 
recent years. This legislation contains a 5-year 
reauthorization, and this too has my strong support.
    Mr. Chairman, I ask unanimous consent that four letters 
representing the kinds of complaints my office has been 
receiving be included in the record.
    Senator Bunning. Without objection.
    Senator Dole. Thank you.
    Senator Sarbanes. Mr. Chairman.
    Senator Bunning. Senator Sarbanes, go right ahead.
    Senator Sarbanes. I do not think I should allow the respect 
to pass that has been expressed for Congressman Bereuter's 
contributions. I want to make it bipartisan. I want to make it 
very clear that that respect exists on both sides of the aisle, 
and it has been a very distinguished record of service to our 
country, and we want to thank him and we want to wish him the 
very best.
    Senator Bunning. On our first panel today we have our good 
friend, Senator Barbara Mikulski from Maryland, the Ranking 
Member of the VA/HUD Subcommittee of the Appropriations 
Committee; and two of my former House colleagues, Congressman 
Doug Bereuter of Nebraska, who is moving on to bigger and 
better things next year.
    Thank you for your service, Doug. You have done a great 
job, and I know when I first came to the Congress, we served 
together on the House Banking Committee, and I think you are 
still on the House Banking Committee.
    Representative Bereuter. I am.
    [Laughter.]
    Senator Bunning. God bless you for 24 years at least of 
service on the House Banking Committee.
    And of course, Congressman Earl Blumenauer of Oregon, thank 
you also for testifying.
    When Senator Mikulski asked me to testify, I remember the 
old adage I learned when I first came to Congress, never, never 
say no to an appropriator.
    [Laughter.]
    Senator Mikulski is a good friend of all of us here, and we 
are glad to have you before this Subcommittee. Senator 
Mikulski, the floor is yours.

                STATEMENT OF BARBARA A. MIKULSKI

           A U.S. SENATOR FROM THE STATE OF MARYLAND

    Senator Mikulski. Thank you very much, Mr. Chairman, and of 
course to my colleagues, Senator Dole, who I worked with hands-
on together when she was the head of the American Red Cross, to 
do an initial FEMA reform and now look forward to working 
together. I also look forward to working with Senator Hagel and 
Senator Sarbanes. He and I are working together to really bring 
to the Congress's attention the lessons that we in Maryland 
learned during Hurricane Isabel.
    The National Flood Insurance Program does need to be 
reauthorized, and yes, for a longer time to provide 
predictability. But we not only have to reauthorize it, we not 
only have to review it, but we also really need to reform it 
because it is not working for the intent that it was provided, 
which is a safety net for those people who have been hit by 
terrible natural disasters.
    On September 18, 2003, Maryland and other East Coast States 
were devastated by Hurricane Isabel. It was the worst natural 
disaster in Maryland's history. For the people who live along 
the Chesapeake Bay and the rivers leading into the Bay, it was 
a catastrophic event. People lost their homes and their 
possessions. They lost their livelihoods, whether it was in the 
crab houses or the oyster shucking houses. They had community 
names like Bowley's Quarters or Miller's Island, Bayside or 
North Beach, Kent Island, or Hooper's Island. This was not 
Gucci waterfront. This was blue collar waterfront. This was 
hard-scrabble, hard-working waterfront people who had worked 
and scrimped to save to buy these homes. Some people I had gone 
to school with, people who had worked along the water to earn a 
living for their communities. Now they are struggling with the 
legacy of Isabel. Wells continue to be polluted. Some are 
living in trailers, but if you looked at those trailers, they 
are really temporary campers, and they are living with 
inadequate heat.
    They are still trying to struggle to recover, and they feel 
that they were victimized by not only the disaster of the 
hurricane, but then they also feel that they have been undone 
by the National Flood Insurance Program that offered inadequate 
payments, no clear right of knowing how to appeal, and great 
disappointment.
    We worked on a bipartisan basis in Maryland. Governor 
Ehrlich responded. Secretary Tom Ridge was on the job, touring 
with Senator Sarbanes and I to see the damage, to talk to the 
people, really work on a Federal-State bipartisan effort. When 
we looked at the damage, we said, ``Your Government will be 
here to help you.'' We saw houses moved off of their 
foundations in North Beach. Walking the streets of Bayside and 
Bowley's Quarters, children's toys and personal items pushed 
into yards, a 78-year-old widow clinging to both me and 
Secretary Ridge, saying, ``What am I going to do? What can we 
do?'' Mud more than a foot deep. Business owners that have lost 
their businesses there.
    We saw not only devastation, but we also saw the good ways 
that people do pull together. We were proud of the way the 
rescue workers came and rescued people. One senior citizen 
trying to rescue her possessions, fell, hit her head, and had 
to be carried out in a rowboat, brave acts, and FEMA did 
respond. But when the flood was over and they tried to get to 
their flood insurance, it really was not there the way it 
should have been.
    Today, 6 months after Isabel has hit, my constituents are 
still trying to rebuild both their homes and rebuild their 
lives. They are struggling to get the money that they feel is 
owed to them. They are frustrated. They are confused, and quite 
frankly, Mr. Chairman and colleagues, they are fed up. They 
feel like the insurance that they paid for is not there when 
they need it the most. That is why I am here today, to tell 
their stories to this community. Thousands of Marylanders could 
be at this hearing to tell it.
    I want to just encourage in the most heartfelt way, the way 
that we need to do, move on the lessons learned. What we 
learned from what the people are telling me is this. They do 
not understand what their flood insurance paid for. They 
thought that they were totally covered. They believed that 
between their homeowner's insurance and their flood insurance, 
they would be covered. Now they are finding out that it is not 
true. They found out that the compensation really does not deal 
with total repair or total rebuilding. They did not know that 
it did not cover the contents of their home. They did not know 
that it did not cover the basement belongings that were in 
their home. Then when they put in their claim, they find out 
that they are only going to get a portion of what it will cost 
to repair or rebuild.
    When they ask their insurance agent to explain things to 
them, they cannot get a straight answer. That is because the 
insurance agents do not know what the policy covers. In 
Southern Maryland, some homeowners were able to get emergency 
advances, but in other parts of the State they could not do it. 
Different agents gave different answers. In some cases the same 
agent gave different answers on the same day.
    I sat in a diner meeting with community leaders to hear 
what their experiences were. One of these was a Baltimore City 
detective. This wonderful woman's job is to get information and 
also get information from people who do not want to talk to 
her, and that is what she felt like when she was trying to get 
information from the National Flood Insurance. I asked them if 
they knew if they could appeal. They did not know that they had 
the right to appeal. No one told them. There was no fact sheet 
on the right of appeal. Nobody told them what they could do.
    My office became the instigator of the appeal in 
cooperation with Senator Sarbanes. We became the clearinghouse 
on the appeal process. I was honored to do it. We organized 
community meetings. We organized the appeal hearings. We 
brought FEMA and the Flood Insurance Program right to the 
communities to hear those appeals. We do not think you can 
appeal on a 1-800 number or on the Internet. You need to know 
the context.
    Mr. Chairman, what we really saw was that the appeals 
process did work when it finally worked, but we had to be the 
instigator of that. A criminal knows their right to appeal in 
court, but a flood insurance victim does not. We have to really 
get this straight.
    Once Marylanders figured out their policies and finally 
figured out their paperwork, they saw that the payments that 
they were not getting were not adequate. The flood insurance 
adjusters do not use real-world estimates. In Bowley's 
Quarters, the adjuster gave such low estimates that the people 
went to an engineering firm in order to be able to get advice 
on how to file their paperwork. Once they did it, they were 
able to get a better deal.
    Is that what we are supposed to do, where a whole community 
has to pool money to get an engineering firm in to get it? I do 
not think so. The people should not have to go through all this 
to get a fair appraisal or a fair reimbursement for the 
insurance that they paid for.
    Mr. Chairman, part of the problem is with the adjusters. 
And this is no fault about these adjusters. They come in at a 
catastrophic time. They go into a hotel room, and the way we 
pay them is in a way that actually works against getting fair 
and adequate adjustments. They have to put out all of their 
expenses up front, and until a claimant signs a particular 
form, they will not get reimbursed. They put pressure on 
signing a form, rather than getting an adequate and fair 
appraisal. What we do is have drive-by assessments rather than 
real assessments.
    I really want to urge in the very strongest way that, we 
move this reform package quickly. I want to have this done 
before tornado season comes again to some of our communities. I 
want to do it before flooding starts in our great midwestern 
areas when the waters start to rise, and I want reform done 
before hurricane season comes to Maryland and comes to our 
company again, and I believe we can do it.
    Senator Sarbanes has taken the lead and we have been 
working together. We have four recommendations. One, full 
information and disclosure of flood insurance polices. Flood 
insurance must provide a clear understanding of what is 
covered. Second, better training for insurance agents who sell 
flood insurance, so they understand what they are selling and 
how to process claims. Number three, a straightforward formal 
appeals process that must be clearly presented to 
policyholders. Number four, adequacy of payments and a reform 
of the adjustment system. Consumers need to know that the 
insurance they pay for will pay for real-world cost of 
repairing the damage, and at the same time we need to reform 
the adjusters' system so that they are adequately paid in a 
timely way, so that the emphasis then is on an adequate 
assessment to minimize the appeals process. Those are four 
straightforward reforms that I believe can be implemented very 
quickly.
    I am going to submit to the Committee two reports, one at 
the request of the Baltimore County Executive. We went to 
Maryland's former Insurance Commissioner, Steve Larsen, to take 
a look at what had happened in Baltimore County. And the 
second, the Maryland Insurance Commissioner's review of this 
process, so you could have the benefit of their expertise.
    Mr. Chairman, I really want to conclude by just saying that 
thousands of people who suffered so much in Maryland and other 
communities, would feel that in some way that what happened to 
them would be somewhat mitigated if out of all of our misery 
and all of the things that we had to live through, that there 
was a true reform of the National Flood Insurance Program, so 
the next time a natural disaster happens and somebody knocks on 
the door and says, ``We are from the Government and we are here 
to help you,'' we really mean it.
    Thank you very much, Mr. Chairman.
    Senator Bunning. Thank you, Senator.
    Now we have my former colleague from the House of 
Representatives, and we are proud to have him here testifying.
    Congressman Bereuter, the floor is yours.

                   STATEMENT OF DOUG BEREUTER

             A U.S. REPRESENTATIVE IN CONGRESS FROM

                     THE STATE OF NEBRASKA

    Representive Bereuter. Thank you very much, Chairman 
Bunning, Senator Sarbanes, Senator Dole, and Senator Hagel, for 
your insightful and very positive remarks about the need for 
flood insurance and especially, I might say, your personal and 
very generous remarks to this Member.
    I have been involved in introducing legislation I think 
each of the last six Congresses on flood insurance reform. The 
last several, I have had the benefit of working with 
Congressman Blumenauer, who has added dramatically to the 
expertise, the interest, and the energy related to reform.
    And I might say that my seat-mate, the person I have sat 
next to for the last 10 years in the House, Richard Baker, has 
had a major role since Louisiana has the most repetitive law 
structures and the largest amount of area below sea level. And 
we worked in considerable detail with him to make sure that 
what we have attempted to accomplish is well-tuned to not only 
reduce repetitive losses and to increase the prospects for 
mitigation, but also to take into account those States that 
have the largest number of repetitive loss structures and the 
financial implications.
    Now, I would say that what we heard from Senator Sarbanes, 
and particularly just now from Senator Mikulski and Senator 
Dole, relates to the lack of clarity about the flood insurance 
policies, the procedural difficulties, the claims filing, and 
the timeliness of response to the claim filing. We did not 
attempt to address those issues. What we have done is focus on 
the structural reforms for the program, and I could well 
envision that you could have a separate title or two that you 
could add to deal with the issues that have been brought up 
here, and we could depend upon you, as far as the House is 
concerned, to take that approach and add it to a legislative 
effort that we have initiated here.
    I would like to tell you, of course, that we have actually 
a very unusually broad, diverse group of organizations that 
support this flood insurance legislation, and you perhaps have 
had distributed to your desk a copy of the list, and that is 
not even, in fact, a complete list. I would briefly like to 
speak about three areas today, and then turn to my colleague, 
Mr. Blumenauer.
    First, is the background on repetitive losses; second, the 
contents, including the new pilot program that we establish; 
and, third, as I mentioned, the diverse support.
    On background. Repetitive loss properties cost the NFIP 
about $200 million annually. The properties, while comprising, 
we have approximately 1 percent of the currently insured 
properties are expected to account for 25 to 30 percent of 
claims paid. For example, I will cite one of many egregious 
examples, among a great many such examples, of costly abuses 
which could be discussed.
    One home, valued at $114,000, has received $806,000 in 
flood insurance payments over 18 years. Furthermore, 25 percent 
of all current NFIP policies do not pay actuarial rates for 
their coverage and, thus, they are subsidized by the other 75 
percent of people who do have flood insurance, and they are 
paying more than their fair share, in an actuarial sense.
    Today, the vast majority of repetitive loss structures 
eligible for subsidized flood insurance are far below the 
actuarial risk rate they should be paying. This bill would at 
last move the NFIP toward a more free-market insurance model by 
requiring people living in flood-prone areas to reduce their 
risk of flooding, mitigation, with help from the Government--
Federal, and in many cases State and local--or pay something 
closer to actuarial rates.
    Now, as far as the contents are concerned, I will just hit 
the high points. The bill uses FEMA's existing FMA program to 
mitigate repetitive loss properties. The bill authorizes up to 
an additional $40 million a year to be transferred from the 
National Flood Insurance Fund into the FMA funds through 2008.
    The pilot program--and this is the one that focuses on the 
repetitive loss structures--authorizes up to $40 million a year 
to be transferred from that same fund for mitigation assistance 
to reduce the problems of severe repetitive loss properties. 
This trial program, which I think cannot effectively be less 
than 5 years, will not have a fair examination of the process 
unless we have a significant length of time.
    This trial program would address those properties in a 
simple, straightforward manner. The owner of severe repetitive 
loss structure properties will be charged a rate closer to the 
actuarial risk-based rate for their National Flood Insurance 
Program if two conditions prevail.
    The first is that it is, indeed, by definition, a severe 
repetitive loss property. We had a long and difficult, but I 
think successful, process to revise what, in fact, is a severe 
repetitive loss, and it has to meet one of the following three 
definitions:
    One, this is a property in which four or more separate 
flood insurance claims payments have been made prior to the 
date of enactment of this act, with the amount of each claim 
exceeding $5,000, and the cumulative amount of such claims 
payment exceeding $20,000 or, two, this is real property in 
which four or more separate claims payments have been made 
after the date of enactment of this act, with the amount of 
each claim exceeding $3,000, and with the cumulative amount of 
such payments exceeding $15,000 or, three, this is real 
property in which two or more separate NFIP claims payments 
have been made which cumulatively exceed the value of the 
insured property.
    The second condition which would cause the applicability of 
the closer to actuarial rates to be applied is that the owner 
of the real property must have refused a mitigation measure 
from a State or locality such as the elevation of the structure 
or a buyout of the property, and it is important to note that 
the bill preserves State and local decisionmaking.
    If both of these conditions have been met, rates for severe 
repetitive loss properties will be increased by 50 percent. 
Properties would be subject to an additional 50 percent for 
each subsequent flood event which claims payments exceed 
$1,500.
    The repetitive loss structures are heavily concentrated in 
6 States. Louisiana, Texas, New Jersey, Florida, North 
Carolina, and New York have more than 5 percent of the total 
repetitive loss structures. In order to provide some assistance 
to them, if they have done proper planning to reduce the number 
and severity of repetitive loss properties, the Federal share 
of reimbursement for mitigation or buyout could be increased 
from the standard 75 percent all the way up to 90 percent. That 
is meant to deal with the problems that some States have in 
this area. So this will also be helpful, of course, to the 
property owners themselves for the repetitive loss structures.
    I think the definitions we have used with respect to 
reimbursement are fair. Those definitions will apply, if there 
is a buyout required and mitigation is impossible and the owner 
is not willing to participate in mitigation, we have tried to 
cover all bases so that, in fact, this property owner is going 
to be treated quite fairly, if it comes to that.
    I would like to stop my testimony at this point, Mr. 
Chairman, and with your approval just let Mr. Blumenauer 
supplement my remarks, and then I will be happy, of course, to 
listen to questions from you.
    Senator Bunning. Congressman Blumenauer, go right ahead.

                  STATEMENT OF EARL BLUMENAUER

             A U.S. REPRESENTATIVE IN CONGRESS FROM

                      THE STATE OF OREGON

    Representative Blumenauer. Thank you. One of the pleasures 
of working on this legislation, Mr. Chairman and Members of the 
Committee, for the last 6 years, is being associated with Mr. 
Bereuter. As usual, his statement was comprehensive, and it 
makes my job a lot easier.
    With your permission, I would like to focus on three points 
to supplement testimony that I have submitted for the record, 
and I too would be happy to answer questions if there are any. 
We really appreciate what has already occurred with your staff, 
I think, in terms of making real progress toward the goal that 
you mentioned, Mr. Chairman, not just to reauthorize, but 
really reform the program and make a substantive difference.
    I think that it is critical that we go beyond simply the 
narrow dealings of flood insurance. The philosophy here is that 
the Federal Government can be a partner to help keep people out 
of harm's way and save money. I am thinking of Senator Dole's 
picture of little Hannah on her father's back as they are 
swimming away from this terrible flood experience.
    We do no one a favor with an inefficient and poorly 
thought-out process of flood insurance if we continue to 
encourage them to live in harm's way, if we subsidize it, and 
if we make it hard for them to protect their families.
    And I think with the work of Mr. Bereuter, he mentioned Mr. 
Baker and a number of people, we have made real progress toward 
this being a template for what we can do in other areas of 
disaster. Certainly, Senator Dole knows from her past 
experience with the Red Cross that we have, because of changing 
demographics and development patterns, we have put more and 
more Americans in harm's way.
    And it looks like in the not-too-distant future, 75 percent 
of American households will be at direct risk for a natural 
disaster, whether it is flooding, which we are talking about 
here today, fire, earthquake, or mud slides. This is 
significant. And we have done a great job of starting to deal 
with people after the fact. Our response, both public and 
private, is really doing a pretty good job these days.
    The problem is that we have not put enough attention to the 
front end to keep people out of harm's way in the first 
instance. This legislation is important because it will help 
move people out of harm's way, help protect them, and I think 
it can help set the tone for what the Federal Government can do 
in a noncoercive, very thoughtful approach.
    I will not repeat what my colleague said about the 
substance of the legislation we brought forward, but I think 
you can help us, in with this Committee, deal with a couple of 
misconceptions.
    Somehow that this is in any way punitive toward States that 
have high repetitive flood losses. It is not. In fact, the 
National Flood Insurance Program started with Representative 
Hale Boggs, from Louisiana, and then followed up with his widow 
who took his place, to help States like Louisiana. And, in 
fact, a number of States like Louisiana actually pay a high 
premium because they have a lot of repetitive flood loss, but 
they have far more property that pays higher premiums than are 
necessary if we eliminated the 10,000 or so repetitive flood 
cases. So they pay in far more to this process than they get 
back, even though they have lots of repetitive flood 
properties.
    And your helping us advance this in a comprehensive way, we 
can make sure that these people understand that they are not 
being disadvantaged, that they are, in fact, being protected.
    This is something that is also going to save huge sums of 
taxpayer money because it is not just the National Flood 
Insurance Program, which is basically actuarially sound, 
although we have to advance money every now and then because 
these premium increases do not always keep pace with the 
dramatically escalating costs of natural disasters.
    But the other side of not moving people out of harm's way 
is that there are billions of dollars that are spent to deal 
with all of the other responses the Federal Government needs to 
make in terms of infrastructure, the civil defense response, 
the whole range of these. So it is a very expensive proposition 
that goes beyond the scope of the National Flood Insurance 
Program.
    I deeply appreciate the experience that is being detailed 
here about the day-to-day administration. As Mr. Bereuter 
mentioned, we did not get into that. We were busy dealing with 
some of the other elements there. You can richly strengthen the 
program, but I would hope that it is also part of your 
Committee report, part of the message that you carry forward, 
that this is a theme we need to weave throughout Federal 
policy, generally, and you are in a perfect position to do 
this.
    I deeply appreciate the opportunity to appear briefly. I 
have a full statement that I would like to put in the record.
    Senator Bunning. Without objection.
    Representive Bereuter. As I do, Mr. Chairman.
    Senator Bunning. Without objection.
    Representative Blumenauer. I look forward to working with 
you to make a big difference for the 75 percent of American 
households that will be in harm's way for some disaster in the 
future.
    Senator Bunning. Unless there are any questions, I would 
thank you both for testifying. We appreciate all of the hard 
work you have done in getting your bill where it is, and we 
hope to be able to make it a little better.
    Thank you very much.
    Representative Blumenauer. Thank you, Mr. Chairman.
    Senator Sarbanes. Mr. Chairman.
    Senator Bunning. Go right ahead, Paul.
    Senator Sarbanes. I just want to make sure I am clear on 
one thing. The 1 percent that represent repetitive loss 
properties, that is 1 percent of all of the properties covered 
by flood insurance?
    Representive Bereuter. That is correct.
    Senator Sarbanes. They account for 25 to 30 percent of all 
of the payout; is that correct?
    Representive Bereuter. All of the claims by dollar amount.
    Senator Sarbanes. Yes, that is quite a staggering figure 
when you think about it, and it really I think dramatizes the 
problem.
    Actually, we had a program working with FEMA in the Western 
part of my State. We had a river valley that was constantly 
being flooded, in the end, they did primarily buyouts, and we 
were able to work out terms for the buyouts that were I think 
quite fair. It is always a wrenching experience to move, but 
they were able to relocate in comparable or, indeed, in some 
instances, maybe even better circumstances and then be freed of 
the apprehension of the constant flooding and so forth.
    But of course in many areas you can mitigate. People can 
stay, but you can take precautionary measures that either avoid 
or significantly reduce the flood damage.
    So thank you very much.
    Representive Bereuter. Senator, if I could put a point on 
your statement, it does mean that the overwhelming majority of 
policyholders--somewhere over 75 to 99 percent, theoretically--
would have a relative and, in most cases, an absolute reduction 
in their premium as this mitigation and buyout takes place.
    Representative Blumenauer. The number on that, just if I 
may, if we avoid one 10-percent rate increase, it saves 
ratepayers $175 million a year, every year, compounded forward.
    Senator Bunning. Thank you both. We appreciate it.
    Representative Blumenauer. Thank you.
    Representive Bereuter. Thank you very much.
    Senator Bunning. Our second panel today, we have Anthony 
Lowe of FEMA and William Jenkins of the GAO. I thank you both 
for testifying. I would especially like to thank Mr. Lowe, who 
I knew had another commitment, but made time to be here today. 
Thank you both for testifying.
    Because of the large number of witnesses we have today, I 
am strictly going to enforce the 5-minute rule. You may submit 
all your written testimony for the record, and it will be 
accepted, but when the 5 minutes are up, so are you.
    [Laughter.]
    Mr. Lowe, you may begin.

                  STATEMENT OF ANTHONY S. LOWE

              ADMINISTRATOR, FEDERAL INSURANCE AND

                 DIRECTOR, MITIGATION DIVISION

              FEDERAL EMERGENCY MANAGEMENT AGENCY

              U.S. DEPARTMENT OF HOMELAND SECURITY

    Mr. Lowe. Thank you very much, Chairman Bunning, Ranking 
Member, in his absence, Senator Dole.
    My name is Anthony Lowe, Federal Insurance Administrator 
and Director of the Mitigation Division, Federal Emergency 
Management Agency, Department of Homeland Security.
    We are here to report to the Subcommittee that while the 
NFIP faces many challenges, and faced many challenges in 2003, 
the state of the NFIP is sound. Today, I will speak to you 
about the NFIP's response to Hurricane Isabel, our strategic 
plan to reduce the number of repetitive loss properties, and 
perhaps in my questioning, something about our Flood Map 
Modernization Program and the importance of reauthorization of 
this program.
    Since its inception in 1968, the NFIP has met, and 
continues to meet, a vital need--the provision of flood 
insurance to those exposed to flood hazards across the country, 
coverage that is virtually unavailable from the private 
insurance market.
    With Congress's guidance over the past 35 years, the 
program has grown to become the largest single-line property 
insurer in the Nation. We have over 4.4 million insurance 
policies, and we have over $663 billion in insurance coverage. 
While planning for the years to come, the NFIP has also faced 
recent challenges, as Senator Mikulski raised. I would like to 
address some of those issues raised by Senator Mikulski in 
regard to Hurricane Isabel, which tested the NFIP when it 
caused extensive flood damage in six Mid-Atlantic States and 
the District of Columbia.
    Our report card was mixed and we believe the lessons we 
learned from Isabel will, in fact, improve the NFIP. We paid 
over $385 million in claims. We expect to pay $450 million 
overall when all claims are paid, on a total of over 25,000 
claims from Hurricane Isabel--known.
    In comparison with other States hit by Hurricane Isabel, 
such as North Carolina, South Carolina, Virginia, West 
Virginia, Delaware, and the District of Columbia, the NFIP 
received a particularly large volume of complaints from 
Maryland policyholders. While these complaints may be partially 
explained by the fact that Maryland has not suffered a major 
flooding event since Hurricane Agnes in 1972, the number of 
complaints from Maryland demands that we initiate truly 
comprehensive review from top to bottom, so we can improve the 
program.
    I am not here to defend the program. I am here to effect 
change because it is quite clear that there are some problems. 
There were far too many issues raised, there have been far too 
many recommendations brought up, there has been far too much 
suffering for anyone to think that there is not a problem.
    From our initial review from Maryland Insurance 
Commissioner Redmer's report, the complaints point to three 
main problems. Those are similar to the problems Senator 
Mikulski also raise: Customer not understanding the policy 
provisions, lack of coordination in providing customer service, 
and agents and companies giving erroneous advice.
    To address these concerns, on the front end, we are 
stepping up our outreach efforts to explain NFIP policy 
provisions and simplifying claims procedures. We are looking at 
ways to provide understandable, easy-to-read information to our 
customers. This is a risk communication issue for us, and we 
understand the key role that outreach plays in the success of 
our program, as the NFIP does not exist to simply react to 
disasters and pay claims. For example, after the recent 
California wildfires, we supplemented our outreach efforts in 
California to make certain that residents understood the 
increased flood risk and benefits of flood insurance that might 
arise from mud slides after the fires occurred there.
    In addition, we are looking at technology to help through 
in our NextGen project, which is a total reformation of our 
processes around a paperless system that allows us to, in real 
time, connect to our insurance companies. We have 92 insurance 
companies, thousands of insurance agents working for those 
companies, and hundreds of adjusters who work under them. We 
have a very complex system of delivery for the National Flood 
Insurance Program.
    NextGen offers the technology to allow us to adjust our 
metrics, see where problems are, and to very quickly adjust and 
confront problems very directly in the field.
    Let me now address a little bit on repetitive flood loss.
    Senator Bunning. Your 5 minutes are up.
    Mr. Lowe. All right.
    Senator Bunning. We will get you in questions.
    Mr. Jenkins.

              STATEMENT OF WILLIAM O. JENKINS, JR.

         DIRECTOR, HOMELAND SECURITY AND JUSTICE ISSUES

                 U.S. GENERAL ACCOUNTING OFFICE

    Mr. Jenkins. I appreciate the opportunity today to discuss 
the National Flood Insurance Program. My statement focuses on 
repetitive loss properties and actions that FEMA and 
legislation have proposed to address those properties.*
---------------------------------------------------------------------------
    * Held in Committee files.
---------------------------------------------------------------------------
    Floods inflict more damage and economic losses on the 
Nation than any other natural disaster. Floods affect all 50 
States and cause about $1 billion in property damage annually. 
During the 10 fiscal years from 1992 through 2001, floods 
resulted in about $55 billion in damages and 900 deaths. During 
that period, the Federal Government paid about $7.7 billion in 
Federal flood insurance claims financed primarily through the 
premiums policyholders paid for National Flood Insurance.
    FEMA has taken a multifaceted approach to reducing flood-
related losses. This includes a variety of grants for State and 
local flood mitigation planning and projects, before and after 
floods occur. The cornerstone of these efforts is the National 
Flood Insurance Program, in which FEMA identifies and maps 
those areas within participating communities that are the most 
flood prone, called ``Special Flood Hazard Areas,'' the areas 
with at least a 1-percent chance of flooding in any given year.
    In these areas, flood insurance purchase requirements and 
enhanced building standards apply. According to FEMA, buildings 
constructed in compliance with these standards suffer about 80 
percent less damage annually than those who do not meet these 
standards. We plan to report soon on FEMA's ongoing effort to 
update the Nation's flood maps.
    Repetitive loss properties represent a significant portion 
of annual flood insurance claims. FEMA defines repetitive loss 
properties as those that have flooded at least twice in a 10-
year period and resulted in flood insurance payments of $1,000 
or more for each claim. These properties represent about 1 
percent of the 4.4 million properties insured by the National 
Flood Insurance Program, account for about $200 million 
annually in claims, and have accounted for about $4.6 billion 
or 38 percent of all flood insurance claim costs since 1978. 
About half of all repetitive loss property payments since 1978 
have been in three States--Louisiana, Florida, and Texas--and 
almost 90 percent are in 15 States.
    FEMA has developed a strategy to reduce the number of 
repetitive loss properties that target properties with the 
greatest losses. As of the end of November 2003, FEMA had 
identified about 11,000 currently insured properties for which 
at least four claims have been made since 1978, costing a total 
of about $1 billion. States or communities may sponsor projects 
to reduce flood losses to these properties, and FEMA encourages 
them to give these properties priority in their mitigation 
efforts.
    FEMA has also initiated a pilot program to allow States and 
communities with these properties to use a simplified 
methodology to more easily demonstrate the cost-effectiveness 
of projects designed to reduce future losses from these 
properties.
    Members of Congress have also recognized the financial 
burden repetitive loss properties place on the program. Under 
H.R. 253, as passed by the House, owners of repetitive loss 
properties, as defined in the bill, could be charged full 
actuarial rates for flood insurance, rates that reflected the 
property's true risk of flooding and damage. These higher rates 
would be charged if, one, the owner refused a buyout, 
elevation, or other flood mitigation measures from FEMA or the 
Flood Insurance Program and, two, the owner subsequently made 
an insurance claim of more than $1,500.
    In our prior work, we have noted that increasing 
policyholder premiums could cause some policyholders, 
particularly those with subsidized policies, to cancel their 
flood insurance. H.R. 253 includes a provision that provides 
FEMA the flexibility to increase the policyholder's deductible, 
rather than increase the premium rate. This may provide 
policyholders who refuse FEMA's mitigation offer a means of 
maintaining their flood insurance without a significant 
increase in their premium rate.
    According to FEMA, about 49,000 currently insured 
properties have accounted for about $2.6 billion in losses 
since 1978. About 6,000--or 12 percent--of these properties 
accounted for about $792 million in total losses and would 
qualify for the pilot program under the criteria specified in 
H.R. 253.
    Of the remaining 43,000 properties, 26,000 had cumulative 
claims greater than $20,000 and accounted for $1.6 billion in 
flood insurance claims, but these properties do not meet H.R. 
253's criteria either because less than four claims had been 
filed or each claim did not exceed $5,000. My written statement 
includes more detailed State-by-State data on repetitive loss 
properties.
    We have not fully analyzed the potential results of FEMA's 
repetitive loss strategy and the mitigation actions encompassed 
in H.R. 253. However, our preliminary assessments suggest that 
both have the potential to reduce the number and/or 
vulnerability of repetitive loss properties and, thus, reduce 
the Flood Insurance Program's cost in the long-run.
    That concludes my statement, and I would be happy to answer 
any questions.
    Senator Bunning. That is marvelous. You had 3 seconds left. 
Thank you.
    [Laughter.]
    I will start the first round, and we will do a 7-minute 
round of questioning, if it is all right with my colleagues.
    Mr. Lowe, what improvements would you make in the House 
bill?
    Mr. Lowe. We think H.R. 253 is a good start in addressing 
the repetitive flood loss problem. I do believe that there are 
some improvements that can be made.
    In short, we have provided the Subcommittee with some of 
those changes. But, for example, in funding, the bill addresses 
three different programs--two mitigation programs and of course 
the National Flood Insurance Program itself. And so there needs 
to be consistency in terms of the way these programs are 
funded.
    For example, we have no-year funding, as addressed in the 
bill, and for the Flood Mitigation Program, for example, we 
have funding on a 2-year cycle. So we probably need to 
standardize those cycles. We would prefer no-year funding to 
give more flexibility.
    Also, the cost shares are different for each of the 
programs. An ``in-kind'' contribution is appropriate, and I 
think that needs to be also synchronized by one definition for 
what ``in-kind'' means. For one of our programs FMA requires 
that of the ``in-kind'' be cash. This may or may not be the 
best approach, if the priority is to give more flexibility.
    Another piece of the bill that can be improved deals with 
administrative costs. There are no administrative costs that 
are covered for FMA or the other mitigation programs in any 
significant way for the effort that we are trying to undertake, 
and so some support in that regard would also be helpful.
    I think the last thing that I would mention is, for some 
reason, commercial properties are not covered under H.R. 253. 
About 25 percent of the repetitive flood loss properties that 
are in our target list are, in fact, commercial properties, and 
so that is another area that I think the Committee should 
consider. Our staff is available to provide any technical 
assistance that you might require.
    Senator Bunning. Do you have a preference on the monetary 
level at which a homeowner would be eligible for mitigation 
assistance--in other words, a level in dollars?
    Mr. Lowe. Well, I am not quite sure I understand your 
question but what you may be getting at is that it takes an 
average of about $59,000 to take a mitigation action, based on 
our figures from 1997 to 2003 for acquisitions, relocations, 
and elevations. Those are the figures that we are dealing with 
when we look at the costs of mitigating these structures.
    I think you can multiply that out over 10,000 and figure 
out where that leads. Now, we in total have 48,000 properties 
that we call repetitive flood losses. It is just the most 
serious, the 10,000 that we are really talking about today, 
which are the costliest.
    Senator Bunning. I am concerned by one part of a proposed 
FEMA rule that directly affects the relationship between an 
insurance agent and a ``Write Your Own'' flood company. 
Currently, the private sector companies, agents, and brokers 
make the decision on what type of arrangements they want to 
solicit, sell, and service flood insurance. ``Write Your Own'' 
companies can use either agents or brokers.
    Under a section of the FEMA proposal, the Federal 
Government would dictate that ``Write Your Own'' companies can 
only use a broker arrangement, not agents. Why does FEMA want 
to change the status quo?
    Mr. Lowe. I understand that there was some discussion about 
that, and a rule is under consideration currently and the 
comment period has closed. But the idea, as I understood it, is 
to try to improve the quality of agents' education and the 
quality of their training that exists by having someone who is 
really looking over the agents. If there is a question in the 
field and you do not know the answer, you know you can call the 
broker to answer that question. And so this may, in fact, not 
be the best approach to do that, but that is the idea here.
    I think what we have heard today is that we have victims, 
who are out in the field and their agents cannot answer their 
question, and that is the first person they are probably going 
to call when they get their policy. And if the agent cannot 
answer the question, where does it go? In this case, what we 
saw is it went to the adjusters and then that did not 
particularly work out well in too many instances.
    So again, what we are trying to do is improve the quality 
of the delivery of service. We have 92 insurance companies, and 
so we are trying to figure out what do we need to do to make 
sure that when people sign up for flood insurance, they really 
understand what it is, what is covered, and they can call 
somebody and get a straight answer. And so that is what it is 
designed to do.
    Senator Bunning. Mr. Jenkins, what, in your opinion, would 
do the most to get properties off the repetitive loss list?
    Mr. Jenkins. I think the problem that you face with 
repetitive loss properties is that a lot of them are 
subsidized, that is, low-income people and they have some 
difficulties finding comparable housing. In other words, if you 
buy them, they have some difficulty finding comparable housing 
nearby that is comparable to what they have and this is one of 
the biggest single challenges. How do you deal with people of 
low income in terms of trying to get them out of harm's way? 
For many of them, they just do not have the wherewithal to 
move. I think that is the biggest single challenge in terms of 
trying to deal with repetitive loss properties for individuals.
    Senator Bunning. I move on. Senator Sarbanes, you may 
begin.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    Administrator Lowe, I do not think it is an overstatement 
to say that the stress that was brought to bear on the FEMA 
system indicated it just wasn't up to the task, and we have a 
lot of problems as a consequence. I am very concerned about 
people who have either not had their claims yet resolved or 
have settled their claims but have done so under circumstances 
in which they feel very strongly that they have not been dealt 
with fairly.
    There is a prevailing view that there were inaccurate price 
guidelines given to the adjusters, and I am going to pursue 
that issue with you in greater detail in a moment. There were 
partial denials of claims if homeowners had not taken remedial 
actions, even though they might have been told by their agents 
not to do so. They were in this situation of, well, do not do 
anything so adjusters can see all the damage in its full glory, 
and yet there is a requirement to try to ameliorate the 
consequences. That in particular deals with the issue of mold. 
Another problem is the significant lack of information given to 
flood victims.
    The report that was done in Baltimore County by the former 
State Insurance Commissioner said,

    In all, the process utilized to settle claims of Isabel 
victims has resulted in many homeowners feeling that they were 
forced into settling claims under duress and against their best 
judgment.

    It goes on to say,

    Most homeowners were not able to get bids from contractors 
that could restore the house to its pre-flood condition for the 
amount the adjuster was offering. Yet, if the homeowner 
continued to fight or argue, it seemed to delay payment, and 
looming over them was the filing deadline.

    It is my view that FEMA should go back and review the 
claims of the flood victims and readjust them in those 
instances in which they were inadequate, inaccurate price 
guidelines or software used to estimate the losses, people felt 
under some duress or coercion to settle the claim because they 
thought they were up against a filing deadline.
    I mean, the Government's responsibility here is to do right 
by people and to be fair and just. No one should profit out of 
it. I do not think people are seeking to profit out of it. In 
fact, I have been tremendously impressed by the type of 
resilience and the decency of the people who have come under 
these difficulties. They want to get back on their feet. They 
want to restore their lives. They want to get equitable 
treatment. They are not looking to get some bonanza out of the 
flood, that is very clear.
    Is there any inhibition to keep you from going back and in 
effect saying to people, well, look, the system was overloaded. 
We think we were using some inadequate guidelines and that is 
reflected in some of these cost estimates. We know there was a 
lot of pressure. We did not have a full program for training 
flood insurance adjusters. It is a particular segment out of 
the general insurance field. So we are going to come back in 
and we are prepared to work with people to review the claims 
and to make adjustments where that is called for. Would the 
agency undertake to do that?
    Mr. Lowe. We have already begun that process. I personally 
went down to the Insurance Commissioner's office in Maryland 
and I asked him, prior to going, of course, for all of the 
complaints he had as well as all the inquiries he had that had 
anything to do with the National Flood Insurance Program. At 
that time, he gave me 80 complaints. We have had a preliminary 
review of all of these 80 complaints. The issues break down 
really across the board, but the commitment was made by me and 
all of my staff that we are going to fix it. If something is 
wrong, we are going to fix it. We have the ability to do that 
and are charged with doing that.
    To be perfectly honest with you, I went Wednesday night to 
Maryland and we were actually in the capital in Maryland and I 
told the Insurance Commissioner, what I would like to do is 
meet with 10 of the people who are least satisfied with how the 
National Flood Insurance Program either handled or is handling 
their claims. And I wrote down on a list what I heard from 
them, and it really wasn't just what I heard, it was what I 
felt from listening to their stories.
    There was a theme, and the first thing I wrote after I 
heard about the first person, and we literally went around the 
room and I just listened, is I thought to myself, this is not 
the way this program is supposed to work, and I told them so.
    The other thing I noticed is that everybody was fighting. 
They were fighting the system. They were fighting with their 
agent. They were fighting with their adjuster. They were 
fighting with the company, and on down the line, trying to get 
some resolution after 6 or 3 months, however long it took them 
to get it done. Again, and Senator Mikulski is correct, after 
they had already been through a disaster. And again, I said to 
myself, this is not the way this program is supposed to work. 
Clearly, the process took too long.
    I heard about low-balling of estimates. I heard about 
misinterpretation of eligibility of coverage, unequal 
treatment, incomplete explanations of decisions on settlements, 
perceptions that they had, in fact, been threatened because 
they were told they had to file that proof of loss. All of 
those indicate to me that there are some problems that we have 
to take a serious look at.
    As you may already know, today and tomorrow we are holding 
a Mid-Atlantic Flood Summit. The purpose of the Flood Summit is 
to have the companies there, the agents there, the national 
software companies there, as well as insurance----
    Senator Sarbanes. No, no. I am getting at a different 
point.
    Mr. Lowe. Please.
    Senator Sarbanes. The session you had, I think was highly 
relevant as you think of, well, how can we correct our 
operations so we do not have these problems in the future. But 
I do not think that the number of people with problems, whether 
their claims got fairly adjusted in Maryland, is 80.
    Mr. Lowe. Of course not, sir.
    Senator Sarbanes. I think it is very substantially in 
excess of that, and I think FEMA should undertake, and has a 
responsibility to go back to these communities and say, there 
have been problems. We are here now with an open door. It is 
going to make some work for you, but that is the only way to 
get the fairness and justice in these instances and allow 
people to come back and revisit with you and work back through 
the process.
    A lot of these people have never gone to the State 
Insurance Commissioner about their problems. You need to reach 
out and give these people an opportunity to get equity.
    If they have gotten equity, then that is the judgment you 
will make and that is what should be said to people. They may 
differ with you, they may not. As I indicated, I think people 
are pretty reasonable in the circumstance. But it is very clear 
to me from what we are hearing and what we are seeing that 
there has been a breakdown in the workings of the system and I 
think FEMA has a responsibility, or the Flood Insurance Program 
people have a responsibility, in effect, to go in and 
straighten this situation out. It is not a situation that 
affects only Maryland. It is generally, I think, characteristic 
of the problems in States hit by Isabel.
    The dimensions of Isabel and the catastrophic impact of it 
were sufficient, I think, to demonstrate that under great 
stress, the system that FEMA had was inadequate to the task. 
One conclusion out of that is that we have to correct it for 
the future, but another, it seems to me also reasonable 
conclusion, is that you need to redo what has been done with 
respect to this natural catastrophe in order to make sure that 
fairness and equity is prevailing. That should be your prime 
objective.
    Senator Bunning. Thank you, Senator Sarbanes.
    Senator Sarbanes. Thank you, Mr. Chairman.
    Senator Bunning. Senator Dole, go right ahead.
    Senator Dole. Thank you, and I would just underscore what 
my friend, Senator Sarbanes, has said, and I appreciate your 
response to him on your work with the Maryland Insurance 
Commissioner. I am wondering if you are doing the same thing 
with the North Carolina Insurance Commissioner.
    Mr. Lowe. They will be in attendance this afternoon, as 
well, and so we will do the exact same thing. In fact, we are 
going through all the claims and the question for us is trying 
to prioritize. We need to accurately identify what the issue 
is. Is the issue the difference between the adjuster and the 
contractor? Is that what we need to be looking at? Is there, in 
fact, a fundamental standard software issue that we need to be 
looking at? So we have to look first at all those claims that 
were handled to get a good sense of the problem.
    We have gone through 24,000 claims as you know, a number of 
them in North Carolina, so they are definitely something we are 
looking at, as well.
    Senator Dole. I mentioned earlier all of the letters that I 
have had, the significant number of people who have still not 
received compensation for their damages and it is 6 months ago. 
Can you tell me how long FEMA expects that it is going to take 
to settle these claims?
    Mr. Lowe. Yes. We understand that about 8 percent of the 
claims are still open. I am told actually that it might be down 
to 6 percent as of today, of the claims that are outstanding 
from the 25,000 that we expected. We believe that we will be 
able to get those closed within the next 60 days. Since these 
claims do not come into FEMA, closing these files involves us 
reaching out to the insurance companies and making sure that we 
push them along a little bit and help resolve any issues that 
are out there.
    Senator Dole. I speak to people in North Carolina about 
improvement of the National Flood Insurance Program. Most note 
the continued need for more mapping modernization. According to 
the GAO, in 2001, approximately 63 percent of the Nation's 
100,000 flood maps were at least 10 years old. Can you update 
that statistic for us now that the map modernization initiative 
is underway?
    Mr. Lowe. Yes, I can.
    Senator Dole. How far along are we?
    Mr. Lowe. Unfortunately, we actually have regressed a 
little bit. Of course, as the years move forward, the age of 
the map goes the opposite direction. About 70 percent of our 
maps are currently 10 years or older. We believe that 7 years 
of implementation, including 5 years of the program, we will be 
able to modernize and provide digital flood maps, new flood 
maps for the entire country. And we are looking forward to 
that. We have a very aggressive, results-oriented, performance-
managed program that is very sophisticated, and uses a 
significant amount of technology. We are very excited.
    As you know, North Carolina is the model for the rest of 
the country in the field of map modernization. They have done 
an outstanding job with geospatial information systems and this 
fits well with the vision of what we are trying to do.
    Senator Dole. Mr. Lowe, in your testimony, you mentioned 
that FEMA has targeted 10,000 repetitive loss properties as the 
highest priority for mitigation in your repetitive loss 
strategy. You state that the program has paid out close to $1 
billion in flood insurance claims over the last 21 years to 
these 10,000 extreme cases. Do you have any cost estimates of 
what mitigation efforts to address these 10,000 properties 
might cost?
    Mr. Lowe. Yes, I do have some estimates. I believe, again, 
we are looking back at the average cost figure of about $59,000 
to mitigate each structure. Under the current program, the way 
it is structured, we are talking about almost $800 million to 
mitigate all those properties. If we look under the bill, H.R. 
253, the cost is in the neighborhood of about $400 million to 
mitigate those properties using a variety of approaches. Some 
may be buy-outs, some may be relocations, elevations, and other 
floodproofing measures.
    Senator Dole. In your testimony, you mentioned that FEMA 
has set up a special direct facility for selling and servicing 
flood insurance on these repetitive loss properties to better 
coordinate claims handling for them. Was claims handling a 
problem in the past for them, and how does this address the 
problem of repetitive losses? Does the facility provide better 
oversight?
    Mr. Lowe. There were no problems, but we do believe that it 
is better for oversight and it gives us the opportunity to 
track what is occurring with those specific properties. As you 
know, those are properties that are repeatedly flooding, and so 
claims are coming in, almost to the extent that you can have 
one on top of the other fairly quickly. So we want to be able 
to identify those properties, understand where they are and 
always know what is occurring with them.
    Senator Dole. Mr. Jenkins, in 2000, GAO testified that the 
National Flood Insurance Program standards for new construction 
saves an estimated $1 billion annually in flood damage avoided. 
Is that estimate still current, or does GAO believe that this 
estimated savings may have changed?
    Mr. Jenkins. That was an estimate that we got through FEMA, 
as well, and since that estimate, we have not done any work 
since then to see what the current status of that estimate is. 
I do not know whether that estimate is lower or higher than it 
was a couple years ago.
    Senator Dole. Thank you.
    Thank you, Mr. Chairman.
    Senator Bunning. Senator Sarbanes, would you like to have a 
second round? Go right ahead. I am finished.
    Senator Sarbanes. Mr. Lowe, I have here in front of me the 
Maryland price guideline used by the adjusters to determine 
losses after Hurricane Isabel. According to FEMA staff, these 
guidelines are taken from the National Construction Estimator 
and distributed to adjusters at FEMA-sponsored trainings and 
are used then by the adjusters to estimate losses after a 
flood.
    We got in touch with the publisher of the National 
Construction Estimator with respect to these guidelines and we 
learned the following. He says,

    costs in the labor column are for normal conditions, 
experienced craftsmen working on reasonably well-planned and 
managed new construction,

    ``new'' underlined, emphasis applied.

    Add 30 to 50 percent on small jobs where fitting and 
matching of materials is required, adjacent surfaces have to be 
protected, and the job site is occupied during construction. 
Add 25 to 50 percent for work done following a major flood, 
fire, earthquake, hurricane, or tornado when skilled tradesmen 
are not readily available. Material costs may also be higher 
after a major disaster.

    And then he goes on to point out some of the higher costs 
that apply when you are not doing new construction, access is 
often limited in repair work.

    It is easy to solve and weld PVC pipe and fittings unless 
that pipe is installed in an 18-inch crawl space under existing 
floor joints.

    The problem of sequence of construction--in new 
construction, you do it in a logical order. When you do 
repairs, you often cannot do that. Repair work nearly always 
requires demolition, a task not easy to estimate before work 
begins. It has to be done carefully to avoid additional damage.
    Now, it seems to me these guidelines you are giving the 
adjusters do not come near to adequately reflecting real-life 
costs. What is your response to this?
    Mr. Lowe. I think two things. First, this is something we 
are looking into very seriously, because we have heard a number 
of complaints like that. We are going to make sure we identify 
where we are going wrong and whether we have a systematic 
problem. Clearly, when you look down the list of what is 
covered and we look against the price guide, by and large, our 
figures are higher across the board, but yet we still have 
people who are not able to rebuild their houses with the claim 
settlements that they are receiving.
    Senator Sarbanes. Your figures are higher than what?
    Mr. Lowe. Than the price guide. You quoted the National 
Construction Estimator.
    Senator Sarbanes. This is what you give the adjusters, as I 
understand it.
    Mr. Lowe. Right, and what I am suggesting is that is higher 
than the National Construction Estimator, which is one of the 
seminal systems out there, as well as the ``Get-A-Quote,'' 
which is, a national system online.
    I am not suggesting to you, frankly, that our figures are 
the best figures or the right figures because it is something 
we are looking at. What I am trying to suggest is they are not 
artificially low as they stand now.
    Nevertheless, I am particularly concerned about the point 
that you raised that I think is a very, very serious issue 
whether or not the adjuster realized and calculated that the 
cost of replacement is, in fact, higher than the cost for new 
construction. As you well know, many of the complaints we 
received are of pre-FIRM properties that were along the 
Chesapeake. Some are only 300 feet from the shore and have been 
there for many years. That is pre-FIRM construction and so it 
is going to take a lot to be able to rebuild those.
    So that is specifically one of the areas we are looking 
into to say, okay, do we specifically need look at all pre-FIRM 
policies that were settled or are outstanding of because maybe 
we do.
    Senator Sarbanes. No, no, wait a second. I mean, it seems 
very clear to me that the briefing material that you were 
giving the adjusters that was to guide them in making their 
calculations were inadequate. They did not really comport with 
the real-life problem, which only underscores a point I was 
trying to make in our previous discussion of the necessity to 
go back and reexamine these claims and the settlements that 
have been made. People have closed on claims under pressure. I 
mean, what are they to do? These are not wealthy people who can 
carry the problem until they get it all worked out. Senator 
Mikulski made that point, I thought very effectively, in her 
opening statement.
    They are in an absolute quandary. How are they going to 
move their life forward? So they end up, they think there is a 
time deadline to settle. This is what they are being offered, 
although the contractor is telling them, look, to get you back 
to where you were is going to cost you a lot more than that. 
The statement in the flood insurance legislative history is 
that we were intending to get them back to where they were.
    Mr. Lowe. And we will, sir.
    Senator Sarbanes. I think it just emphasizes the necessity 
to go back and review this with people.
    Mr. Lowe. I agree, sir.
    Senator Sarbanes. I have got a real problem. I appreciate 
your focusing on changes for the future. You need to change the 
system. That is quite obvious. But you also need to do 
something so those who were caught in the system in this 
instance get fair treatment, and we intend to follow that 
closely with you.
    My time is going to run out. Let me ask you one other 
question. There is a story in this morning's Baltimore Sun 
paper about the problem of how the adjusters are compensated 
and the fact that the way they are compensated may result in 
the adjusters putting pressure on flood victims in order to get 
these claims settled. They say the adjusters come in. They are 
out of all of these out-of-pocket expenses, but they do not 
start getting any payment until they start settling claims.
    If that is the case, the adjusters are going to be 
motivated to push people pretty hard to sign the claim forms. 
Otherwise, they are laying out all of this money out-of-pocket 
and are not getting reimbursed. Is there not a different way to 
handle the compensation of the adjusters so they are not in the 
posture of pressuring the people to sign the claims because 
that is the only way they can get paid?
    Mr. Lowe. Yes, sir, I agree with you. I believe that is 
correct. We need to look at the incentive structure and to 
figure out, is it leading to low-balling? Is it leading to 
rushed decisions? Is it leading to creating unnecessary, undue, 
and unreasonable pressure on people that just should not occur 
in this program. I agree with you.
    Senator Sarbanes. Well, that goes back again to my first 
point. You have a situation here. I mean, we have now talked 
about that the price guidelines being inadequate, and the way 
you compensate the adjusters. You admit yourself you need to 
look at this and reexamine it, but in this instance, the 
consequence of the way they were being compensated was that, in 
effect, they ended up putting pressure on people to sign claim 
forms. Otherwise, they are laying out all this money for room 
and board and all other expenses and they are not getting 
recompensed for that.
    Again, I urge you to go back, and we intend to continue to 
follow up on this with the agency, but we need to be sure that 
the people that were affected by Isabel are getting fair 
treatment.
    Thank you.
    Senator Bunning. Thank you, Senator Sarbanes.
    We will look into the additional things that we are going 
to put into our legislation to make sure that this will not 
occur again in the future, to make sure that there is a 
reasonableness by the adjusters and by those agents that are 
writing this type of insurance, to make sure that they are 
adequately paid for and not only after the fact that they get a 
paper signed, but they are also taken care of in a normal way 
so that the pressure is not on the one who has had the loss but 
it is on someone else.
    I thank you for your testimony. We appreciate you being 
here. We know you had other engagements, so thank you very 
much.
    Senator Bunning. The third panel consists of Chad Berginnis 
of the Association of Floodplain Managers and three 
Kentuckians, William Stiglitz, III, Hyland, Block, Hyland 
Insurance Company, Louisville, Kentucky; Greg Kosse, Associate 
General Counsel, Kentucky Farm Bureau Mutual Insurance Company 
from Louisville; and Steve Feldmann, Director of Community 
Affairs, the Fischer Group, Crestview Hills, Kentucky.
    Thank you all for testifying, but because of the large 
amount of witnesses, I am going to strictly enforce the five-
minute rule. So please restrict your oral testimony to 5 
minutes and we will accept any written testimony for the record 
in its entirety.
    Mr. Berginnis, you may begin.

                  STATEMENT OF CHAD BERGINNIS

     CHAIR, ASSOCIATION OF STATE FLOODPLAIN MANAGERS, INC.

    Mr. Berginnis. Thank you. Kentucky and Ohio have a common 
border, the Ohio River, and its floodplain. In late 1997, we 
also shared a common threat, flooding that in some areas was 
the historical flood of record. Mr. Chairman, as you well know, 
that particular flood resulted in a lot of devastation in 
Falmouth, Kentucky, as well as a lot of areas in Southern Ohio.
    Research conducted after the flood showed that one 
significant reason that families did not mitigate against risk 
of flooding through the purchase of flood insurance was the 
fact that the policy cost too much. Likewise, in Ohio, we, too, 
encountered the same issue.
    Mr. Chairman, distinguished Members of the Subcommittee, I 
am grateful for the opportunity to testify before you this 
morning. My name is Chad Berginnis and I am supervisor in the 
Ohio State Floodplain Management Office and Chair of the 
Association of State Floodplain Managers. Our organization 
represents over 6,500 people, mostly State and local officials 
who work daily with the National Flood Insurance Program, 
mitigation planning, and flood recovery.
    I will use the balance of my time and my experience as both 
a local and State Floodplain Manager to discuss the issues 
pertaining to repetitive flood losses, repetitive loss 
legislation, and a couple comments and concerns about FEMA and 
the Department of Homeland Security.
    What, then, is the relationship between repetitive loss 
properties and the cost of a flood insurance policy? Almost all 
of these properties were constructed before the creation of the 
National Flood Insurance Program and consequently have not been 
required to be built to flood safety standards of the 
community. Unlike most forms of insurance, flood insurance 
under the NFIP, rates do not change as a result of repetitive 
flood losses. Instead, all of the Nation's 4.4 million 
policyholders must bear the cost of these repetitive loss 
properties, resulting in a cross-subsidy within the NFIP. I 
would again just like to note that these are not taxpayer 
dollars, as common misconceived.
    Thus, solving the conundrum of repetitive loss properties 
will result in cost containment for the NFIP and benefit all of 
the Nation's flood insurance policyholders. This is why ever 
State really needs to pay attention to this important reform 
legislation.
    A framework for addressing repetitive loss properties must 
include basic provisions to ensure that solutions are cost-
effective and in the best interests of the NFIP. Solutions must 
be technically feasible and they must allow flexibility that 
address a variety of communities' mitigation and economic and 
development goals. Also, we must ensure that low-income 
property owners are fairly addressed. We must then recognize 
that repetitive loss properties are residential and 
nonresidential structures and include provisions to address 
both of those types.
    Representatives Bereuter and Blumenauer are to be 
congratulated for their hard work on the passage of H.R. 253, 
and this bill contains a sensible framework for addressing 
repetitive loss properties. The ASFPM supports H.R. 253. 
However, we think that there could be some improvements.
    Specifically, we think that H.R. 253 could integrate 
existing mitigation insurance mechanism called ICC and also, we 
can make some alterations to clarify definitions, procedures, 
and other provisions. The ASFPM proposes using the H.R. 253 
framework that we include such changes.
    Integration of ICC, the existing mitigation insurance 
coverage, into the repetitive loss program is key to its 
success. One concern that all of us share, and it was expressed 
during the House debates and the House hearings, is the cost to 
property owners that would be participating in these programs.
    If ICC can be integrated as the ASFPM would propose, in 
most instances, the local cost share could be met, resulting in 
little or no out-of-pocket expense, which is especially 
critical in some of the other mitigation alternatives, such as 
elevation and floodproofing.
    Also, despite, and it was brought up earlier and I think it 
was a great point, despite the myth--there seems to be a bit of 
a myth in terms of H.R. 253 that it solely focuses on 
acquisition. Again, H.R. 253 really does portray a broad range 
of mitigation options.
    I would like to close by simply saying that we would urge 
the Committee to maintain regular contact with FEMA and DHS to 
ensure short-term and long-term benefits to the NFIP are 
realized in the coming years. Thank you very much.
    Senator Bunning. Good timing. Very good.
    Mr. Stiglitz.

               STATEMENT OF WILLIAM STIGLITZ, III

          INDEPENDENT INSURANCE AGENT, HYLAND, BLOCK,

           AND HYLAND INSURANCE, LOUISVILLE, KENTUCKY

                          ON BEHALF OF

              THE INDEPENDENT INSURANCE AGENTS AND

              BROKERS OF AMERICA AND THE NATIONAL

          ASSOCIATION OF PROFESSIONAL INSURANCE AGENTS

    Mr. Stiglitz. Good morning, Chairman Bunning. My name is 
Bill Stiglitz and I am pleased to have the opportunity to give 
you the views of the Independent Insurance Agents and Brokers 
of America, IIABA, and the National Association of Professional 
Insurance Agents, PIA, on the National Flood Insurance Program. 
I am an Independent Insurance Agent with Hyland, Block, and 
Hyland Insurance of Louisville, Kentucky, and I am an elected 
officer of the IIABA.
    Let me begin by stating clearly that IIABA supports the 
NFIP. Our members, independent agents and brokers, play a vital 
role in the delivery system for flood insurance. The majority 
of the $370 billion in flood policies are sold by the more than 
110,000 insurance agents participating in NFIP's ``Write Your 
Own'' program. This system operates well and does not need 
revision.
    The NFIP provides an important service to people and places 
that have been hit by a natural disaster. The private insurance 
industry has been and continues to be almost entirely unwilling 
to underwrite flood insurance because of the catastrophic 
nature of these disasters. Therefore, NFIP is virtually the 
only way for people to protect against the loss of their home 
or business.
    While we support the NFIP, we recognize there is a need for 
reform to make the program actuarially sound. We believe that 
if reforms are made to the program, certain areas must be 
addressed. I would like to briefly explain the five principles 
that we believe should be followed to strengthen the program 
and avoid any unintended negative effects on the NFIP.
    First, we need to strengthen NFIP building regulations. 
Building regulations help communities better manage their 
floodplains. These regulations require communities to ensure 
that any new construction or new improvements to existing 
buildings in floodplains include safeguards against flood 
damage. It is clear that building regulations work. In fact, 
only 4 percent of repetitive loss properties were built after 
1974.
    Second, increase compliance with the mandatory purchase 
requirement. Sanctions for, and enforcement of, the NFIP 
mandatory purchase requirement need to be improved so that the 
program can collect additional premium to enhance the financial 
position of the program. IIABA also proposes that insurance 
companies be made to inform their customers that flood 
insurance is not covered in their standard homeowners' policy, 
and if they are in a flood zone, it is mandatory that they must 
purchase such coverage.
    Third, NFIP should have additional resources for 
mitigation. The NFIP should take action to prevent future 
losses. There are two basic ways to do this. The first is to 
move people out of the floodplain through buying their homes or 
the businesses of property owners in the most flood-prone 
areas.
    The second way is through providing grant funds to owners 
of existing properties so that they can make improvements, such 
as raising their structures, that decrease the risk of flood 
loss. These preventative measures will decrease the number of 
repetitive claims and save the program money. In fact, former 
FEMA Director James Lee Witt has estimated that there will be a 
$2 return on every $1 spent on buy-outs of repetitive loss 
properties.
    Fourth, we need to stop abuse of the program through 
multiple claims, and I think that has pretty well been covered 
this morning.
    Fifth, we require mandatory disclosures of flood 
information. One of the best ways to avoid these future 
problems with the NFIP is to give people information about the 
flood risk. Reform of the NFIP needs to include mandatory 
disclosures of the flood history of the property so that buyers 
can make an informed choice in their purchases and they can 
properly value the home.
    As important as any reform, we also believe the Congress 
needs to create certainty in the NFIP by reauthorizing the 
program for 5 years. In 2002, Congress adjourned without 
reauthorizing the NFIP program. This put the program in limbo 
and left the industry, and more importantly consumers, not 
knowing when or if the program would be reauthorized and 
wondering how they should proceed in the meantime. We strongly 
recommend that Congress change the reauthorization period to 5 
years in order to create market stability.
    Before I conclude, I would like to address a pressing issue 
that greatly concerns agents who sell and service policies 
under the program. I am troubled by recent developments by FEMA 
which has proposed a rule that would harm the position of 
insurance agents participating in the ``Write Your Own'' 
program and ultimately be detrimental to the NFIP. The proposed 
rule would change current standard practice by designating 
producers as agents of insureds for the purposes of selling and 
servicing NFIP policies. Currently, the status of an insurance 
producer as an agent or broker is a contractual issue 
determined by the producer and insurer.
    FEMA's proposed rule, by dictating that an agent is 
essentially a broker for purposes of NFIP, undermines the 
agent's ability to establish such a contractual relationship 
and, therefore, alters the rights and responsibilities provided 
for in such contracts. This will increase the liability 
exposure of agents and exacerbate the already difficult task of 
securing errors and omissions coverage for their businesses.
    To date, we are still unclear why FEMA is making these 
changes and all the lines of insurance or producer status is 
always determined through contractual negotiations. I believe 
FEMA's number one job is to help administer this program and 
protect consumers. I am still unclear how this move will in any 
way help this program or the people it serves.
    Thank you for giving me the opportunity to express the 
views of the Nation's insurance agents on this important 
program. IIABA looks forward to working with the Committee on 
this issue, and I will be happy to take any questions you may 
have.
    Senator Bunning. Thank you very much.
    Mr. Kosse.

                    STATEMENT OF GREG KOSSE

            ASSOCIATE GENERAL COUNSEL, KENTUCKY FARM

                BUREAU MUTUAL INSURANCE COMPANY

                          ON BEHALF OF

                 THE PROPERTY CASUALTY INSURERS

                     ASSOCIATION OF AMERICA

    Mr. Kosse. Thank you. Mr. Chairman, my name is Greg Kosse. 
I am Associate General Counsel and spokesperson of Kentucky 
Farm Bureau Mutual Insurance Company, the largest property and 
casualty insurance company in Kentucky. We very much appreciate 
the opportunity to testify on the importance of a long-term 
reauthorization of the National Flood Insurance Program.
    Kentucky Farm Bureau is a member of the Property Casualty 
Insurers Association of America, which represents nearly 40 
percent of the property and casualty market. As a Farm Bureau 
insurer, we are reflective of much of PCI's membership across 
the country that offer insurance services to consumers in only 
one or a handful of States. Kentucky Farm Bureau is a member 
service of the Kentucky Farm Bureau Federation, an organization 
of families across Kentucky.
    The Farm Bureau represents over 440,000 households in 
Kentucky, or nearly 25 percent. If you drive down a road in 
Kentucky, any road in Kentucky, one out of four mailboxes that 
you see we are touching. From our humble beginnings in the 
1940's of selling insurance from a card table in a feed store, 
we are now the largest property casualty insurer in Kentucky.
    Why is the National Flood Insurance Program important to an 
organization like Kentucky Farm Bureau Insurance? There are 
three basic reasons.
    One, it allows for available and affordable coverage for 
consumers for catastrophic and widespread flood losses. It 
partners with the insurance industry to distribute and serve 
the program, and by working with communities and lending 
institutions, the program encourages mitigation of future flood 
losses. Let me touch on each of those just briefly.
    The availability and affordability--the Federal Government 
realized after widespread and terrible flood losses in the 
1960's that the private market could not sustain flood losses 
without it being prohibitively expensive for insurers and for 
policyholders, and if it is too expensive, people will not buy 
the product. As strong as Kentucky Farm Bureau is in the 
Kentucky market, a one-State operation could not adequately 
spread the risk of loss across the State. We could not absorb 
the loss without one of two things happening, premiums becoming 
excessively high or we simply would not write the product, and 
therefore, that is where the Federal Government stepped in as 
the underwriter.
    That leads to the second reason, the second half of the 
partnership, which is the practical and effective distribution 
and servicing network. Kentucky Farm Bureau has agents in every 
county in Kentucky. We have adjusters that visit every county 
in Kentucky every week. People like to buy a product from 
someone that they have a relationship and with whom they trust. 
Therefore, we have the distribution network to sell and service 
the product. This is something that, quite frankly, the Federal 
Government does not have. The NFIP in this partnership assures 
that families across Kentucky and across America have available 
and affordable insurance coverage.
    And finally, the after-loss mitigation efforts that have 
been discussed at great length today. The National Flood 
Insurance Program partners with communities and lending 
institutions to protect investments. Local communities must 
adopt sound land use and floodplain management ordinances. It 
also encourages policyholders to buy flood insurance. If you 
have a federally backed loan and live in a floodplain, you will 
need flood insurance. We support the mitigation efforts as they 
alleviate repetitive loss issues.
    In closing, my primary purpose today is in support of a 
long-term reauthorization of the National Flood Insurance 
Program. Simply, it works. It allows for available and 
affordable coverage for a natural disaster through a unique 
partnership between the Federal Government and private 
insurers.
    On behalf of Kentucky Farm Bureau Mutual Insurance Company 
and the Property Casualty Insurers Association of America, I 
appreciate the opportunity to comment on the importance of the 
NFIP and encourage you to reauthorize the program. Thank you.
    Senator Bunning. Thank you very much.
    Mr. Feldmann.

                STATEMENT OF STEVEN M. FELDMANN

                 DIRECTOR OF COMMUNITY AFFAIRS,

          THE FISCHER GROUP, CRESTVIEW HILLS, KENTUCKY

                          ON BEHALF OF

           THE NATIONAL ASSOCIATION OF HOME BUILDERS

    Mr. Feldmann. Good morning, Senator Bunning. I am pleased 
to appear before you today on behalf of the 215,000 member 
firms of the National Association of Home Builders to share our 
views concerning the repetitive losses and the National Flood 
Insurance Program and the Congressional efforts to reauthorize 
that program.
    I am Steve Feldmann. I am the Director of Community Affairs 
for Fischer Homes, one of the largest home builders in the 
Nation. We are focused exclusively in your home region, 
northern Kentucky, and greater Cincinnati.
    Home builders believe that the Federal Emergency Management 
Agency's National Flood Insurance Program is vital because it 
enables its 4.4 million policyowners to protect their 
properties and investments against flood losses while living in 
a home of their choice in a location of their choice. In order 
for our members to continue to provide safe, decent, affordable 
housing to consumers, the home building industry depends on a 
strong National Flood Insurance Program that is annually 
predictable, universally available, and fiscally viable.
    Unfortunately, the solvency and stability of the NFIP is 
threatened by a small percentage of properties that have 
suffered multiple costly flood damages. Approximately 48,000 
currently insured properties have incurred two or more floods 
within a 10-year period. This makes up only 1 percent of the 
current policies and costs the NFIP approximately $200 million 
annually and accounts for approximately 25 to 30 percent of the 
claims paid by the program. These repetitive loss properties 
significantly impact the National Flood Insurance Program, 
drives up the cost of premiums for all policyholders, and 
allows the system to teeter on an unstable actuarial 
foundation.
    With this said, I would like to turn to some of our 
thoughts on the current legislation. First, although Congress 
recently extended FEMA's statutory authority to issue flood 
insurance policies until June 3 of this year, a lapse in 
authority after that date will have severe repercussions for a 
vast number of land owners. Allowing FEMA's authority to limp 
from one short-term authorization to the next does not provide 
consistency for policyholders, future homebuyers, and 
industries that depend on a viable National Flood Insurance 
Program. Congress should reauthorize the NFIP for a full 5 
years.
    Second, the NAHB recognizes the need to address repetitive 
loss properties in order to ensure the long-term viability of 
the NFIP. However, these properties must be allowed to remain 
eligible for flood insurance. Further, any reauthorization 
legislation must narrowly define repetitive loss properties to 
only include those properties that pose the most severe 
flooding risk.
    Third, the NAHB has been a proponent of the House-passed 
reauthorization legislation. However, we believe that the 
thresholds for severe repetitive loss properties proposed in 
the House bill are too low and do not truly reflect the cost of 
flood damage in many areas. In many instances, minor flooding 
can produce claims that exceed the thresholds established by 
the House bill. The NAHB believes that only the most severe 
properties should be targeted.
    Fourth, Congress should encourage FEMA, with the 
participation of State and local governments, to facilitate the 
redevelopment of properties according to FEMA standards. After 
FEMA purchases a flood-damaged property, that property is 
ineligible for redevelopment. This means that for every home 
purchased via the NFIP, a formerly buildable lot has been taken 
out of production. If these properties are allowed to be 
redeveloped to current floodplain standards, local governments 
can satisfy their local housing needs while ensuring that the 
properties are less prone to floods.
    Fifth, additionally, in cases where FEMA makes an offer to 
buy a property, the property owner must be paid fair market 
value for the land and the structure.
    Sixth, FEMA should be granted the authority to charge a 
higher premium for those repetitive loss properties for which 
reasonable mitigation offers were refused. Through such a 
mechanism, property owners will be encouraged to accept an 
offer of mitigation and, therefore, reduce the repetitive 
claims in the NFIP.
    Finally, the NAHB believes that any reauthorization 
legislation should include a provision to require FEMA to 
notify all policyholders of changes to the program. It would be 
unfair to the 4.4 million policyholders, especially the 
approximately 46,000 repetitive loss property owners, to be 
caught unaware by changes to the NFIP without the opportunity 
to read and understand the policy changes.
    Mr. Chairman, thank you for this opportunity to share the 
views of the National Association of Home Builders on this 
important issue. We look forward to continuing to work with you 
and your colleagues and we urge you to fully consider how the 
NFIP enables the home-building industry to deliver safe, 
decent, affordable housing to consumers.
    Senator Bunning. Thank you very much.
    Senator Bunning. Let me just try to bring you up to date on 
where we are heading. We look to mark up a bill probably next 
week or the following week. It is our intention to have no 
lapses, and I know that is important, and that we do it for a 
5-year period. I think that those are some of the basic tenets 
of the bill that we are approaching.
    We are going to try to address some of the problems that 
occurred in Maryland and North Carolina with language that will 
suit that, but I appreciate all your information, and if we 
need more, we will call on you. Thank you very much for being 
here.
    We are adjourned.
    [Whereupon, at 11:52 a.m., the hearing was adjourned.]
    [Prepared statements and additional material supplied for 
the record follow:]
             PREPARED STATEMENT OF SENATOR PAUL S. SARBANES
    I want to thank Senator Bunning for scheduling this important and 
timely hearing and want to welcome Congressmen Blumenauer and Bereuter 
before us today and to commend them for moving a flood insurance reform 
bill through House.
     I am also delighted that my colleague from Maryland, Senator 
Mikulski, is here and for her leadership and interest on this issue. 
Senator Mikulski and I toured some of the areas affected by Hurricane 
Isabel, and that gave us a deep appreciation for the losses suffered by 
our constituents and the impact upon their lives.
     The National Flood Insurance Program provides flood insurance to 
over 4.3 million properties throughout the country. It is an extremely 
important program, helping to ensure that families devastated by floods 
can rebuild, replace, or relocate. The Federal Government plays a 
critical role in requiring and providing flood insurance coverage and 
encouraging communities to adopt policies that decrease the chances of 
flood losses.
     Congressmen Blumenauer and Bereuter have addressed the important 
issues of repetitive loss properties, which every statistic shows is a 
matter of major concern.
     We had a devastating impact in Maryland from Hurricane Isabel. 
Many of the properties which were damaged by the floods were covered by 
the National Flood Insurance Program (NFIP), which was established in 
1967 in order to ``provide the necessary funds promptly to assure 
rehabilitation or restoration of damaged property to pre-flood status 
or to permit comparable investment elsewhere.'' (House and Senate 
Reports)
     Unfortunately, many flood victims in Maryland have been offered 
settlements that come nowhere near close to restoring pre-flood 
conditions and meeting contractor estimates for repair and 
rehabilitation. Furthermore, many flood victims have found the process 
of trying to recover on their flood insurance policies to be time-
consuming, confusing, and frustrating.
     I am very greatly concerned about how the Flood Insurance Program 
is being administered and the adequacy of the coverage. We have heard 
from numerous flood victims that they are not being adequately 
reimbursed for flood losses; there are inaccurate guidelines for the 
price of repairs; FEMA rules, or adjuster practices, have consistently 
lead to flood insurance payments significantly lower than what is 
needed to restore families to their pre-flood conditions.
     People covered did not realize the limitations contained in their 
flood insurance policy or that exclusions existed creating a 
significant gap between their coverage and their damages. These 
exclusions are not made clear to policyholders in FEMA publications or 
in the flood insurance policy itself.
     We had a careful study done in one of our jurisdictions in the 
State--Baltimore County by Steve Larsen, the former Maryland Insurance 
Commissioner that goes through detailing a wide range of problems that 
exist in this area.
     I am very frank to tell you that I believe that FEMA should start 
down the path by conducting a comprehensive review of the adequacy of 
coverage provided under the standard flood insurance policy. This would 
address the future problem.
     But in the short-term, they should go back to the flood victims to 
make sure they have been treated fairly. They should review their 
claims and determine whether they were based on inaccurate FEMA price 
guidelines or software that does not correspond with the real world 
prices in terms of the costs of repairs.
     And I then urge FEMA to readjust those claims just as a matter of 
fairness. They should be able to go back and review those problems. I 
will explore this issue more fully with Mr. Lowe, the Federal Insurance 
Administrator at FEMA, and hope that he will agree to revisit these 
claims. If it was all done properly then there is no need to adjust. 
But in many instances we are convinced that people have suffered an 
injustice.
                               ----------
              PREPARED STATEMENT OF SENATOR JON S. CORZINE
    Thank you, Mr. Chairman, for holding this hearing on the Flood 
Insurance Reform Act, and I would like to join you in welcoming our 
distinguished colleagues and witnesses.
     Mr. Chairman, floods are a serious threat to people in my State, 
and because of that they are very concerned about flood insurance. The 
most recent data from FEMA shows that New Jersey has over 180,000 
people who have flood insurance, and they pay more than $95 million a 
year in premiums. Both of these numbers are in the Top 5 for the 
Nation. The National Flood Insurance Program has been very important 
for people in my State, providing over $575 million in the past 25 
years to help people rebound after a devastating flood. I am very 
pleased that we are taking a good hard look at this program, and I look 
forward to making sure we get a full extension out of Committee as soon 
as possible.
     Of course, one of the reasons we are here today is to hear about 
repetitive loss properties, and this is also something that we are no 
strangers to in New Jersey. We have roughly the 3rd highest number of 
repetitive loss properties in the country, and I hope that we tackle 
this issue thoughtfully and carefully, taking into account both the 
people who live in houses that are continually getting flooded, and 
those people who are subsidizing them through higher premiums. The 
Association of State Floodplain Managers estimates that New Jersey 
policyholders could save almost $10 million a year if we take steps to 
address repetitive loss properties, and I would certainly like to see 
them keep their money if at all possible.
     I am pleased to see our distinguished colleagues from the House 
here this afternoon. This bill passed the House last year with an 
overwhelming bipartisan majority, and I hope we can continue in that 
spirit over on this side, and work together to enact some necessary 
improvements to our flood insurance system.
     Thank you for holding this hearing, and I look forward to hearing 
from our witnesses.
                               ----------
               PREPARED STATEMENT OF BARBARA A. MIKULSKI
               A U.S. Senator from the State of Maryland
                             March 25, 2004

    Chairman Bunning, Ranking Member Schumer, Senator Sarbanes and my 
other colleagues, I am pleased to have the opportunity this morning to 
testify before your Committee on the experiences of my constituents 
with the National Flood Insurance Program following Hurricane Isabel.
    I appreciate the work you are doing to review and reauthorize the 
National Flood Insurance Program. I especially want to thank Senator 
Sarbanes, my colleague from Maryland, and a member of this committee. 
Senator Sarbanes and I are working together on this issue to help the 
people of our state and to share lessons learned.

Hurricane Isabel
    Today, I would like to share with you the experiences of my 
constituents in the aftermath of Hurricane Isabel. In September 2003, 
my State of Maryland was devastated by Hurricane Isabel. This was the 
worst natural disaster in Maryland history. The people who live on the 
Chesapeake Bay and the many rivers leading into the Bay lost their 
homes, their possessions, and many lost their livelihoods. Some of the 
communities that were hit particularly hard were Bowley's Quarters, 
Miller's Island, Bayside Beach, North Beach, Kent Island, and Hooper's 

Island
    The people who live in these communities are hard-working people. 
Many of those affected are retirees who scrimped and saved to buy these 
homes. I went to school with some of the people whose homes and 
businesses were devastated in the Hurricane. These communities are 
still struggling with the legacy of Hurricane Isabel. Many people still 
have polluted wells. Too many of those affected spent the winter living 
in trailers that are really campers with inadequate heat.

Partnership
    Right after Isabel, Senator Sarbanes and I went with Governor 
Ehrlich and Secretary Ridge to see the damage, to talk to the people, 
and to find out how we could work together to help Marylanders put 
their lives back together. When disaster strikes, we are Team Maryland 
and Team America--Federal and State officials--Democrat and Republican. 
I am so proud of how we worked together and how these communities 
pulled together.

Impact of Hurricane Isabel
    During our statewide tour of Maryland to see first-hand the 
devastation caused by the storm, we saw houses moved off their 
foundations in North Beach. We walked the streets of Bayside Beach and 
Bowley's Quarters where children's toys and personal items were pushed 
into yards by 3 feet of flood waters. We saw mud more than foot deep or 
more three blocks away from the water. We talked to a business owner on 
Kent Island who lost her restaurant only 6 months after she bought it. 
I was incredibly moved by what I saw. Not only was I moved by the scope 
and scale of the devastation, but also the way these people were 
pulling together.
    We heard about daring rescues by our intrepid first responders. We 
heard how churches opened their doors to provide food and shelter. All 
over Maryland, we saw that neighbor was helping neighbor.
    I promised them, their Federal Government would help them. I am so 
proud of FEMA and how they responded. FEMA quickly set up local offices 
and worked with local officials to get help to those who needed it.
National Flood Insurance Program
    Unfortunately, the National Flood Insurance Program did not respond 
as quickly as FEMA. Today, nearly 5 months after Hurricane Isabel hit, 
my constituents are still struggling to rebuild. They are struggling to 
get the money that is owed to them. They are frustrated. They are 
confused. And frankly, many are fed up. They feel like insurance they 
paid for did not provide coverage when they need it most.
    Today, I want to share with you their experiences and tell their 
stories to this Committee. I respectfully ask that you consider what is 
happening in Maryland as you focus on reauthorization of the National 
Flood Insurance Program.

Experiences of Marylanders
Lack of Information
    One of comments I have heard consistently from my constituents is 
that they were not provided with adequate information regarding their 
flood insurance policies. From the communities in Anne Arundel County 
to the Eastern Shore, people are telling me that they do not understand 
what their flood insurance pays for. They thought they were covered for 
damages related to flooding. They believed that because they often had 
both homeowners insurance and flood insurance, they thought they had 
purchased adequate coverage.
    Now, they are finding out that is not true. The limitations of 
their coverage were not explained to them when they bought these 
policies. For example, many did not know that the contents of their 
home are not covered without a separate policy. They thought that if 
they had $200,000 worth of coverage on a home they bought for $50,000 
their flood insurance would pay to replace the home. Now, when they put 
in their claim, they are finding out that they will get only a portion 
of what it will cost to make repairs or rebuild.

Insurance Agents Training
    When my constituents asked their insurance agents to explain things 
to them, they often could not get a straight answer. I want to know if 
this is because the insurance agents do not know what these policies 
cover or how they really work.
    In Southern Maryland, some homeowners were able to get emergency 
advances in order to make urgent repairs so they could stay in their 
homes. Others were told that there was no way to get advances on their 
claims. Different agents gave different answers. In some cases, the 
same agent would give a different answer depending on the day. That is 
unacceptable.

Appeals
    When I heard stories about claims denied or shortchanged, I asked 
my constituents if they could appeal. Many told me they did not know. 
When they filed their claims, no one told them how to appeal or even if 
an appeal was possible.
    My office became a clearinghouse for appeals. We asked the National 
Flood Insurance Program and FEMA for a fact sheet or instructions on 
filing an appeal that we could give to constituents coming to our 
office for answers. There wasn't one.
    So, I organized community meetings and appeals hearings. I brought 
FEMA and the National Flood Insurance Program to Baltimore, Anne 
Arundel, and Dorchester Counties to explain to Marylanders what they 
needed to do to get a fair hearing.
Adequacy of Payments
    Once Marylanders figured out what their policy covered and filed 
their paperwork, the payments they are getting were not adequate to 
repair the damages. The flood insurance adjusters were not using real 
world estimates for how much it would cost to repair the damages or to 
replace what had been lost.
    For example, in Bowley's Quarters, one insurance adjuster was 
giving unrealistically low estimates for people's repairs. So the 
community association asked a local contractor to come in for a second 
opinion. The local contractor's estimate provided an accurate 
assessment of what it was going to cost to repair the damage. It was 
also significantly higher than the estimate from the insurance 
adjuster. The community leaders then talked to the insurance adjusters 
working with NFIP and asked them to provide more accurate assessments 
and to review prior claims.
    In the end, Marylanders received more accurate cost estimates to 
repair the damages from Hurricane Isabel. Claims were paid and repairs 
are underway. Today, the people of Bowley's Quarters are getting what 
they need; but, no one should have to go through all this to get a fair 
appraisal and a fair reimbursement from insurance that they paid for.
Senators Sarbanes and Mikulski Recommendations
    Based on these experiences, Senator Sarbanes and I have four 
recommendations to improve the National Flood Insurance Program. 
Senator Sarbanes has been instrumental in developing these 
recommendations and is working with the Committee to develop 
legislation.
    I want to commend the work of my senior Senator who shares with me 
such grave concern for the plight of Marylanders affected by Hurricane 
Isabel.

Four Recommendations
Full Information and Disclosure of Flood Insurance Policies
    The National Flood Insurance Program must provide a clear and 
understandable outline of policies so policyholders understand what is 
covered and what is not.

Better Training for Insurance Agents
    Agents who sell flood insurance must understand what they are 
selling and how claims are processed so consumers do not get the run-
around instead of answers.

A Straightforward Formal Appeals Process
    There must be a clear way for policyholders to appeal their claims 
awards or appraisals of loss.

Adequacy of Payments
    Consumers need assurance that the insurance they pay for will pay 
the real world cost of repairing the damage and replacing their loss.

Reports Based on Maryland's Experiences
    Finally, I respectfully submit to this Committee 2 reports:
Report to the County Executive of Baltimore County Maryland on the
Response to Flood Victims of Hurricane Isabel by Insurance Companies
and Agencies of the State and Federal Government
    This report was prepared at the request of the Baltimore County 
Executive, Jim Smith. Following Isabel, he asked Maryland's former 
Insurance Commissioner, Steve Larsen to examine the experiences of 
Baltimore County residents and make findings and recommendations.

A Report to The Maryland Congressional Delegation on Hurricane Isabel
    This report was report prepared by the Maryland Insurance 
Administration and was lead by Alfred Redmer--the current Insurance 
Commissioner for Maryland.
    I believe the Committee and your staff will find these report very 
useful as you conduct your review of the National Flood Insurance 
Program. Many the findings in these two reports are similar to what 
Senator Sarbanes and I have heard directly from our constituents. I 
would also like to offer assistance if the Committee staff would like 
to talk to any local Maryland representatives about these reports or 
our experiences following Hurricane Isabel. My office would be happy to 
facilitate such a meeting.
    Again, I would like to thank Senator Bunning and Senator Schumer 
and the Members of the Subcommittee for providing me the chance to 
discuss these important issues with you today. I know that you also 
have constituents who have been hard hit by natural disasters like 
Hurricane Isabel. Every member has had experience with hurricanes, 
tornadoes, floods, or fires in their State. When disasters strike, 
people need to know that their government is on their side. That is why 
the work you are doing is so important. I hope that by working 
together, we can improve the National Flood Insurance Program so that 
no American is delayed in getting the help they need following a 
natural disaster. This concludes my prepared remarks. Thank you.




                  PREPARED STATEMENT OF DOUG BEREUTER
      A U.S. Represenative in Congress from the State of Nebraska
                             March 25, 2004

    Good morning. Thank you very much Chairman Bunning for holding this 
Subcommittee hearing on the subject of National Flood Insurance Program 
(NFIP) repetitive losses. As you undoubtedly know, on November 20, 
2003, the House passed the Flood Insurance Reform Act of 2003 (H.R. 
253) by a vote of 352 to 67. This bill both authorizes the NFIP through 
September 30, 2008, and makes essential changes to the program as it 
relates to the mitigation of repetitive loss properties. The 
authorization of the NFIP is set to expire on June 30, 2004. This 
legislation represents a continuation of my long-term interest and my 
past efforts in the House to reduce the extraordinary costs of 
repetitive losses from the NFIP as administered by Federal Emergency 
Management Agency (FEMA).
    First, this Member would like to thank Chairman Mike Oxley (R-OH) 
of the House Financial Services Committee, and Ranking Member Barney 
Frank (D-MA) for their support of this legislation. I would also like 
to thank Representative Earl Blumenauer (D-OR), who is both an original 
cosponsor of this legislation and a tireless advocate for reform of the 
NFIP. Representative Richard Baker (R-LA) also deserves credit for his 
significant contributions to and support of this legislation. I would 
also note that FEMA has been involved in both the drafting and revising 
of this legislation.
    Today, I would like to briefly speak about the following points:

 background on repetitive loss properties;
 contents of H.R. 253 including the existing Flood Mitigation 
    Assistance (FMA) program and the new pilot program; and
 the diverse groups who are supporting H.R. 253.

Background on Repetitive Loss Properties
    Repetitive loss properties cost the NFIP about $200 million 
annually. These properties while comprising approximately 1 percent of 
the currently insured properties, are expected to account for 25 
percent to 30 percent of claims paid. For example, I will cite one of 
many egregious examples among a great many such examples of costly 
abuse which could be discussed. One home, valued at $114,480, has 
received $806,591 in flood insurance payments over 18 years.
    Furthermore, 25 percent of all current NFIP policies do not pay 
actuarial rate for their coverage and thus are subsidized by the 75 
percent of other policyholders. Today, the vast majority of repetitive 
loss properties are eligible for subsidized flood insurance far below 
the actuarial risk rate they should be paying. This bill, H.R. 253, 
would at last move the NFIP toward a more free-market insurance model 
by requiring people living in flood prone areas to reduce their risk of 
flooding.

Contents of H.R. 253
    This legislation, H.R. 253, authorizes funds for the existing FMA 
program and then authorizes a new pilot program to address severe 
repetitive loss properties. At the outset, it is important to note that 
no property owner under this bill is ever denied Federal flood 
insurance except for fraudulent claims.

FMA Program
    This bill uses FEMA's existing FMA program to mitigate repetitive 
loss properties. The bill authorizes an additional $40 million a year 
to be transferred from the National Flood Insurance Fund into the FMA 
fund through fiscal year 2008.

Pilot Program
    The pilot program authorizes up to $40 million a year to be 
transferred from the National Flood Insurance Fund for mitigation 
assistance to reduce the problem of severe repetitive loss properties. 
This trial pilot program, which would expire on September 30, 2008, 
addresses these properties in a simple, straightforward manner; the 
owner of a severe repetitive loss property will be charged a rate 
closer to the actuarial, risk-based rates for their national flood 
insurance policy if two conditions prevail.
    The first condition is that it is indeed by definition a ``severe 
repetitive loss property.'' Under this legislation, a severe repetitive 
loss property must at least meet one of the following three 
definitions:
    (A) this is real property on which four or more separate flood 
insurance claims payments have been made prior to the date of the 
enactment of this Act, with the amount of each such claims exceeding 
$5,000 and with the cumulative amount of such claims payments exceeding 
$20,000; or
    (B) this is real property on which four or more separate claims 
payments have been made after the date of enactment of this Act, with 
the amount of each such claims exceeding $3,000 and with the cumulative 
amount of such claims payments exceeding $15,000; or
    (C) this is real property on which 2 or more separate NFIP claims 
payments have been made which cumulatively exceed the value of the 
insured property.
    The second condition which would cause the applicability of closer 
to actuarial rates to be applied is that the owner of the real property 
must have refused a mitigation measure from a State or locality, such 
as the elevation of the structure or a buy-out of the property. (It is 
important to note that this bill preserves State and local 
decisionmaking.)
    If both of these conditions have been met, rates for severe 
repetitive loss properties will be increased by 50 percent. Properties 
will be subject to additional 50 percent increases for each subsequent 
flood event where claims payments exceed $1,500; however, flood 
insurance rates applied cannot be higher than the actuarial-based NFIP 
rates.
    Mr. Chairman, Members of the Subcommittee, it is also important to 
note that this pilot program to be authorized in H.R. 253 would also 
reduce the non-Federal cost share for mitigation offers in certain 
States which qualify in order to help those States that have a high 
number of severe repetitive loss properties. Under current law, FEMA 
pays for 75 percent of the cost of mitigation. There is a 25 percent 
nonFederal match which is composed of State, local, and homeowner 
contributions. However, a provision in the pilot program would allow 
the Director of FEMA to reduce the non-Federal cost share under the 
pilot program from 25 percent to as low as 10 percent for any State, 
and for the communities located in that State, with respect to that 
year, if the following two criteria are met:
    (A) 5 percent or more of the total number of severe loss properties 
in the United States are located in that State (For 2002, the following 
States would have qualified: Louisiana, Texas, New Jersey, Florida, 
North Carolina, and New York); and
    (B) the State submits a plan to FEMA as to how they would address 
the problem by reducing the number and severity of severe repetitive 
loss properties.
    The pilot program also creates an appeal process. Under H.R. 253, 
any owner of a severe repetitive loss property may appeal an increase 
to an actuarial rate of insurance to an independent third party. One of 
the grounds for appeal is that the owner of the property would not be 
able to purchase a replacement primary 
residence of comparable value which is functionally equivalent to their 
current residence. Thus this provision helps to assure that the 
legislation is homeownership-friendly and humanely judicious.
    With respect to the legislation as a whole, a section-by-section of 
H.R. 253 has been circulated to the desks of each of the Senators on 
the Subcommittee. A summary of the important provisions of the bill are 
found in this section-by-section.
Groups Which Support the Flood Insurance Reform Act of 2003
    Last, Mr. Chairman and Members of this Subcommittee, it is 
important to note that the unusually broad coalition of diverse groups 
which supported our legislation when it passed the House: the National 
Association of REALTORS'; the American Banker's Association; 
America's Community Bankers; American Planning Association; the 
National Association of Professional Insurance Agents; the Independent 
Insurance Agents and Brokers of America; the Mortgage Banker's 
Association; the Association of Floodplain Managers; the National 
Wildlife Federation; the National Association of Homebuilders; 
Taxpayer's for Common Sense; U.S. Public Interest Research Group; the 
National Taxpayer's Union; Citizens Against Government Waste; Heritage 
Foundation; Coast Alliance; Friends of the Earth; American Rivers; and 
the Ocean Conservancy.
    I believe that it is important that one final public policy point 
be made. Under the NFIP, a very large regional cross-shifting of the 
cost of flood insurance is occurring among States and within States; 
the policyholders in nonrepetitive loss areas of the country by their 
higher than appropriate premiums are subsidizing the policyholders in 
repetitive loss areas of the country. This bill will give FEMA the 
needed tools to gradually reduce the number of repetitive loss 
properties and to substantially reduce the dramatic cases of this cost-
shifting to other NFIP policyholders.
    In conclusion, I would posit that Congress finally needs to act to 
stop the very expensive treading through the water of repetitive loss 
after repetitive loss. I would encourage the Senate to pass H.R. 253, 
the Flood Insurance Reform Act, as it is the right thing to do at the 
right time. Congress has delayed far too long in making the obvious 
reforms needed in the NFIP.
    Thank you for your consideration of my remarks and this 
legislation.



                 PREPARED STATEMENT OF EARL BLUMENAUER
       A U.S. Representative in Congress from the State of Oregon
                             March 25, 2004

    My goal in Congress is to make the Federal Government a better 
partner in the livability of our communities--ensuring that our 
families are safe, healthy, and economically secure. The National Flood 
Insurance Program (NFIP) is crucial to the lives of many people across 
the country, and is a good example of how the Federal Government can 
work with local communities to lessen the impact that disasters have on 
people's lives and property. It provides benefits for the economy, the 
environment, and for individual property values.
    The NFIP was started in 1968, after private insurance companies 
experienced such high losses from floods in the first half of the 
century that they stopped offering coverage for flood damage. The NFIP 
has been successful in helping homeowners deal with flood losses as 
well as giving communities tools to prevent future flood damage. It is 
estimated that the program has lowered flood damage by about 25 percent 
below the level that would have occurred without the program. However, 
as we look toward reauthorization, it is time for the Federal 
Government to provide better incentives for individuals, communities, 
and States to act responsibly.
    Unfortunately, our national disaster policy--including the dominant 
structural model for floodplain and flood management--has a number of 
problems. Flooding has historically been the most expensive natural 
hazard--as well as the leading cause of death from natural hazards. 
Between 1975 and 1998, flood losses averaged more than $4.4 billion per 
year. This problem is going to get worse: As more retirees and other 
Americans flock to coastal States, the number who live in hurricane 
alleys is expected to double. It is estimated that by 2025, 75 percent 
of our Nation's population will live in or near coastal communities. 
Natural forces will continue to confound our best engineering efforts.
    In some cases, Federal flood control policy actually encourages 
floodplain development by financing the construction and repair of 
levees and underwriting the risk of flooding. As both environmental and 
taxpayer watchdog organizations have argued for years, one major 
unintended impact of the NFIP has been to encourage construction and 
reconstruction in high-risk floodplains and coastal areas. Development 
density in many high-risk coastal areas has increased by more than 60 
percent over the last 10 years, and studies have shown that some of 
this growth can be attributed to the NFIP. By reducing the economic 
risks of living near the water, the Federal Government has stimulated 
development there.
    The Federal Emergency Management Agency, under both the Clinton and 
Bush Administrations, has recognized the problems of the NFIP. 
Representative Bereuter and I worked with former FEMA Administrator 
James Lee Witt to develop our legislation, and FEMA has been a key 
partner in our efforts this year as well. The Office of Management and 
Budget has pointed out that in too many years the program has expenses 
greater than its revenue from insurance premiums which prevents 
building long-term reserves to handle the costs of flood insurance. 
About 25 percent of the policyholders pay substantially subsidized 
premiums, with the Federal Treasury and other policyholders paying the 
difference. This inefficiency means that the losers in the NFIP are the 
people who live in areas that require flood insurance, even though they 
do not have their property flood often, nonetheless pay dramatically 
high rates. It also results in a premium shortfall of about $700 
million annually. The program is currently self supporting from premium 
income. However, in the 1980's Federal taxpayers had to make up a 
shortfall of $1.2 billion when the income from the low premiums was not 
enough to cover the flood claims. The chances of this happening again 
are high.
    Repetitively flooded properties are a significant strain on the 
NFIP. FEMA reports that just 1 percent of the properties account for 25 
percent of NFIP flood loss dollars. Many of these properties have 
received more in flood insurance claims payments than the building's 
value.
    Subsidizing people to live in repetitively flooded areas does not 
make sense. It is bad for the Federal taxpayer, bad for the 
environment, and bad for the families that are continually placed in 
harm's way. The majority of these repetitively flooded properties are 
primary residences. These property owners are often trapped in a 
dangerous and expensive cycle. We do flood victims no favors by 
rebuilding their homes in harm's way.
    To deal with these problems, Representative Doug Bereuter and I 
introduced legislation during the last three Congresses to reform the 
NFIP. The strategy was to avoid many of the injuries, deaths, and 
damages before they occur, and give property owners the option of 
moving to a less hazardous area. The bill, H.R. 253, passed the House 
on November 20, 2003 under the title ``The Flood Insurance Reform Act 
of 2003.''
    Our approach helps build disaster resistant communities and safe 
homes by providing mitigation assistance to communities; there is 
currently more demand for this type of mitigation than FEMA and local 
governments can provide. The bill authorizes a pilot program that 
provides funding for communities to help relocate or elevate properties 
that have sustained repeated flood damage. A property owner is eligible 
for a mitigation offer if he or she has received four or more separate 
flood insurance claims payments each exceeding $5,000 with the 
cumulative amount of such claims payments exceeding $20,000 or 2 or 
more separate NFIP claims payments that cumulatively exceed the value 
of the insured property. Those who refuse mitigation funding could see 
their flood insurance rates increase to better reflect the actuarial 
cost of continuing to live in harm's way. This Act does not deny 
national flood insurance coverage to any interested owner, renter, or 
occupant of a property.
    This bill has a number of benefits:

 Most importantly, it will move people out of harm's way and 
    discourage newcomers from moving there. This bill will save lives 
    by moving people to higher ground.
 Often overlooked is that the reforms in this bill will save 
    the Federal Government millions of dollars in avoided flood 
    damages. FEMA reports that mitigation and building standards 
    already in place have resulted in over $1 billion annually in 
    reduced flood losses. Our bill will significantly increase these 
    savings by increasing funding for the mitigation grant assistance 
    program.
 These reforms will also present significant potential savings 
    to ratepayers in the National Flood Insurance Program. Mitigating 
    repetitively flooded properties will reduce the pressure to raise 
    flood insurance rates. The Association of State Floodplain Managers 
    estimates that avoiding just one 10 percent rate increase could 
    save the 4.4 million policyholders $175 million each year.
 Finally, this bill will significantly benefit the environment.

   If property-owners choose to relocate, the land will convert 
        to open-space.
   Non-structural approaches to flood control, such as 
        voluntary buyouts and restoration of natural floodplains, are 
        often much more effective in controlling floods than structural 
        approaches.
   Natural floodplains also prevent pollution problems from 
        flooding.

    The change in title of this bill to the ``National Flood Insurance 
Reform Act of 2003'' represents a substantive change in the approach to 
dealing with repetitively flooded properties. As the legislation went 
through the House Financial Services Committee and to the Floor, we had 
the opportunity to work with Members from coastal areas to make the 
reforms more sensitive to the plight of their constituents. I 
especially appreciated the constructive work of Representative Baker 
from Louisiana and Representative Gene Green from Texas. As a result of 
input from these and other stakeholders, more resources in the bill now 
go to the heavily flooded States; more flexibility is given to FEMA and 
local governments in the mitigation process; and the bill more 
sensitive to the problems of families who are continually flood 
victims.
    I respectfully urge the Senate to pass H.R. 253, the ``Flood 
Insurance Reform Act of 2003.'' This is one of the best fiscal and 
environmental opportunities for Congress this year.
                               ----------
                 PREPARED STATEMENT OF ANTHONY S. LOWE

   Administrator, Federal Insurance and Director, Mitigation Division
                  Federal Emergency Management Agency
                  U.S. Department of Homeland Security
                             March 25, 2004

    Chairman Bunning, Ranking Member Schumer, and Members of the 
Subcommittee, I am Anthony S. Lowe, Federal Insurance Administrator and 
Director of the Mitigation Division of the Federal Emergency Management 
Agency (FEMA) of the Department of Homeland Security. On behalf of the 
National Flood Insurance Program (NFIP), we welcome and appreciate the 
invitation to appear today before the Economic Policy Subcommittee of 
the Senate Banking, Housing, and Urban Affairs Committee.
    We are pleased to report to the Subcommittee that the state of the 
NFIP is sound. The NFIP is implementing a number of results-oriented 
initiatives to build upon the program's past successes and current 
strengths while making the necessary adjustments for the future.
    It has now been over 35 years since Congress first authorized the 
NFIP.
    Since 1968, the NFIP has met and continues to meet an important 
property insurance need: To offer flood insurance to those exposed to 
flood hazards across the country--coverage that is virtually 
unavailable from the private insurance market.
    The series of devastating hurricanes and storms in the early to 
mid-1960's underscored the need for this coverage. However, two 
features of the original design significantly hindered the NFIP from 
becoming broadly successful. The program was voluntary both for the 
local community and for the individual property owner. Flood-prone 
communities faced no economic consequences for not joining the program. 
Property owners at risk were not required to buy flood insurance. As a 
result, the NFIP remained underutilized, with 5,500 participating 
communities and only 273,000 flood insurance policies at the end of 
1973.
    When a series of severe floods in the early 1970's revealed that 
very few of the flood victims had flood insurance, Congress passed 
legislation to address these shortcomings. The Flood Disaster 
Protection Act of 1973 placed requirements on both the local community 
and the property owner. First, the Act encourages community 
participation by offering identified flood-prone communities with a 
clear choice: Either join the NFIP or face the loss of Federal 
financial assistance in their high-risk flood areas. Second, the 1973 
Act places requirements on individual owners of property located in 
flood hazard areas. These individuals must purchase flood insurance to 
either be eligible for federally related mortgages or to receive other 
Federal assistance, including Federal disaster assistance. As a result 
of these changes, participation in the NFIP greatly increased over the 
following 20 years. By 1994, there were over 18,000 participating 
communities and 2.8 million policies.
    But the Midwest Flood of 1993 revealed that participation in the 
NFIP still needed to be greater. It became clear that the program 
needed reforms to ensure compliance by lenders with the flood insurance 
purchase and retention requirements of the 1973 Act. Lenders were given 
those tools through the passage of The National Flood Insurance Reform 
Act of 1994. This Act has enabled the program to grow, and today there 
about 4.4 million policies totaling about $650 billion in coverage.
    A major benefit is that claim payments for flood damage under the 
NFIP reduce the burden on taxpayers for Federal disaster relief. These 
claims payments have exceeded $12 billion in the history of the NFIP.
    The NFIP now stands as the largest, single-line property insurance 
writer in the United States.
    But the success of the NFIP is not measured only in the number of 
policies issued and the flood damages that have been paid but also in 
losses avoided. Today, the nearly 20,000 participating communities 
across America have adopted and are enforcing the program's mitigation 
standards to protect new buildings from flood hazards. The floodplain 
management standards these communities are implementing are part of an 
overall strategy. The strategy benefits the entire floodplain, and, in 
a number of cases, holds the line altogether on new construction in the 
flood hazard areas. The mitigation standards of the program to elevate 
or flood-proof new construction are reducing America's flood damages by 
an estimated $1 billion each year.
    Mr. Chairman, besides the obvious successes the program is 
enjoying, I am also happy to report that the NFIP is once again debt-
free.
    As you know, the program does not receive appropriations to pay for 
its operations. It is self-supporting through premium income from our 
policyholders enabling us to pay losses which are have averaged 
approximately $750 million per year. However, flood losses for a 
specific year can vary significantly from this average. When flood 
losses exceed NFIP reserves, we have the authority to borrow funds from 
the U.S. Treasury to pay for those losses. Whenever we have to borrow 
from the Treasury to pay for historically high losses, we must repay 
with interest what we borrowed. Since 1986, when the program received 
its last appropriation, we have borrowed and repaid approximately $2.7 
billion.
    In June 2001, for example, Tropical Storm Allison battered the Gulf 
Coast and East Coast States. After final losses were tallied, Allison 
became, sadly, the program's first billion-dollar storm. The NFIP had 
to borrow $660 million from the Treasury. We repaid that debt--with 
interest--as of October 2002. So once again the NFIP is operating debt-
free, and the program continues to stand on solid financial ground.
    More recently, in September 2003, Hurricane Isabel caused extensive 
flood damage in six Mid-Atlantic States and the District of Columbia. 
To date we have paid $263 million on 16,776 flood insurance claims to 
insured victims of that event. We expect to pay out approximately $450 
million on the total 24,725 flood insurance claims from Hurricane 
Isabel. We will not need to borrow any funds from the U.S. Treasury to 
pay Hurricane Isabel claims.
    The NFIP however, does not just react to disasters and pay claims. 
In the past year, the NFIP began major outreach campaigns to inform the 
public about the importance of flood insurance. For example, the NFIP 
recently entered into an agreement with a major advertising firm to 
build a flood insurance marketing strategy, which will include a 
comprehensive multimedia campaign. After the California wildfires, we 
also supplemented our flood insurance marketing in California to make 
certain that residents understood the increased flood risk and benefits 
of flood insurance. The NFIP is also working to assure that our 
customers and industry partners understand flood insurance restrictions 
in Coastal Barrier Resource Systems, and to this end we are 
collaborating with the Fish and Wildlife Service on a comprehensive 
CBRA outreach strategy. These outreach tools raise public awareness of 
flood hazards and the role of flood insurance, and are designed to 
increase NFIP policy growth by 5 percent annually.
    I am also pleased to report that we are maximizing the program's 
insurance mechanism to achieve mitigation. We have increased the 
benefits under our Standard Flood Insurance Policy to help property 
owners pay for mitigation measures necessary to comply with State and 
local ordinances after substantial or repetitive flood losses. These 
mitigation measures include assistance with elevations, buyouts, and 
relocation of flood-prone properties. An increase in benefits from 
$20,000 to $30,000 became effective on May 1, 2003. We consider this 
coverage an important mitigation tool that enables our policyholders to 
protect their properties after a substantial flood loss and break the 
cycle of flood damage and repair. This is an example of how FEMA is 
using flood insurance protection to reduce costs to taxpayers and 
provide a bridge to mitigation that prevents future losses.
    But the NFIP is not without challenges or issues of concern.
    Before addressing the need for the reauthorization of the NFIP, I 
want to particularly thank the Banking Subcommittee for its leadership 
in reauthorizing the 
program for 2003 and the first quarter of 2004. For the first 13 days 
of 2003 the program's authorization lapsed. Through the Committee's 
efforts we were able to maintain operations and service to the 4.4 
million policyholders as well as to the lending and real estate 
industries that rely on the program for protection against flood 
losses. The temporary disruption to the NFIP underscored the importance 
of flood insurance to the American economy.
    The NFIP is currently reauthorized annually and has several 
distinct authorities that must be changed during each reauthorization. 
We believe that it would be beneficial if the NFIP were reauthorized on 
a 5-year basis. Of course, it would be our pleasure to work with the 
Subcommittee on appropriate changes.
    Let me now address the issue of repetitive flood loss. It is a 
national problem, and a problem with both a human impact and an 
economic impact. The majority of the repetitive flood loss buildings 
are primary residences, meaning that many families find themselves in a 
flood-rebuild-flood cycle. The 48,000 repetitive flood loss buildings 
account for about 25 percent, or $200 million, of the flood claims 
payments each year. By itself, our Repetitive Loss Target Group, which 
is a subset of the 10,000 worst repetitive loss properties, accounts 
for $80 million in annual losses. These losses increase pressure each 
year to raise rates for other policyholders and, when combined with a 
higher than average loss year, make it more likely that the program 
will have to borrow from the U.S. Treasury.
    Paying claims for the same properties time and again is not good 
public policy, not sound business practice, and not prudent 
stewardship. We are spending far too much money on just a handful of 
properties--a costly drain on the NFIP and its policyholders. Reducing 
the number of repetitive loss properties is one of our top priorities.
    The problem of repetitive flood losses is largely a vestige of the 
past. Congress structured the NFIP as an agreement between the Federal 
Government and local communities.
    To participate in the NFIP, communities must adopt and enforce 
flood mitigation standards for new construction in their high-risk 
flood areas. In return, flood insurance is made available to all 
properties built before the availability of detailed flood maps at 
premium rates that do not fully reflect the true risk. Congress 
directed discounted premium rates for such existing properties so as 
not to penalize those who bought or built in the floodplain without 
full knowledge of the flood hazard. As such, these property owners are 
permitted to pay subsidized premiums for flood coverage.
    We call these properties ``Pre-Flood Insurance Rate Map'' or ``Pre-
FIRM'' properties. Repetitive flood loss properties are for the most 
part a subset of these Pre-FIRM structures, with Pre-FIRM properties 
accounting for close to 90 percent of all repetitive loss properties 
nationwide.
    There were good public policy reasons for providing insurance to 
these older properties at less than full-risk premiums. However, 
properties that flood over and over again lock their owners into a 
dismal cycle of damage and repair--with diminishing property values.
    Today, the Department of Homeland Security has mitigation programs 
that can, and are, being used to reduce the Nation's repetitive flood 
loss problem. However, the participation in our mitigation programs is 
voluntary. We have not always had the needed leverage or incentives for 
repetitive flood loss property owners to accept grant offers intended 
to reduce or eliminate the flood risk.
    FEMA is making strategic changes to focus on our repetitive loss 
problem. We have targeted about 10,000 repetitive flood loss properties 
as the highest priority for mitigation in our repetitive loss strategy. 
These 10,000 high-priority properties, which are currently insured 
under the NFIP, have had four or more flood losses, or two or three 
losses that cumulatively exceed the value of the building. These 10,000 
are the ``extreme cases,'' ones that we have paid close to $1 billion 
in flood insurance claims over the last 25 years. This small set of 
properties now cost the NFIP about $80 million in claims each year. We 
are targeting these properties for mitigation actions that will remove 
them altogether from the floodplains, elevate them above the reach of 
floodwaters, or apply other mitigation measures to significantly reduce 
their exposure to flood risk.
    We are now building a consensus on the best practices and latest 
technologies to use to mitigate repetitive loss properties. For 
example, we recently gathered some of the Nation's leading experts in 
the repetitive loss problem for a 3-day workshop to discuss their 
experiences in addressing this issue. The result of this workshop is a 
Repetitive Loss Action Plan, which is being finalized. We will use this 
action plan to guide our efforts in the coming months and years.
    With this current grant cycle we are emphasizing the importance of 
addressing repetitive loss properties to States and communities. For 
fiscal year 2004, we will direct all funding for the Flood Mitigation 
Assistance program toward mitigating repetitive loss properties. We 
will place a national priority on the Pre-Disaster Mitigation 
applications addressing the mitigation of repetitive loss properties.
    We are also undertaking additional steps to address the repetitive 
loss problem. The policies on these properties are serviced separately 
to better coordinate claims handling. We are reviewing all of our 
repetitive flood loss databases and making accurate flood loss data 
available to State and local governments for mitigation projects. We 
are also offering incentives under our Community Rating System, or CRS, 
program to communities to address this issue locally. CRS provides 
premium discounts of up to 45 percent for local mitigation actions.
    The steps we have taken to date have only partially addressed the 
repetitive loss problem. Even with our proposed increased emphasis in 
the grant programs, we will make limited progress in addressing this 
serious problem. To aggressively address this problem, we will need 
additional tools.
    We commend the House Committee on Financial Services on the passage 
of H.R. 253, the Flood Insurance Reform Act of 2003, which reauthorizes 
the NFIP for 5 years and provides resources and a structure to reduce 
repetitive flood losses. We would be pleased to work with this 
Committee on furthering these efforts.
    Mitigation projects are most successful when State and local 
governments are involved in their development and execution. Certainly 
where there is a non-Federal cost share requirement, State and local 
governments have a stake in the process and outcome. However, there 
will be instances in the interest of protecting lives and property, 
where we will need the authority to address individual properties that 
are not part of any larger mitigation effort.
    A broad effort that has the flexibility to recognize individual 
circumstances will give us the means to address the repetitive loss 
problem in ways that can be refined based on what we learn about these 
properties. We can achieve results that are good for the community, the 
individual property owner, and the National Flood Insurance Program.
    These measures I have described will strengthen our ability to 
remove the costliest risks from the NFIP and help people end the 
devastating cycle of damage-repair-damage.
    Mitigating the highest risks, which include repetitive flood loss 
properties, also requires accurate risk assessment. This is why our 
Flood Map Modernization initiative is critical to our efforts to reduce 
the exposure of people and property to flood hazards. Congress 
appropriated $150 million in fiscal year 2003, and $200 million in 
2004, for flood map modernization. This will be added to the 
approximately $50 million in funding from NFIP fees that contribute 
annually to the mapping program. This combination of funds enables us 
to continue a multi-year effort that will cost approximately $1 
billion.
    We approach this multi-year effort with the certainty that to be 
successful we must leverage all of our partnerships--State, local, and 
regional entities, as well as other Federal agencies and the private 
sector.
    Managing our flood map modernization and hazard mitigation efforts 
will also help build a foundation for the Department of Homeland 
Security to safeguard the Nation from the full range of hazards, 
natural and manmade, including repetitive flood loss properties.
    How we fully address the repetitive loss problem still needs to be 
resolved, but we are all in agreement that we need to address the 
problem. This problem affects both individual property owners and 
entire communities that flood time and again.
    Again, we appreciate the help of this Committee in re-authorizing 
the NFIP through the end of March. As you face the upcoming task of 
renewing our authorization, we strongly believe that a multi-year 
authorization--preferably 5 years--will best serve the policyholders 
and the real estate and lending industries.
    In closing, I appreciate the opportunity to represent the 
Department of Homeland Security before the Economic Policy 
Subcommittee. I am pleased to answer any questions you may have.
                               ----------
                  PREPARED STATEMENT OF CHAD BERGINNIS
         Chair, Association of State Floodplain Managers, Inc.
                             March 25, 2004

Introduction
    The Association of State Floodplain Managers, Inc., and its 18 
State chapters represent over 6,500 State and local officials and other 
professionals who are engaged in all aspects of floodplain management 
and hazard mitigation, including management, engineering, planning, 
community development, hydrology, forecasting, emergency response, 
water resources, and insurance. All are concerned with working to 
reduce our Nation's flood-related losses. Our State and local officials 
are the Federal Government's partners in implementing programs and 
working to achieve effectiveness in meeting our shared objectives. Many 
of our members are designated by their governors to coordinate the 
National Flood Insurance Program (NFIP). For more information on the 
Association, please visit http://www.floods.org.
    The ASFPM is enthusiastic that the Committee has put consideration 
of NFIP reforms high on its agenda for the 108th Congress. We are 
appreciative of the time and attention that Representatives Bereuter, 
Blumenauer, and Baker have collectively paid to the issue of repetitive 
claims against the NFIP and how measures to reduce those claims can be 
put into place. We would also like to recognize the time and resources 
that FEMA has dedicated to the issue of repetitive loss properties, and 
commend their prioritization of repetitive loss properties as a 
significant issue.
    Thank you for inviting us to offer our views on the repetitive loss 
property issue and recent actions taken by the Congress and FEMA to 
mitigate repetitive losses. The following testimony addresses:

 The Nation's 4.4 Million Policyholders Benefit by Addressing 
    Repetitive Loss Properties;
 An Effective Approach to Mitigating Repetitive Losses in the 
    Nation;
 Reform of Existing Mitigation Insurance Will Strengthen the 
    Repetitive Loss Legislation;
 FEMA's Repetitive Loss Strategy;
 Matters Related to Reauthorization of the NFIP;
 The NFIP and the Department of Homeland Security;
 FEMA's Map Modernization Initiative;
 The Effectiveness and Value of the National Flood Insurance 
    Program and FEMA's Flood Mitigation Programs.
The Nation's 4.4 Million Policyholders Benefit by Addressing Repetitive
Loss Properties
    It is important to put the repetitive loss problem in context. 
While the exact number is not known, it is estimated that between 9 and 
11 million buildings are in the areas we call special flood hazard 
areas that are shown on FEMA's Flood Insurance Rate Maps. About 4.4 
million buildings both in and out of the floodplain are insured today 
(up from only 2 million just 9 years ago). Of those, about 40,000 are 
on FEMA's list of repetitively flooded properties. Nearly 10,000 have 
experienced four or more losses, or two or more losses which combine to 
exceed the building's value as reported on the flood insurance policy 
(FEMA uses this definition for the ``Target Group). This means that 
initially we are focusing attention on one-quarter of 1 percent of the 
insured buildings. But the impact is huge, since that small fraction 
accounts for over 25 percent of the NFIP's losses since 1978.
    Why, then should everybody be concerned? All current and future 
NFIP policyholders will benefit from addressing repetitive loss 
properties because the pressure to raise the rates will be 
significantly diminished. FEMA reports that, as a larger group, all 
properties that have received multiple insurance claim payments account 
for an average of $200 million in claims each year. This contributes 
significantly to the pressure to raise the rates on all types of 
policies and accounts for a significant factor affecting the stability 
of the National Flood Insurance Fund.
    Although it is a simplistic assessment, if just one rate increase 
can be avoided, 4.4 million policies holders throughout the Nation 
could be able to keep in their pockets as much as $175 million (FEMA 
cannot raise rates more than 10 percent at any time, although the 
typical increase is 4-8 percent). Estimated savings for the 10 States 
with largest number of priority repetitive loss properties are shown in 
the following table. To estimate savings for other States, see the NFIP 
policy statistics that are online at: http://www.fema.gov/nfip/
pcstat.shtm.




    A repetitive loss strategy should be viewed as a cost containment 
initiative for the NFIP that will benefit every current and future 
policyholder. It makes sense for the policyholders to invest in cost 
effective measures that will, in short order, reduce the pressure to 
raise the rates.
An Effective Approach to Mitigating Repetitive Losses in the Nation
General Comments on Repetitive Loss Strategies
    It must be clear that any repetitive loss strategy should fund only 
mitigation measures for specific properties that achieve results that 
are cost effective and in the best interests of the NFIP. For 
mitigation projects, benefits are defined as ``damages avoided if the 
project is implemented.'' Under this requirement, a building that has 
sustained several low-dollar value claims will rarely have a cost-
effective solution, and thus an offer of mitigation assistance will not 
be made. If there is a cost effective mitigation measure, such as 
elevation-in-place, a property owner should be encouraged to 
participate. If the owner declines an offer, the rest of the 
policyholders should not have to bear the continued claims against the 
Fund.
    It must also be clear that only projects that are technically 
feasible will be funded. There will be properties for which the typical 
approaches (acquisition or elevation) will not be possible, in which 
case an offer for such measures will not be made. For example there are 
many situations where low-cost measures can have significant benefits, 
such as relocating utilities out of a basement. For nonresidential 
structures, of which there are many near the top of FEMA's list of 
repetitive loss properties, a range of retrofit floodproofing options 
may yield significant benefits.
    When a specific property cannot be mitigated in a manner that is 
both technically feasible and cost effective to the NFIP, then the best 
mitigation is continued subsidized insurance, as anticipated by 
Congress when the NFIP was created in 1968. While the NFIP policy base 
as a whole would continue to subsidize the risk (which is the 
fundamental premise of insurance), at least the owners will continue to 
purchase flood insurance and contributes their own recovery, thus not 
burdening the U.S. taxpayer. The cross subsidy for these particular 
structures will be comparatively small.
    FEMA's other mitigation programs and tools can be brought to bear 
to support mitigation of repetitive losses. Any new initiative can and 
should be designed to work in concert with existing programs to 
maximize effectiveness. These existing programs and tools include:

 Mitigation insurance (Increased Cost of Compliance) which is 
    described below and is ripe for revisions;
 The Flood Mitigation Assistance Program authorized by Congress 
    as part of the NFIP Reform Act of 1994 as Section 1366;
 The Nationwide Pre-Disaster Competitive Mitigation Program, 
    authorized in 2000 and funded in fiscal year 2003 and fiscal year 
    2004 to create a nationwide competitive grant program; and
 The post-disaster Hazard Mitigation Grant Program authorized 
    by the Robert T. Stafford Disaster Relief and Emergency Assistance 
    Act--but this vital funding source was proposed to be zeroed in the 
    fiscal year 2003 and fiscal year 2004 budget and we expect that 
    pressure to continue (see Section H, below).
Objectives of a Repetitive Loss Strategy
    In addition to cost containment for the NFIP and its policyholders, 
an effective repetitive loss strategy will, without a doubt, reduce 
Federal disaster assistance, although it may take longer to see the 
effects. When we relieve the pressure to raise the rates, more people 
will see that flood insurance is a ``good buy'' as the cost comes more 
in line with their perceived risk. This is the single most significant 
way to reduce that part of the Federal disaster dollar that supports 
uninsured individuals, families, and businesses after the President 
declares a flood disaster. For flood-related disasters declared between 
1989 and 1998, FEMA paid over $3 billion for Individual and Family 
Grants (does not include SBA and other agencies, or the effects of the 
casualty loss deduction on tax income). For this reason, ASFPM believes 
it is appropriate for a repetitive loss strategy to increase funding 
for the basic Flood Mitigation Assistance Program and to modify the 
insurance mechanism called Increased Cost of Compliance. ASFPM's 
proposal has been submitted to the Subcommittee.
    An effective repetitive loss strategy will not place an unnecessary 
burden on low-income homeowners and renters that occupy houses in the 
Nation's repetitive loss areas. Often the low-income occupant simply 
does not have the financial ability to move elsewhere or to pay for 
mitigation measures. It is far too simplistic to assume that every 
owner is able to make a rational choice based on cost alone. In those 
instances where grants or offers are made to low-income homeowners and 
renters, we are concerned that it be done in a carefully crafted manner 
that networks with existing housing programs. Further, we propose that 
``comparable housing'' be included when communities extend buyout 
offers to these owners.
National Repetitive Flood Loss Mitigation Legislation
    On November 20, 2003, the House of Representatives passed the Flood 
Insurance Reform Act of 2003 (H.R. 253). We commend the House sponsors 
for their efforts, and believe the bill contains a number of important 
provisions, including:

 A framework for mitigating repetitive loss properties through 
    a community/State-oriented program and a direct property owner 
    program (when the State or community is unable to manage such a 
    grant);
 A consequence that moves flood insurance policies toward 
    actuarial rate in the event a property owner rejects an offer of 
    mitigation;
 The flexibility to use many different types of mitigation 
    options; and
 An appeals process.

    For these reasons, the ASFPM supported the passage of H.R. 253 in 
the House. However, the ASFPM remains concerned with certain aspects of 
the bill and urge your consideration of revisions to address these 
matters. We believe the bill:

 Contains definitions, procedures, and provisions that are 
    either too cumbersome or inconsistent with existing mitigation 
    programs which could result in delays, confusion, and unintended 
    consequences during implementation;
 Does not adequately integrate into the existing mitigation 
    insurance mechanism (which could alleviate nearly all concerns 
    about the cost share requirements for communities and property 
    owners); and
 Modifies the basic Flood Mitigation Assistance Program which 
    has had demonstrated success providing mitigation opportunities in 
    many communities and which must continue unchanged.

    The ASFPM feels that certain adjustments must be in the House bill 
to ensure that the resulting national repetitive loss mitigation 
legislation will be effectively implemented by FEMA, States, and 
communities to address our goals and objectives while also supporting 
community needs. The ASFPM offers the following suggestions.

 Preserve Basic Flood Mitigation Assistance Program (FMA), 
    while making some Modifications to Improve Effectiveness. It is 
    important to maintain the existing FMA as the basis on which the 
    focus on repetitive losses is built. The basic program works well 
    and needs to continue after expiration of any new authority. 
    However, there are some modifications that can be made to build on 
    its effectiveness, such as: (1) Specifying that the valuation for 
    acquisition should be based on Fair Market Value (current FMV is 
    usually selected when flooding occurred some time in the past and 
    homes have been repaired or appreciated in value). When a flood has 
    just occurred, we use pre-flood FMV, but then are required to 
    subtract certain disaster assistance payments and insurance claim 
    payments (to avoid Duplication of Benefits). Many communities 
    select post-flood FMV and then owners are allowed retain any 
    disaster assistance and their insurance payments (which are 
    determined as an estimate of cost to restore the home to pre-flood 
    condition); (2) Eliminate the limitations on amounts to States and 
    communities for project grants; and (3) Eliminate the requirement 
    that in-kind contributions shall not exceed one-half the amount of 
    the non-Federal funds.
 Define the Focus of New Programs for Priority Repetitive Loss 
    Properties. We recommend that the bill define ``priority 
    properties'' as a subset of NFIP-insured properties that, based on 
    available data, appear to represent opportunities to mitigate 
    unreasonable burdens on the National Flood Insurance Fund due to 
    multiple insurance claim payments. It is this subset of properties 
    that will then be examined to determine whether there are 
    reasonable, feasible, and cost-effective mitigation measures. Any 
    property that does not have such a measure should be removed from 
    the subset and should no longer be identified as a ``priority 
    property.''
 Authorize the Repetitive Loss Priority Program as a grant 
    program to be administered as an adjunct to the Basic FMA to 
    achieve mitigation of ``priority properties.'' Eligible grantees 
    and eligible activities should the same as those for Basic FMA, 
    provided they address ``priority properties.'' The ASFPM recommends 
    that this part of the new program be funded in the amount of $50 
    million per year for 6 years, to be transferred to the National 
    Flood Mitigation Fund from the National Flood Insurance Fund, and 
    made available until expended; FEMA should be specifically directed 
    not adjust rates/fees for offsetting income (due to the rapid cost 
    savings expected by focusing on the top-tier of repetitive loss 
    properties). For acquisitions, valuation should be as defined for 
    Basic FMA, and restrictions on ownership and use of cleared land 
    should be consistent with FEMA's other grant programs. Finally, the 
    program should specify that mitigation offers are valid until the 
    State or community indicates closure of the grant (although 
    individual properties would continue to remain eligible under the 
    Individual Priority Property Program (next item), so an owner who 
    initially declines an offer may yet be extended another offer).
 Authorize the Individual Priority Property Program to give 
    FEMA the authority to make grants directly to property owners, but 
    only if States and communities do not have the capacity to manage 
    grants. Again, eligible activities should be those defined for 
    Basic FMA, although it is notable that FEMA is not able to take 
    title to land and thus acquisition is not a viable option under 
    this program. Authorized funding for the Individual Property 
    Program should be in the amount of $20 million per year for 6 years 
    and $10 million per year thereafter, such amounts to be available 
    until expended; such amounts to be transferred to the National 
    Flood Mitigation Fund from the National Flood Insurance Fund; FEMA 
    should be directed specifically not adjust rates/fees for 
    offsetting income.
 Authorize a consequence for owners of ``priority properties'' 
    who decline mitigation offers under the Repetitive Loss Priority 
    Program and the Individual Property Program. The consequence should 
    be the imposition of actuarial rates (whether all at once or in a 
    stepped process). Additionally, the consequence should be attached 
    to the property and FEMA should create a process to formally notify 
    owners of the consequence and their right to appeal the 
    consequences of declining an offer of financial assistance to 
    implement a feasible and cost-effective mitigation measure.
 Allow Increased Cost of Compliance (ICC) to be used as part of 
    the local match for the Repetitive Loss Priority Program and the 
    Individual Property Program (please see discussion in Section C, 
    below).
 Require that Privately Owned Buildings on Leased Federal Lands 
    be charged full actuarial rates of flood insurance unless the 
    Federal landowner agency preserves the quid pro quo of the NFIP by 
    implementing a system to review structural development and require 
    it to be compliant with minimum NFIP standards, thereupon the 
    structures would be charged flood insurance rates consistent with 
    those charged in communities in good standing with the NFIP.
Reform of Existing Mitigation Insurance will Strengthen the Repetitive
Loss Legislation
    The 1994 NFIP Reform Act authorized mitigation coverage as part of 
the standard flood insurance policy. Called ICC or ``Increased Cost of 
Compliance,'' it was touted by FEMA--and expected by others--to be one 
of the best tools to bring about post-flood mitigation, in part because 
it is funded by a surcharge on flood insurance policies. Although FEMA 
increased the benefit under ICC to $30,000 (effective May 1, 2003), in 
actuality, as currently administered this increase does very little to 
increase funding of eligible mitigation activities. The average ICC 
payment to support an acquisition project is on the order of $7,000. 
For elevation projects the average is around $16,000. While we 
appreciate that initially the agency had no experience on which to base 
its interpretations, much has been learned in the last 5 years. 
Currently ICC collects over $80 million in premiums, yet not even 2 
percent of that money is spent annually to pay ICC claims.
    Every flood insurance policy on property within a mapped 
floodplain--even post-FIRM policies, pays something for ICC. The cost 
ranges from $6 to $75 per year (capped by statute). The upper limit is 
paid on pre-FIRM buildings and V Zone buildings (where open coast where 
wave energies and erosion are greatest). It is notable that post-FIRM 
buildings (built in compliance with the rules) pay for this coverage 
even though the chances of ever qualifying are slim. This is because 
Congress recognized the long-term benefits: If ICC works correctly, 
then every policyholder will enjoy the benefits of reduced pressure to 
raise the rates.
    ICC is a claim, paid only if damage is triggered by a flood event 
and only if the damage is sufficient to meet one of three triggers. 
Every community in the NFIP administers what is commonly referred to as 
``the 50 percent rule'' or substantial damage. If the cost to repair a 
damaged building to its predamage condition exceeds 50 percent of its 
market value, then the community's rules require the owner to bring it 
into compliance. Most commonly, this means the existing building is 
lifted off its foundation and raised on a new, higher foundation. This 
substantial damage rule has been in place since early in the program; 
until ICC was authorized, the owner had to bear the entire cost. The 
second trigger is a variation of substantial damage called ``cumulative 
substantial damage.'' The statute defines this as two or more claims in 
a 10-year period, each of which is at least 25 percent of the market 
value of the building. However, because the statute specifically states 
that compliance is required, FEMA's implementation requires the 
community to have an ordinance that mirrors that trigger. Very few 
communities have adopted that ordinance language.
    The third trigger is one that has not been implemented by FEMA. 
That trigger explicitly authorizes the FEMA Director to pursue 
mitigation offers for properties for which it is determined that it is 
cost-effective and in the best interests of the NFIP to achieve 
compliance. It is our understanding that FEMA's reluctance is based, at 
least in part, on the statutory constraint that ``compliance'' is 
required. FEMA does not impose compliance--that is the purview of the 
local regulatory authority.
    The ASFPM believes that ICC must be integrated into the new 
repetitive flood loss program, and has offered some recommended changes 
to Sec. 1304(b). These changes will assure that it achieves the 
originally intended objectives. We also urge the Committee to consider 
a fourth trigger to explicitly requiring that an ICC claim be allowed 
and counted as local matching funds when an offer of mitigation is made 
under the new Repetitive Priority Program, the new Individual Loss 
Property Program, and FEMA's other mitigation assistance programs.
    This amendment is essential because it substantially decreases or, 
in many cases, would likely eliminate the community's (or property 
owner's) burden of coming up with the local cost share. It is important 
to note that ICC funds are collected from policyholders and are not 
Federal funds. Because of the amount collected since ICC was authorized 
(approximately $400 million of which less than $20 million has been 
used), we believe that FEMA's likely concerns about how our proposals 
would impact the pricing of the coverage should be blunted.

FEMA's Repetitive Loss Strategy
    FEMA has been looking at numerous ways to bring about mitigation of 
repetitive loss properties and recently hosted a discussion session 
with stakeholders, including the ASFPM. FEMA has made some adjustments 
to existing grant programs, but the agency is limited in what it can do 
without changes to FMA and ICC that we are recommending. We would like 
to commend FEMA for their utilization of resources and an open, 
collaborative process involving stakeholders to create its repetitive 
loss strategy.
Matters Related to the Reauthorization of the NFIP
    The ASFPM does not consider the NFIP's periodic sunset provision to 
be an explicit expression of Congressional intent that the program may 
actually be terminated. It is a convenient mechanism to require 
periodic attention to the needs of the program. The consequences of 
short-term lapses have been outlined by others, in particular, the 
insurance and lending industries that are especially sensitive to this 
issue. We submit that it is reasonable to reauthorize the NFIP on a 3-
year basis, which will preserve the opportunity for oversight on a 
regular basis. This timeframe is important for two reasons: (1) to 
allow for consideration of the success and progress of the proposed new 
repetitive loss programs, and (2) because the results of the NFIP's 
first objective and comprehensive evaluation will become available 
within the next year or so.

The NFIP and the Department of Homeland Security
    The NFIP is only one of FEMA's many responsibilities that are now 
transferred into the Department of Homeland Security (DHS). The ASFPM 
is very concerned that the NFIP's mission--and FEMA as a whole--will 
get overwhelmed by the forces driving DHS. Millions of homes and 
businesses are located within the Nation's floodplains and development 
pressures continue. These people are located in areas that, with 
reasonable scientific certainty, we can say are exposed to a 1 percent 
or greater chance of flooding in any given year. Every year, areas in 
nearly every State are flooded, often damaging critical local 
infrastructure and forcing thousands of people out of their homes. This 
is a risk that we cannot allow to fall victim just because FEMA is in a 
new agency.
    We appreciate Secretary Tom Ridge's statement made before the House 
Appropriations Homeland Security Subcommittee last spring that FEMA's 
mission ``will not be jeopardized in any way, shape or form.'' We are 
particularly encouraged that he specifically mentioned the importance 
of mitigation in that mission. However, we are greatly concerned that 
the Initial Draft of the National Response Plan, which, under 
Presidential Directive, is to be created by DHS, eliminates 
``mitigation'' as a term and concept. Since the National Response Plan 
is to supercede the Federal Response Plan (which has mitigation as a 
foundation of the Nation's overall response strategy), we question the 
true future of mitigation under DHS.
    A major part of FEMA's mission is disaster loss mitigation. 
Millions of people, buildings, and public infrastructure facilities are 
at risk due to natural hazards. Development of mitigation policies and 
programs is absolutely essential to controlling the huge costs of 
natural disasters and will contribute to saving lives and property. 
Such policies are an important corollary to FEMA's response and 
recovery capabilities. In fact, mitigation often is accomplished in the 
immediate aftermath and rebuilding phase following a natural disaster 
when people's awareness of their risks is high and local and State 
commitments leverage Federal dollars.
    States and local jurisdictions know FEMA for its disaster response 
functions. They also know FEMA for its role in establishing long-term 
policies that influence new development and redevelopment in high risk 
areas. FEMA establishes minimum flood hazard area development 
regulations, provides Federal flood insurance, prepares and issues 
flood hazard maps, and coordinates technical assistance through the 
States to help communities and land owners manage flood hazards in ways 
that minimize damage. FEMA works with building code organizations to 
incorporate reasonable and cost effective mitigation measures into 
building codes, and to encourage States and local jurisdictions to 
adopt those codes in order to remain economically and socially viable 
by reducing flood losses. FEMA's partnerships, and more than 30 years 
of experience in administering the NFIP and mitigation programs are 
important to the Nation's efforts to prepare for, respond to, recover 
from, and mitigate against the perils of natural hazards.
    It is important for us to agree that a Federal flood insurance 
program is a vital component in the economic well-being of the Nation. 
Without the NFIP, trying to bear the rising costs of flood disasters 
would have catastrophic financial implications for millions of families 
and businesses and about 19,600 counties, cities, towns, and villages 
across the country. Once we agree on the NFIP's importance, then we can 
pursue what is needed to strengthen the program in a variety of ways.
    We urge the Committee to maintain regular contact with DHS to 
ensure that the short-term and long-term benefits of the NFIP are 
realized in the coming years. To that end, we suggest that the 
Committee monitor FEMA's budget to ensure that adequate funds are 
requested and spent to accomplish the goals set forth in statutes under 
the Committee's jurisdiction, and to express your desire that the NFIP 
and hazard mitigation remain high on DHS's priorities.

FEMA's Map Modernization Initiative
    The importance of modernizing and updating flood hazard maps is now 
widely understood, and based on the fiscal year 2003 and fiscal year 
2004 budgets, funding is being provided. The initiative will span at 
least 5 years, and the end products will be better quality, converted 
to modern technology that will facilitate administering programs to 
reduce flood losses in nearly 20,000 communities, and lower long-term 
costs to maintain the maps.
    The ASFPM is concerned that bureaucratic hurdles may adversely 
impact implementation of the flood map modernization program. For 
example, a new contract with the ``National Service Provider'' 
contractor that will have significant responsibilities in the 
implementation of map modernization is not yet signed. There have been 
delays created due to the extra layer of review and approval as a 
result of FEMA being an entity within DHS.
The Effectiveness and Value of the National Flood Insurance Program and

FEMA's Flood Mitigation Programs
    The National Flood Insurance Program is the Nation's oldest flood 
mitigation program. It is a unique arrangement with many stakeholders: 
(1) the Federal Government establishes regulatory standards, issues 
Flood Insurance Rate Maps, and 
provides the insurance; (2) the private insurance sector sells 
insurance and the private engineering community performs engineering 
and planning studies; (3) the States coordinate the program and provide 
technical assistance to communities; local jurisdictions adopt, 
administer, and enforce floodplain regulations; and (4) homeowners and 
business owners buy flood insurance. This arrangement contributes to 
the program's effectiveness.
    FEMA has estimated that over $1 billion in damages are avoided each 
year due to the fact that States and communities administer floodplain 
regulations to recognize flood hazards in their development decisions. 
These savings accrue in part to the U.S. taxpayer because compliant 
construction is much less likely to sustain damage and because insured 
property owners are unlikely to qualify for disaster assistance.
    FEMA's mitigation grant programs require communities to plan in a 
systematic way to reduce flood risk. The planning process leads to 
greater overall disaster resistance and sustainability. In addition to 
the obvious benefits to owners of structures that are mitigated, there 
are multiple benefits to the community. Although often more difficult 
to quantify in strict benefit:cost models, these multiple benefits are 
critical to individual quality of life and a community's economic 
vitality.
    One of FEMA's most successful mitigation grant programs, the Hazard 
Mitigation Grant Program (HMGP), continues to be jeopardized. Using 
these post-disaster funds, States and communities have implemented 
projects that reduce the damage potential for over 25,000 buildings. 
Examples of successes abound. The ASFPM has published several ``Success 
Stories'' publications illustrating examples from all over the Nation 
(available online at http://www.floods.org/Publications/free.asp).
    For the past 3 years the Administration's budget has attempted to 
eliminate HMGP. It is notable that through the fiscal year 2003 budget 
process, the amount of mitigation funding that is made available in the 
post-disaster period was halved. This program is formula-based, 
resulting in funds for mitigation as a function of certain categories 
of FEMA's disaster assistance expenditures. It provides funding at the 
most opportune time, after a federally declared disaster. Although FEMA 
has created a nationwide Pre-Disaster Mitigation program, it will never 
be as successful as HMGP because it does not take advantage of the 
post-disaster period when communities and victims are most aware of 
their risk and are willing to participate and leverage other funds. The 
ASFPM urges the Members of this Committee to learn about successful 
post-disaster mitigation efforts in your home States and to support 
continuation of HMGP and to restore it to the 15 percent level.

Conclusion
    We appreciate that in the past Congress has provided an array of 
flood mitigation tools which increase the prospects that communities, 
States, and businesses and families can be truly resistant to future 
flood disasters. This Committee's consideration and action on new 
authorities and funding to allow us to mitigate repetitive loss 
properties are vital next steps.
    Thank you for the opportunity to provide our thoughts on these 
important issues. The ASFPM and its members look forward to working 
with you as we move toward a common goal of reducing flood losses.
                               ----------
              PREPARED STATEMENT OF WILLIAM STIGLITZ, III
           Independent Insurance Agent, Hyland, Block, Hyland
                     Insurance, Louisvile, Kentucky
                              on Behalf of
      The Independent Insurance Agents and Brokers of America and
       The National Association of Professional Insurance Agents
                             March 25, 2004

    Good afternoon Chairman Bunningy, Ranking Member Schumer, and 
Members of the Subcommittee. My name is Bill Stiglitz and I am pleased 
to have the opportunity to give you the views of the Independent 
Insurance Agents and Brokers of America (IIABA) and the National 
Association of Professional Insurance Agents (PIA) on the National 
Flood Insurance Program (NFIP or the Program). I am an Independent 
Insurance Agent with Hyland, Block, Hyland Insurance of Louisville, 
Kentucky, and a member of the Executive Committee of the IIABA.
    IIABA is the Nation's oldest and largest national trade association 
of independent insurance agents, and represents a network of more than 
300,000 agents and agency employees nationwide. IIABA members are small 
businesses that offer customers a choice of policies from a variety of 
insurance companies. Independent agents offer all lines of insurance--
property, casualty, life, health, employee benefit plans, and 
retirement products.
    PIA, founded in 1931, is a national trade association that 
represents member insurance agents and their employees in all 50 
States, the District of Columbia, and Puerto Rico. PIA members sell and 
service all lines of insurance, specializing in coverage of 
automobiles, homes, and businesses. PIA represents its members' 
interests in State capitals and in Washington, DC to ensure that 
policymakers understand the perspectives and concerns of insurance 
agents.

Introduction
    Let me begin by stating clearly that IIABA and PIA support the 
NFIP. NFIP provides an important service to people and places that have 
been hit by a natural disaster. The private insurance industry has 
been, and continues to be, almost entirely unwilling to underwrite 
flood insurance because of the catastrophic nature of these disasters. 
Therefore, NFIP is virtually the only way for people to protect against 
the loss of their home or business. Prior to the introduction of the 
program in 1968, the Federal Government spent increasing sums of money 
on disaster assistance to flood victims. Since then, NFIP has saved 
disaster assistance money and provided a more reliable system of 
payments for people whose properties have suffered flood damage. It is 
my understanding that since 1986, no taxpayer money has been used to 
support the NFIP, rather the NFIP has been able to support itself using 
the funds from the premiums it collects ever year. We want the program 
to continue and we hope it will get stronger.
    Our members--independent insurance agents and brokers--play a vital 
role in the delivery system for flood insurance. The NFIP has about 
three and one-half million policies in force with over $370 billion in 
coverage. The majority of these policies are sold by the more than 
110,000 insurance agents participating in NFIP's ``Write Your Own'' 
program. This system operates well and this aspect of NFIP does not 
need revision. In fact, IIABA and PIA are greatly concerned about FEMA 
efforts to change the WYO program as it applies to insurance agents. I 
will address that issue briefly at the close of my remarks.
    It is clear, however, that reforms of the NFIP are necessary to 
address operating losses and make the NFIP actuarially sound. The 
premium structure is not sufficient to allow the Program to build up 
reserves to cover long-term expected losses. According to the General 
Accounting Office, multiple loss properties (defined as those with two 
or more losses over $1,000 each in a 10-year period) account for about 
$200 million in claims per year and about 36 percent of all claims paid 
on a historical basis.
    What I would like to do this afternoon is explain the five 
principles that IIABA and PIA believe must animate any NFIP reform 
efforts to both improve the program and avoid any unintended negative 
effects of reform:

 Strengthen NFIP building regulations.
 Increase compliance with the mandatory purchase requirement.
 Provide additional resources for flood loss mitigation 
    efforts.
 Stop abuse of the program through multiple claims.
 Require mandatory disclosures of flood information.
Strengthen NFIP Building Regulations.
    The first principle that we believe should be part of any reform of 
the NFIP is strengthened NFIP building regulations. The building 
regulations help communities better manage their floodplains in two 
ways. First, the regulations require communities to ensure that any new 
construction in floodplains includes safeguards against flood damage 
such as building new homes above the flood elevation on pilings. 
Second, the regulations require that any substantial improvements made 
to existing buildings in the floodplain incorporate safeguards similar 
to those required for new construction.
    Experience with the program demonstrates that the building 
regulations work. The majority of flood losses are caused by damage to 
older homes. In fact, only 4 percent of repetitive loss properties were 
built after 1974. In 1999, the Federal Insurance Administration 
estimated that the program's construction standards were saving $1 
billion per year. Structures that are built to the program's standards 
are three and one-half to four times less likely to suffer flood 
losses. In addition, the damages to structures built to these standards 
are 40 percent less per claim than the damages to older structures.
    For example a client of mine with a home on the Ohio River suffered 
a total loss of $250,000 in the flood of 1997. In order to rebuild he 
was required to raise his home above the hundred year floodplain and 
comply with all lower level standards set by the NFIP. My client now 
has a magnificent home in total compliance with NFIP requirements and 
is paying a reasonable premium to continue his flood coverage.
    In light of this success, building requirements should be tightened 
to ensure that properties are built to minimize potential flood damage 
and to discourage unwise construction in floodplains.

Increase Compliance with the Mandatory Purchase Requirement
    NFIP would receive additional premiums and improve its financial 
condition if there were a better rate of compliance with the mandatory 
flood insurance purchase requirement. In 1973, the purchase of flood 
insurance became mandatory for any property in a floodplain having a 1 
percent or greater chance of flood occurrence in a given year. The 
purchase requirement takes effect when a loan is made, increased, 
extended or renewed on the property. The Federal Emergency Management 
Agency (FEMA) has found that fewer than twenty 5 percent of buildings 
in areas covered by the mandatory purchase requirement are actually 
covered by flood insurance. And compliance rates vary dramatically. 
Based on past disasters, coverage has ranged from less than 10 percent 
to seventy 5 percent of eligible properties. In fact I have seen that 
many insured's do not renew their mandatory coverage after the first 
year due to the cost of the policy and the lack of an enforcement 
mechanism on the part of lenders.
    Sanctions for and enforcement of the mandatory purchase requirement 
need to be improved so that the program can collect additional premium 
to help balance its books, and fund the payment of future losses with a 
reduced likelihood of having to borrow from the Federal treasury.

NFIP Should Have Additional Resources for Mitigation
    NFIP should take action to prevent future losses. There are two 
basic ways to do this. The first is through buying the homes and 
businesses of property owners in the most flood-prone areas so that 
those individuals can move out of the floodplain. The second is through 
providing grant funds to owners of existing properties so that they can 
make improvements (such as raising their structures) that decrease the 
risk of flood loss. These preventative measures will decrease the 
number of repetitive claims and save the program money.
    Repetitive loss properties are clearly a drain on the financial 
resources of the NFIP. In fact, one-quarter of 1 percent of the 
properties in the program are responsible for 10 percent of the losses. 
Multiple loss properties account for $200 million per year in claims. 
As of 1999, GAO reported that the cost of multiple claims had reached 
$2 billion over the life of the NFIP. GAO also noted that about 40,000 
properties that had made multiple claims were still insured by the 
program. Reduction in the number of repetitive loss properties, which 
would save the program millions of dollars, can be accomplished through 
grants to buy-out property owners or to modify structures to come into 
compliance with NFIP standards.
    A perfect example of the proper use of mitigation funds is the town 
of English, Indiana. Formerly located on the Blue River, a tributary of 
the Ohio River, this town was continually inundated by flood waters. 
Finally, after devastating losses in the early 1990's this small city 
was moved in it's entirety to higher ground. The citizens of English 
now enjoy a very nice new town as well as the recreational land along 
the river which is available for public use.
    Buy-outs allow residents to relocate outside the floodplain and 
prevent future losses. Of course, we must be sensitive to the needs of 
residents when using buy-outs. Many residents bought their homes before 
we had full information about the floodplains. The value of many of 
these homes also may not be sufficient to allow homeowners to relocate 
to a comparable home. We should avoid creating a new problem by pushing 
residents out of their homes without sufficient resources to relocate.
    As long as the program is sensitive to the potential dangers, buy-
outs can be beneficial tools to improve the financial state of the 
NFIP. Former FEMA Director James Lee Witt has estimated that there will 
be a $2 return on every $1 spent on buy-outs of repetitive loss 
properties. That is an impressive return on investment that we should 
maximize by putting more money into the program for buy-outs. Past 
efforts have proved that mitigation works. Damage to towns along the 
Mississippi River following the 1993 floods were huge--$67 million in 
Wisconsin, $251 million in Iowa, and $253 million in Illinois. Last 
year's flood carried about as much water in some areas as in 1993, but, 
according to the Washington Post, damage estimates in those three 
States was only $30 million total. Overall damage from the 1993 flood 
was more than $10 billion, but last year was a fraction of that. While 
some of those savings are attributable to differences in the floods, a 
lot of it is because people and towns were bought out and moved.
    NFIP also should have additional resources for structural 
modification of properties to prevent losses. Many residents do not 
want to move and should not be forced to do so. Experience with the 
NFIP building standards has shown that many owners can elevate their 
homes or businesses and effectively reduce flood risks. In some cases, 
modifying the current property is less expensive and equally (or almost 
as) effective as a buy-out. And this option can help preserve 
communities to the fullest extent possible. NFIP needs the authority 
and resources to help property owners improve their properties before 
the program suffers additional losses.

Stop Abuse of the Program Through Multiple Claims
    We need to do more to stop the abuses of the program. Some 
individuals have bought in flood zones in order to take advantage of 
repeat payments from the NFIP. While the people in this category are a 
small minority of all property owners, they are an expensive minority. 
There must be some mechanism to either remove these individuals from 
the program or make them pay the full, unsubsidized premium based on 
sound actuarial standards. This approach would be similar to the 
limitations put on the crop insurance program in which farmers who file 
numerous, repetitive claims again are put in a special ``high risk, 
nonclassified'' system with increased rates and less than full 
guarantees. Simply reducing abuse of the system will be an important 
boost to the financial soundness of NFIP.
    We also need to recognize that not all repeat claimants are abusing 
the system. The majority of these people are the victims of natural 
disasters and bought their homes or businesses without any desire at 
all to make a claim for flood damage. These are difficult events in 
people's lives and they should not be punished for them. Many bought 
without full knowledge of the flood risk to their property and many 
more do not have the resources to elevate their properties or move. And 
many of these individuals cannot sell their homes for a reasonable 
price because they have suffered repeat flood damage--these people are 
stuck in the program through no fault of their own. They need to be 
given mitigation options to enable them to escape this nightmarish 
cycle.

Require Mandatory Disclosures of Flood Information
    One of the best ways to avoid future problems with the NFIP is to 
give people information about flood risks. As I said before, many 
people originally bought their properties without knowledge of the risk 
of flood. Reform of the NFIP needs to include mandatory disclosures of 
the flood history of the property so that buyers can make an informed 
choice in their purchases and they can properly value the home. To make 
mandatory disclosure effective, we should create an accessible 
electronic database of flood losses. Disclosure of flood information 
will help ensure that when a tragedy strikes in the future NFIP does 
not have to pay for an artificially overvalued property. The disclosure 
also should bring more people into the program by giving them the 
information about their risks.
    Finally, IIABA and PIA support the provision of the House-passed 
bill, H.R. 253, that lengthens the program reauthorization period from 
1 year to 5 years. In 2002, Congress adjourned without reauthorizing 
the NFIP program. This put the program in limbo, and left the industry 
and more importantly consumers not knowing when or if the program would 
be reauthorized and wondering how they should proceed in the meantime. 
Thankfully, Congress reacted swiftly and passed a reauthorization bill 
the first week they returned from recess. Those 2 weeks of uncertainty, 
however, caused a great deal of panic in the market and had the 
potential to freeze the entire real estate market because consumers 
need flood insurance to be able to close on a mortgage. We strongly 
support the provisions in H.R. 253 that change the reauthorization 
period to 5 years and change the expiration day from the end of the 
year to another time, as to avoid having the program expire at the same 
time as Congress is adjourned.

Proposed FEMA Regulations Would Harm Agents and NFIP
    Before I conclude, I would like to address a pressing issue that 
greatly concerns agents who sell and service policies under the 
program. As I mentioned at the beginning of my testimony, the Federal 
Emergency Management Agency (FEMA) has proposed a rule that would harm 
the position of insurance agents participating in the WYO program and, 
ultimately, be detrimental to NFIP. The proposed rule, published in the 
Federal Register on October 14, 2003, would amend the Federal Insurance 
Administration, Financial Assistance/Subsidy Arrangement. Paragraph 
61.5(f) of the FEMA proposed rule would change current standard 
practice by designating independent property and casualty agents as 
``agents'' of insureds, not agents of 
private Write Your Own insurers, for the purposes of selling and 
servicing NFIP policies. Currently, the status of an insurance producer 
as an agent or broker is a contractual issue determined by the producer 
and insurer.
    The regulatory intervention by FEMA into private contractual 
relationships between insurers and their agents is a sea change in the 
way NFIP has functioned since 1983 when private insurers were brought 
into the program and, more broadly, in the relationship between 
insurers and their agents. The contractual relationship between the 
insurance producer and insurance company is the defining element in the 
determination of the status of a producer as ``agent'' as opposed to 
``broker.'' FEMA's proposed rule, by dictating that an agent is, 
essentially, a broker for purposes of NFIP, undermines the agent's 
ability to establish such a contractual relationship and, therefore, 
alters the rights and responsibilities provided for in such contracts.
    It is currently standard practice to include cross-indemnification 
provisions in agency contracts. Thus, agents are required to indemnify 
insurers in instances where the carrier is held liable for an agent 
mistake. Similarly, companies are required to indemnify agents for 
company mistakes. By restructuring the agent-company relationship, 
FEMA's proposed rule would effectively do away with agency agreements, 
including these cross-indemnification provisions. In essence, this 
change would shield private insurers from liability for their own 
errors, leaving agents fully responsible for errors which may not be 
their fault. This will increase the liability exposure of agents and 
exacerbate the already-difficult task of securing errors and omissions 
coverage for their businesses. Loss of such coverage could force agents 
to drop out of NFIP or leave the insurance business entirely.
    Finally, the FEMA proposed rule's effective elimination of agents 
from NFIP would violate the National Flood Insurance Act. It has been 
clear since Congress passed the Act that the law and rules promulgated 
thereunder define the relationships between the Federal Government and 
the private parties with which the Government deals directly under 
NFIP. To date, however, the Act and rules have not attempted to define 
the relationships of private parties with each other. The proposed rule 
is the first time FEMA has attempted to interfere with private parties 
in this manner. Although we recognize that FEMA can and does define its 
relationship with agents that sell and service policies for FEMA 
directly, there is no statutory or regulatory authority for interfering 
in the relationship between agents and the WYO insurers for whom they 
are selling flood coverage.
    For these reasons, we urge you to take action to prevent FEMA from 
adopting the proposed rule, which FEMA intends to make effective May 1 
of this year.
    Thank you for giving me the opportunity to express the views of the 
Nation's insurance agents on this important program. The IIABA and PIA 
look forward to working with the Committee on this issue and I will be 
happy to take any questions you may have for me.
                               ----------
                    PREPARED STATEMENT OF GREG KOSSE
                       Associate General Counsel
             Kentucky Farm Bureau Mutual Insurance Company
                              on Behalf of
         The Property Casualty Insurers Association of America
                             March 25, 2004

    Chairman Bunning, Ranking Member Schumer, and other Subcommittee 
Members, Kentucky Farm Bureau Mutual Insurance Company (KFB Insurance) 
on behalf of the Property Casualty Insurers Association of America 
(PCI) appreciates the opportunity to testify before the Senate Banking 
Subcommittee on Economic Policy regarding the National Flood Insurance 
Program. KFB Insurance and PCI strongly support a multiyear 
reauthorization of the Federal flood insurance program.
    PCI, an association formed in January with the merger of the 
National Association of Independent Insurers and the Alliance of 
American Insurers, represents over 1,000 member companies that write 
over $154 billion in direct annual premium, almost 40 percent of the 
U.S. property and casualty market. KFB Insurance, a mutual insurance 
company owned by its policyholders, is representative of much of PCI's 
membership. We welcome the opportunity to comment and hope that the 
comments that follow help to explain the importance of the National 
Flood Insurance Program to your constituents across America.

Kentucky Farm Bureau Mutual Insurance Company
    Kentucky Farm Bureau Mutual Insurance Company is a member service 
of the Kentucky Farm Bureau Federation, an organization of families 
across Kentucky, both rural and urban. The Kentucky Farm Bureau 
Federation has over 440,000 members in Kentucky. In the 1940's, the 
Kentucky Farm Bureau recognized the need for affordable insurance with 
prompt and fair claim service for its members; hence the birth of the 
Kentucky Farm Bureau Mutual Insurance Company. From our humble 
beginnings of providing insurance needs from a card table in a feed 
store, KFB Insurance has grown to be the largest property and casualty 
insurance company based in Kentucky.

 We are the largest in total premiums written in Kentucky.
 We are the largest in property insurance premiums written in 
    Kentucky. We insure more residential property--homes, farms, mobile 
    homes, and apartments--in Kentucky than any other insurer. We have 
    nearly 304,000 personal property policies.
 We insure more cars in Kentucky than any other insurer. We 
    write nearly 700,000 automobile insurance policies.
 We are the largest volume insurer of farm property in 
    Kentucky.
 We are the second largest volume homeowner insurer in 
    Kentucky.
 We are the fifth largest commercial writer of business in 
    Kentucky, specializing in small businesses and family businesses.
 In 2002, we serviced nearly 158,000 claims.

    KFB Insurance only writes business in the Commonwealth of Kentucky. 
We are representative of many of the Farm Bureaus across America that 
offer insurance services to consumers in only one State or a few 
States. Our strength lies in our relationships with and presence in the 
local communities across Kentucky. We firmly believe that consumers 
want to deal with professional insurance agents and claimspersons, who 
are members of their communities, whether that community is a rural 
county or an urban neighborhood. Customers desire to deal with people 
with whom they have relationships.
    Kentucky also has a very diverse and competitive insurance market. 
We have over 200 companies authorized to write property and casualty 
business in Kentucky, ranging from the strong national companies, such 
as Allstate, to the smaller local niche companies like Kentucky 
Growers. We believe strong marketplace competition serves consumers' 
best interests. KFB is a single State writer and serves a critical need 
in the insurance market. Because of our knowledge of the Kentucky 
market and our presence throughout Kentucky, we assist in keeping the 
Kentucky insurance marketplace available and affordable. Reauthorizing 
the NFIP plays an important role in maintaining this effective 
marketplace.

The Importance of the National Flood Insurance Program
    The National Flood Insurance Program (NFIP or program) was created 
in 1968 because of severe and catastrophic losses resulting from 
floods. Flood insurance is offered through the Federal Emergency 
Management Agency (FEMA), now part of the U.S. Homeland Security 
Department. The program is significant, both for consumers and 
insurers, such as KFB Insurance. The NFIP allows for available and 
affordable coverage for consumers for catastrophic and widespread flood 
losses. The program partners with the insurance industry to distribute 
and service the program. Finally, after losses, by partnering with 
communities and lending institutions, the program enforces and 
encourages mitigation of future flood losses.

Available and Affordable Flood Coverage
    The program was originally established because the Federal 
Government and private insurers recognized the widespread catastrophic 
loss potential of floods. The Federal Government recognized that 
private insurance companies lacked the resources to identify all the 
flood-hazard areas (the mapping) and were unable to measure the 
potential loss. Furthermore, these catastrophic losses could not be 
sustained by private industry alone without becoming prohibitively 
expensive or simply unavailable for consumers.
    The Federal Government undertook the job of classifying flood-
hazard areas. Mapping the entire United States for flood zones took 
roughly 6 years. Most flood insurance rating maps (pre-FIRM) dates are 
1974. Many maps have been updated or 
revised in the 30+ years the program has been in existence, and the 
NFIP is currently undertaking a 7-year project to remap, using more 
sophisticated techniques (such as geo-coding), the entire United 
States. While mapping may have helped make floods more predictable and 
measurable, fully 25 percent of all the flood losses (according to the 
NFIP) occur in areas outside of the existing 100-year mapped 
floodplains. This fact reinforces the widespread nature of this type of 
catastrophic loss and reinforces the need to continue the remapping 
project underway.
    The NFIP serves a critical function for an insurance carrier such 
as KFB Insurance. If no Federal program existed and flood insurance 
became a private sector 
responsibility, flood insurance would either be unavailable or 
unaffordable for consumers. Insurers base their rates on predictability 
of risk. Insurers distribute the propensity for loss among many 
policyholders making the coverage affordable for all. For example, when 
a KFB insured has a loss due to a hailstorm or tornado, all KFB 
insureds pay for the loss. However, while such events as hailstorms or 
tornados are unpredictable, they typically will not result in 
widespread catastrophic loss. Floods, on the other hand, are typically 
more catastrophic and more regionally predictable. For example, history 
teaches us that floods will likely occur in Kentucky, from the 
mountains of eastern Kentucky to the great Ohio and Mississippi Rivers 
in the north and west. Running water abounds in Kentucky, and it is 
likely that flooding will occur and be catastrophic in nature affecting 
many consumers.
    Private insurers, like KFB Insurance, are an integral part of the 
competitive 
markets in each State; however, a one-State operation like ourselves 
could not adequately spread the risk of loss from these potential 
floods to policyholders nor absorb the losses when they occur. The 
NFIP, on the other hand, spreads this risk across the entire country 
based on floodplain exposure levels, making the product more affordable 
for all. If the flood program were shifted to the private sector, to 
insurers such as KFB Insurance, one of two things would happen:

 Insurers would need to charge extremely high premiums to cover 
    the flood exposure making flood coverage unaffordable, thereby 
    making consumers uninsured for flood losses.
 The risk would be prohibitive, so insurers would not write and 
    flood coverage, thereby making consumers uninsured for flood 
    losses.

A Practical and Effective Distribution and Service Network
    Another advantage of the NFIP as set-up today is that the Federal 
Government partners with carriers like KFB Insurance to sell flood 
insurance when a customer is purchasing all of their insurance needs. 
In other words, the Federal Government assumes the premiums and losses 
of the program, yet the distribution and servicing network of the 
program is through the local companies and their agents and adjusters. 
This fits well within the KFB Insurance framework, policyholders 
purchasing needed affordable coverage through persons in their 
community with whom they trust and have a relationship. Simply, more 
consumers purchase the needed coverage, thereby allowing society to 
rebuild after catastrophic losses.

After Loss Partnering to Rebuild and Mitigate Future Loss
    The program also encourages mitigation efforts to reduce future 
losses, while partnering with the financial lending sector to rebuild 
after losses. We, as a society, value the amenities, business 
opportunities, and lifestyle of property close to water. The NFIP helps 
building efforts near water, but requires that rebuilding efforts be 
done with an eye toward mitigating flood losses in the future. The NFIP 
helps to strike the balance between our desire as a society to be close 
to water and the practical necessity of ensuring that flood losses are 
minimized.
    Local communities must adopt sound land use policies or floodplain 
management ordinances. If these local municipalities do not adopt such 
plans and submit these plans to the Government for approval, the 
municipality cannot participate in the NFIP. If they cannot participate 
in the NFIP, they simply lack the resources to rebuild.
    The existence of the NFIP has allowed communities to develop the 
land in some flood-prone areas (with the buildings properly elevated). 
This would not have been possible in the private insurance marketplace 
as the risk of loss would have been too great and without some 
incentive, buildings would have been put, even more than they already 
are, in harm's way.
    The NFIP also encourages more property owners in floodplains to 
purchase and pay for flood insurance. Since 1973, any federally backed 
mortgage (for example through FHA, VA, SBA, Freddie Mac, or Fannie Mae) 
on a property in a floodplain (an area located in the 100-year 
floodplain), must purchase and maintain flood insurance. Mortgage 
lenders are required to make sure the insurance is purchased and 
maintained on the property. This furthers society's desire to have 
buildings near water, but requires those individuals to pay premiums to 
insure that property.
    The U.S. economy is just now getting back into a growth mode; 
however, the housing market has remained very strong, even through the 
recent downturn. Long-term reauthorization of this well-established 
program is vital to the U.S. economy, new and existing home purchasers, 
mortgage lenders, and the insurance industry.

Program Improvement--Repetitive Loss
    There are several ways the program could be improved. We would 
support, because of the high-cost of continually repairing or replacing 
repetitive loss structures, an expansion of the FEMA program that 
purchases these properties (at a fair-market cost) to reduce the costs 
to the program. We would also support charging these repetitive loss 
properties the true ``risk-based'' premium, based on sound actuarial 
principles, if the property owner or the community is not willing to 
relocate or sell the property. Repetitive losses account for almost 30 
percent of all losses paid by the NFIP on an annual basis while the 
most costly of these repetitive losses (those where the loss has 
exceeded the building value in a 10-year period--10,000 properties), 
amount to over half of 1 percent of the 4.4 million flood insurance 
policies.
    In addition, we support including language clarifying Federal court 
jurisdiction over lawsuits arising out of NFIP in comprehensive 
legislation affecting the program.
    We would be happy to discuss repetitive loss or jurisdictional 
issues with any of the Committee Members or their staff; however, 
support of the reauthorization is the primary purpose of my appearance 
here today.

Summary
    There is a delicate balance between the Federal Government and the 
private insurance industry on several insurance-related programs that 
must be preserved. Programs such as Federal Crop and Crop-Hail 
Insurance, Terrorism Reinsurance, the Price-Anderson Act for Nuclear 
Liability, Federal Deposit Insurance, and the NFIP, exist because of 
the truly immeasurable (from both a frequency and severity viewpoint) 
risks associated with these types of losses. We believe only the 
Federal Government has the resources to address these risks.
    As evidenced by letters sent last year on behalf of the industry, 
this program is vital to a diverse and competitive property and 
casualty insurance market. We understand that the current program will 
end June 30, 2004, without reauthorization. This is the beginning of 
the hurricane season (June 1) and the height of the real estate season, 
thus, we would strongly encourage Congress to act and extend this 
program for a minimum of 5 years (if not permanently). We would also 
recommend that Congress provide the authority to modify existing 
regulatory provisions and coverages to address legal and consumer 
issues. Finally, we would encourage Congress to fund a pilot program 
for repetitive losses.
    Again, on behalf of the Kentucky Farm Bureau Mutual Insurance 
Company and PCI, we appreciate the opportunity to comment on the 
importance of the National Flood Insurance Program.

                               ----------
                PREPARED STATEMENT OF STEVEN M. FELDMANN
                     Director of Community Affairs
             The Fischer Group, Cresentview Hills, Kentucky
                              on Behalf of
               The National Association of Home Builders
                             March 25, 2004

    Chairman Bunning, Ranking Member Schumer, and Members of the 
Economic Policy Subcommittee, I am pleased to appear before you today 
on behalf of the National Association of Home Builders (NAHB) to share 
our views concerning repetitive losses in the National Flood Insurance 
Program and Congressional efforts to reauthorize the program. We 
appreciate the invitation to appear before the Subcommittee on this 
important issue.
    My name is Steve Feldmann and I am the Director of Community 
Affairs for The Fischer Group. The Fischer Group is one of the largest 
home builders in the Nation and focused exclusively in the Northern 
Kentucky and Greater Cincinnati Region. The Fischer Group has been 
providing high-quality, affordable housing, and the joys of 
homeownership, for over 20 years.
    Mr. Chairman, NAHB represents more than 215,000 member firms 
involved in home building, remodeling, multifamily construction, 
property management, housing finance, building product manufacturing, 
and other aspects of residential and light commercial construction. The 
Federal Emergency Management Agency's (FEMA) National Flood Insurance 
Program (NFIP) plays a critical role in directing the use of flood-
prone areas and managing the risk of flooding for residential 
properties. The availability and the affordability of flood insurance 
gives homebuyers and homeowners the opportunity to live in a home of 
their choice in a location of their choice, even when the home lies 
within a floodplain. The home building industry depends upon the NFIP 
to be annually predictable, universally available, and fiscally viable.
    A strong, viable national flood insurance program enables the 
members of the housing industry to continue to provide safe, decent, 
affordable housing to consumers, in a design of their choice and in a 
location of their choice. The choices American consumers make when they 
are buying homes are some of the most critical aspects of the 
homebuying process. Through decisions about where to live, where to 
shop, and how to get around town, consumers apply the power of the 
marketplace to shape the Nation's communities. The NFIP, by enabling 
the choice of purchasing a home in a floodplain, allows consumer 
preferences to shape towns and cities into communities that maximize 
quality of life and economic development.
    Without the NFIP, many communities would be unable to provide 
affordable housing to many of their citizens. Despite a decade of 
unprecedented prosperity, many communities are seeing a growing gap 
between the supply and demand for housing. Families across the economic 
spectrum are finding it increasingly difficult to find a home that 
meets their needs. One of the leading causes of the housing 
affordability problem is the shortage of buildable land. By 
guaranteeing affordable flood insurance, the NFIP allows communities to 
use land that would otherwise be too costly due to high flood insurance 
premiums. Through the NFIP, flood insurance policies remain available 
and affordable and residential structures can be constructed in 
floodplains as long as they are built to withstand flooding. Therefore, 
the NFIP provides the means by which communities can address housing 
needs by making homeownership in areas prone to flooding safe, 
affordable, and practical.
    The NFIP provides flood insurance to approximately 4.4 million 
policyholders, enabling them to protect their properties and 
investments against flood losses while living in a home of their 
choice, in a location of their choice. Further, the NFIP creates a 
strong partnership with State and local governments by requiring them 
to enact and enforce floodplain management measures, including building 
requirements that are designed to ensure occupant safety and reduce 
future flood damage. This partnership, which depends upon the 
availability of comprehensive, up-to-date flood maps, ensures that 
State and local governments can create policies that reflect the needs 
of local communities, enabling them to direct development where it best 
suits the needs of their constituents and consumers.
    Unfortunately, the solvency and stability of the NFIP is threatened 
by an extremely small percentage of properties that have suffered 
multiple, costly flood damage. Approximately 48,000 currently insured 
properties, deemed ``severe repetitive loss properties'', have incurred 
two or more floods within a 10-year period. An even smaller subset of 
the severe repetitive loss properties, which number approximately 
10,000, have had four or more claims that cumulatively exceed the value 
of the property. These properties, which make up only 1 percent of the 
current policies, cost the NFIP approximately $200 million annually and 
account for approximately 25 percent to 30 percent of the claims paid 
by the program. The vast majority of severe repetitive loss properties 
were built before implementation of floodplain management standards and 
are eligible for subsidized flood insurance that is below the actuarial 
risk rate.
    These severe repetitive loss properties significantly impact the 
national flood insurance program, drive up the cost of premiums for all 
policyholders, and allow the system to teeter on an unstable actuarial 
foundation. Because of the frequency and expense of the claims on these 
severe repetitive loss properties, FEMA oftentimes does not have funds 
to keep the NFIP solvent. Insolvency threatens the future of the NFIP 
and the ability of the program to provide affordable flood insurance 
and service its 4.4 million policyholders. The Nation cannot afford to 
have this program collapse. By focusing on improving and mitigating 
potential damage to these severe repetitive loss properties, FEMA can 
ensure a viable, long-term program.
    As this Subcommittee, and the Congress as a whole considers 
legislation to reauthorize the NFIP, NAHB urges you to fully weigh the 
following principles:
Five-Year Reauthorization of the NFIP
    NAHB recognizes the importance of the NFIP in enabling consumer 
choice by protecting life and property in flood-prone areas. Although 
Congress recently extended FEMA's statutory authority to issue flood 
insurance policies until March 31, 2004, a lapse in authority after 
that date, as experienced in early 2003, will have severe repercussions 
for a vast number of landowners. Allowing FEMA's authority to limp from 
one short-term authorization to the next does not instill confidence or 
consistency for policyholders, future homebuyers, or industries that 
depend on a viable national flood insurance program. Congress should 
reauthorize the NFIP for a full 5 years. The uninterrupted availability 
of affordable flood insurance is vital to allowing the home building 
industry to continue to deliver safe, decent, affordable housing to 
consumers in a location of their choice.

All Properties must Remain Eligible for Flood Insurance
    Congress must ensure that all properties located within a FEMA-
designated floodplain, including severe repetitive loss properties, 
remain eligible for flood insurance. NAHB recognizes the need to 
address the problem that severe repetitive loss properties pose to the 
long-term health of the NFIP. However, these properties must be allowed 
to remain eligible for flood insurance. H.R. 253, the Flood Insurance 
Reform Act of 2003, as passed by the House of Representatives during 
the last session of Congress, in attempting to address severe 
repetitive loss properties, ensures that, at a minimum, severe 
repetitive loss properties are allowed to remain eligible for flood 
insurance. NAHB soundly agrees with this policy.

Narrowly Define Severe Repetitive Loss Properties
    Severe repetitive loss properties, which represent a 
disproportionate number of claims to the NFIP, must be addressed in 
order to ensure the long-term viability of the NFIP. NAHB believes that 
the NFIP reauthorization legislation, however, must narrowly define 
severe repetitive loss properties to only include those that pose the 
most severe flooding risks. By narrowing the scope of targeted 
properties, FEMA is directed to address the most problematic properties 
first, which will quickly lead to significant savings to the NFIP.
    Unfortunately, the definition of severe repetitive loss properties 
in H.R. 253 contains a threshold that is too low and does not truly 
reflect the cost of flood damage in many areas. In such instances, 
minor flooding can produce claims that exceed the threshold simply 
because the carpet or electrical systems were damaged by an inch of 
water. These are not the properties that we believe should be targeted.
    At a minimum, severe repetitive loss properties should be defined 
according to existing law, which states that,

        The term ``repetitive loss structure'' means a structure 
        covered by a contract for flood insurance . . . that has 
        incurred flood-related damage on 2 occasions during a 10-year 
        period ending on the date of the event for which a second claim 
        is made, in which the cost of repair, on the average, equaled 
        or exceeded 25 percent of the value of the structure at the 
        time of each such flood event. (42 U.S.C. 4121(a)(7))

    If an authorization bill is to target the most severe properties, 
that universe, by definition, should be smaller than the pool 
established by current law. Therefore, the current definition, as 
stated above, should serve as the baseline for the definition of 
``severe repetitive loss properties.''

Encourage the Redevelopment of Affected Properties
    The Congress should encourage FEMA, with the participation of State 
and local governments, to facilitate and provide funding for the 
redevelopment of affected properties in accordance with FEMA standards. 
Oftentimes, FEMA proposes to a property owner an offer to buy-out a 
severe repetitive loss property. The offer serves two purposes: (1) the 
buy-out allows the landowner an opportunity to relocate to an area with 
reduced or zero flooding risks and (2) it allows FEMA the ability to 
remove a repetitive claim, high cost property from the flood insurance 
roles. Given that the vast majority of these properties were built 
before implementation of floodplain management standards, many of these 
properties are not sufficiently flood-proof. It makes good policy sense 
for FEMA to mitigate (that is elevate, relocate, demolish, flood proof, 
and/or construct small flood control projects) or purchase these 
properties to reduce their flood risk or remove them from the insurance 
roles.
    However, after a buy-out, these properties are ineligible for 
redevelopment because they fall under clause i and ii of Section 
404(b)(2)(B) of the Robert T. Stafford Disaster Relief and Emergency 
Assistance Act (the Stafford Act) (42 U.S.C. 5170c(b)(2)(B)). Under the 
Act, any property acquired by FEMA with disaster assistance funds only 
can be used as open space, a recreational area, or for wetlands 
management. This means that for every home purchased via the NFIP, a 
formerly buildable lot has been taken out of production.
    In order to facilitate the responsible redevelopment of these 
properties, NAHB encourages FEMA to work with the affected State and 
local governments prior to offering buy-outs to plan for the 
redevelopment of these properties so that they meet local floodplain 
codes and regulations, as do newly constructed homes. If these 
properties are allowed to be redeveloped to current floodplain 
standards, local governments can satisfy local housing needs while 
ensuring that the properties are less prone to future floods and costly 
insurance claims. Further, local governments, not FEMA, should be 
allowed to make the decision as to whether or not the properties should 
be redeveloped. NAHB believes that local communities are the best 
arbiters for land use decisions, not the Federal Government.

Ensure Properties are Purchased at Fair Market Value
    In cases where FEMA makes an offer to buy a property, the property 
owner must be paid fair market value for both the land and the 
structure. Any reauthorization proposal must honor the 5th Amendment to 
the U.S. Constitution, which states that no ``private property be taken 
for public use without just compensation.'' This principle is a long-
held core belief of the members of NAHB. To that end, we are pleased 
that H.R. 253 adheres to this principle.

Higher Premiums for Severe Repetitive Loss Properties
    In its efforts to address severe repetitive loss properties, FEMA, 
through the NFIP, should be granted the authority to charge a higher 
premium for those severe repetitive loss properties for which 
reasonable mitigation offers were refused. As stated earlier, the drain 
on the NFIP from severe repetitive loss properties demands that the 
owners of these properties, in coordination with FEMA and local 
governments, take action to decrease the instances of flood damage. To 
that end, NAHB supports the provision in H.R. 253 that authorizes FEMA 
to increase the flood insurance rates for severe repetitive loss 
property owners that refuse mitigation.
    As set forth in H.R. 253, FEMA would have the authority to offer 
mitigation assistance (that is elevation, relocation, demolition, flood 
proofing of structures, and minor physical localized flood control 
projects or purchase) to the owners of severe repetitive loss 
properties. Under H.R. 253, if an owner of such a property refuses an 
offer of mitigation, and is ineligible for a waiver, FEMA may begin to 
charge higher flood insurance rates, up to the sound actuarial rates 
for that property. It is NAHB's hope that this provision will reduce 
Federal expenditures for flood control and disaster assistance by 
encouraging severe repetitive loss property owners to agree to the 
mitigation offer and rehabilitate their properties so that flood damage 
is reduced.

Notification of All Current Policyholders
    Given the sweeping changes to the NFIP that are being considered by 
this Subcommittee, NAHB believes that any reauthorization legislation 
include a provision to require FEMA to notify all current policyholders 
of the changes to the program. It would be unfair to the 4.4 million 
policyholders, especially the approximately 46,000 severe repetitive 
loss property owners, to be caught unaware by changes to the NFIP 
without the opportunity to read and understand the policy changes. 
Unfortunately, H.R. 253 is silent on this issue.
    Mr. Chairman, thank you for this opportunity to share the views of 
the National Association of Home Builders on this important issue. We 
look forward to continuing to work with you and your colleagues as you 
contemplate changes to the National Flood Insurance Program. We urge 
you to fully consider NAHB's position on the issue and how this program 
enables the home building industry to deliver safe, decent, affordable 
housing to consumers. I look forward to any questions you or other 
Members of the Subcommittee may have for me.




     STATEMENT OF THE NATIONAL ASSOCIATION OF REALTORS'
                             March 25, 2004

    Thank you for the opportunity to submit this statement for the 
record presenting the views of The National Association of 
REALTORS' (NAR) on the National Flood Insurance Program 
(NFIP) and the issue of repetitive flood loss. The one million members 
of NAR--including its institutes, societies, and councils--commend 
Chairman Bunning for holding this hearing on a subject that is of great 
importance to REALTORS'.
    It is often said that REALTORS' do not sell homes, we 
sell communities. The members of The National Association of 
REALTORS' are concerned and active members of our 
communities. We recognize and support the important role the National 
Flood Insurance Program plays in managing the risk of flooding that 
affects so many of our citizens.
    The NFIP is a unique partnership between our three levels of 
government. It enables property owners in participating communities to 
purchase insurance as a 
protection against flood losses in exchange for State and community 
floodplain management regulations that reduce future flood damages. As 
a result, Federal expenditures for disaster assistance and flood 
control are reduced.
    Flood insurance is required in order to secure financing to buy, 
build, or improve structures in Special Flood Hazard Areas (SFHA's). 
Federally regulated or federally insured lending institutions must 
determine if a structure is located in a SFHA and must provide written 
notice requiring flood insurance. Flood insurance is available to the 
owner of any property located in a community participating in the NFIP.
    The program partners with nearly 20,000 communities nationwide and 
holds 4.4 million policies representing $623 billion in insurance 
coverage. It provides over 90 percent of all flood insurance nationwide 
and close to 100 percent of flood insurance coverage for individually 
owned properties and small- to mid-size commercial properties. Ninety-
one insurance companies write flood insurance, either under the Write 
Your Own program or through direct sales. In fiscal year 2002, the 
program generated $1.4 billion in written premiums, with an average 
premium of $393, average coverage of $142,204, and an average payout of 
$24,551. By providing affordable flood insurance that is unavailable in 
the private market, the NFIP helps our citizens achieve the American 
Dream of homeownership.
    Unfortunately, the program is currently burdened by the cost of 
repetitive loss properties. Approximately 48,000 insured properties 
nationwide have incurred two or more flood losses over a 10-year 
period, each of which exceeds $1,000. These properties cost the flood 
insurance program over $200 million annually. The top 10,000 structures 
alone cost the program over $65 million annually. Repetitive loss 
properties comprise approximately 1 percent of insured properties but 
account for 
approximately 25-30 percent of claims losses. By not paying premiums 
that adequately reflect their exposure to the risk of flooding, these 
properties threaten the flood insurance program's actuarial foundation.
    As a consequence, the NFIP faces continuing pressure to increase 
premiums for all policyholders nationwide. To do so would have a 
serious negative impact on the real estate industry and our Nation's 
economy. Directly and indirectly, the housing sector has played a 
critical role in keeping the overall national economy afloat. With over 
6.1 million existing home sales, 2003 was a record-setting year. The 
over 1 million new home sales in 2003 was also an all-time high. 
However, continued progress is threatened when costs in the form of 
higher insurance premiums are added to the home transaction and 
potential homebuyers are shut out of the market.
    NAR believes that Congress must address the repetitive loss issue 
in order to place the flood insurance program on firmer financial 
ground. We support an approach that has three main components: (1) 
repetitive loss properties remain eligible for Federal flood insurance; 
(2) flood mitigation measures are offered to the worst repetitive loss 
properties; and (3) if a mitigation offer is refused, the owner of a 
repetitive loss property will be required to pay a higher insurance 
premium. This win-win approach ensures that insurance payouts will be 
reduced by properly mitigating the worst repetitive loss properties. At 
the same time, it allows the property owner to remain in the program, 
while paying a premium that adequately reflects the property's flood 
risk.
    We feel that H.R. 253, the repetitive loss bill approved late last 
year by the House of Representatives, is a constructive and viable bi-
partisan effort to address the repetitive loss problem. It is designed 
to improve the financial soundness of the NFIP by shifting more of the 
burden of recovery costs to property owners who choose to remain 
vulnerable to repetitive flood damage. The bill focuses on the most 
severe repetitive loss properties, and it provides an appeals process 
to prevent unfairness and injustice.
    We must make one final point on this issue. It is critical that 
flood insurance remain accessible and equitable for all individuals who 
own property in a floodplain. NAR opposes a phase-out of subsidized 
flood insurance for second homes and rental properties. Non-primary 
residences should be given the same consideration as primary 
residences. These properties face a flooding risk which is identical to 
that of adjacent primary residences. For reasons of fundamental 
fairness, they should not be charged full risk premiums unless they 
fall under the definition of repetitive loss properties.
    Furthermore, charging full risk premiums for second homes and 
rental properties would significantly increase their insurance costs. 
Consequently, the purchase price of homes in resort and coastal areas 
would increase, their affordability and marketability would decrease, 
and local economies would suffer. Owners of rental properties would be 
forced to pass on the increased costs of flood insurance through rent 
increases to their tenants, placing additional strain on the budgets of 
low- and fixed-income renters.
    At the same time that Congress works to improve the financial 
soundness of the NFIP, it is important that you maintain the program's 
continuous authority to provide flood insurance coverage. Two year's 
ago, the 107th Congress adjourned without extending FEMA's statutory 
authority to issue flood insurance policies beyond the end of the year. 
Thakfully, Congress and the President acted quickly in the early days 
of this Congress to pass and sign retroactive reauthorization. In the 
interim, FEMA and a coalition of public and private sector 
organizations worked hard to provide guidance to private industry and 
the public and prevent disruptions in the real estate, insurance, and 
lending industries.
    Although disruptions were largely averted, such a lapse of 
authority could have severe repercussions for an industry that 
continues to be one of the few bright spots in our Nation's economy. An 
absence of authorization raises compliance and legal questions for 
lenders and insurers. In such an uncertain climate, home purchases and 
insurance policy renewals are jeopardized. For prospective homebuyers, 
this can mean an opportunity delayed . . . or possibly lost entirely. 
FEMA estimates that a short lapse in authority could affect 
approximately 400,000 households seeking to obtain or maintain flood 
insurance.
    This situation should not be allowed to happen again. We encourage 
Congress to enact a multiyear reauthorization, as is provided in H.R. 
253, in order to ensure program continuity.
    Thank you for allowing the National Association of 
REALTORS' an opportunity to share our views on important 
issues involving the National Flood Insurance Program. We urge the 
Subcommittee and Committee to undertake a bi-partisan effort and pursue 
improvements that will strengthen the NFIP and make it more effective 
for policyholders nationwide. We look forward to working with you in 
support of this effort.
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