[Senate Hearing 109-830]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-830

 
                       THE FUTURE OF THE NATIONAL
                        FLOOD INSURANCE PROGRAM

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

                                HEARINGS

                               before the

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

                       ONE HUNDRED NINTH CONGRESS

                        FIRST AND SECOND SESSION

                                   ON

  EXAMINATION OF THE FUTURE OF THE NATIONAL FLOOD INSURANCE PROGRAM, 
   FOCUSING ON REDUCING LOSSES TO THE PROGRAM RESULTING FROM POLICY 
   SUBSIDIES AND REPETITIVE LOSS PROPERTIES, AND DEVELOPING ACCURATE 
                           DIGITAL FLOOD MAPS

                               __________

           OCTOBER 18, 2005, JANUARY 25, AND FEBRUARY 2, 2006

                               __________

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


      Available at: http: //www.access.gpo.gov /congress /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                    THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire        DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina       ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                Jeffrey T. Powell, Legislative Assistant

            J. Brack Hudson, Assistant to the Chief Counsel

           Mark A. Calabria, Senior Professional Staff Member

                    John East, Legislative Assistant

             Jonathan Miller, Democratic Professional Staff

               Jennifer Fogel-Bublick, Democratic Counsel

            Sarah Garrett, Democratic Legislative Assistant

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                       TUESDAY, OCTOBER 18, 2005

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................     2
    Senator Bennett..............................................     4
    Senator Reed.................................................     4
    Senator Bunning..............................................     4
    Senator Carper...............................................     5
    Senator Dole.................................................     6

                               WITNESSES

David I. Maurstad, Acting Director and Federal Insurance 
  Administrator Mitigation Division, Federal Emergency Management 
  Agency, Emergency Preparedness and Response Directorate, U.S. 
  Department of Homeland Security................................     7
    Prepared statement...........................................    36
    Response to written questions of Senator Sarbanes............    91
William O. Jenkins, Jr., Director, Homeland Security and Justice 
  Issues, U.S. Government Accountability Office..................     9
    Prepared statement...........................................    40
Chris Landsea, Tropical Prediction Center/National Hurricane 
  Center, National Weather Service, National Oceanic and 
  Atmospheric Administration, U.S. Department of Commerce........    11
    Prepared statement...........................................    56
J. Robert Hunter, Director of Insurance, Consumer Federation of 
  America........................................................    26
    Prepared statement...........................................    59
Douglas J. Elliott, President, Center On Federal Financial 
  Institutions...................................................    28
    Prepared statement...........................................    68
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief 
  Economist, Insurance Information Institute, New York, NY.......    29
    Prepared statement...........................................    69
Chad Berginnis, CFM, Immediate Past Chair, State of Ohio.........    30
    Prepared statement...........................................    78
Mark J. Browne, Gerald D. Stephens CPCU Chair, Risk Management 
  and Insurance, School of Business, University of Wisconsin--
  Madison........................................................    32
    Prepared statement...........................................    85

              Additional Material Supplied for the Record

Letter from the National Association of Realtors' 
  submitted by Senator Elizabeth Dole............................    97

                              ----------                              

                      WEDNESDAY, JANUARY 25, 2006

Opening statement of Chairman Shelby.............................   101

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................   103
    Senator Bennett..............................................   105
    Senator Menendez.............................................   105
    Senator Bunning..............................................   106
    Senator Stabenow.............................................   107
    Senator Crapo................................................   108
    Senator Carper...............................................   108
    Senator Dole.................................................   109
    Senator Martinez.............................................   110
    Senator Allard...............................................   112
    Senator Reed.................................................   138
    Senator Hagel................................................   144

                               WITNESSES

David M. Walker, Comptroller General of the United States........   113
    Prepared statement...........................................   145
    Response to written questions of:
        Senator Dole.............................................   179
        Senator Reed.............................................   179
David I. Maurstad, Acting Director and Federal Insurance 
  Administrator Mitigation Division, Federal Emergency Management 
  Agency, Emergency Preparedness and Response Directorate, U.S. 
  Department of Homeland Security................................   115
    Prepared statement...........................................   166
    Response to written questions of:
        Senator Dole.............................................   181
        Senator Reed.............................................   184
Donald B. Marron, Acting Director, Congressional Budget Office...   117
    Prepared statement...........................................   172

                              ----------                              

                       THURSDAY, FEBRUARY 2, 2006

Opening statement of Chairman Shelby.............................   189

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................   190
    Senator Reed.................................................   191
        Prepared statement.......................................   231
    Senator Santorum.............................................   195
    Senator Allard...............................................   220
    Senator Carper...............................................   226

                               WITNESSES

David R. Conrad, Senior Water Resources Specialist, National 
  Wildlife
  Federation.....................................................   192
    Prepared statement...........................................   231
Regina M. Lowrie, CMB, Chairman, Mortgage Bankers Association....   195
    Prepared statement...........................................   242
    Response to written questions of Senator Reed................   274
J. Robert Hunter, Director of Insurance, Consumer Federation of 
  America........................................................   197
    Prepared statement...........................................   248
    Response to written questions of Senator Reed................   275
David Pressly, President, National Association of Homebuilders...   200
    Prepared statement...........................................   252
    Response to written questions of Senator Reed................   276
Paul J. Gessing, Director of Government Affairs, National 
  Taxpayers Union................................................   201
    Prepared statement...........................................   255
David C. John, Senior Research Fellow, Thomas A. Roe Institute 
  for Economic Policy Studies, The Heritage Foundation...........   206
    Prepared statement...........................................   263
Pamela Mayer Pogue, CFM, Chair, State of Rhode Island............   208
    Prepared statement...........................................   267


           THE FUTURE OF THE NATIONAL FLOOD INSURANCE PROGRAM

                              ----------                              


                       TUESDAY, OCTOBER 18, 2005

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

    The Committee met at 10:30 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Richard C. Shelby (Chairman of 
the Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. This morning, the Committee meets now to 
hold a hearing on the future of the National Flood Insurance 
Program. Hurricanes Katrina and Rita have not only reminded us 
that flooding has been the most common and costly natural 
disaster in American history, but also that the Federal 
Government has long played an important role in planning for 
and reacting to flooding.
    A significant part of the Federal Government's role is the 
National Flood Insurance Program. Established by the National 
Flood Insurance Act of 1968, this program works to both help 
flood victims recover from disasters and encourage communities 
and homeowners to mitigate against future floods. Despite both 
Federal and local government efforts, the damages from 
flooding, both in terms of life and property, have continued to 
increase. It is likely that Hurricane Katrina will be the most 
costly natural disaster in our Nation's history.
    Flooding, however, has not been limited to the Gulf States, 
including mine, as we have witnessed with the recent flooding 
in both New Hampshire and New Jersey. The claim payments that 
are likely to result from recent flooding bring to the 
forefront many of the structural weaknesses inherent in the 
design of the National Flood Insurance Program. For instance, a 
sizable portion of properties continue to receive insurance 
rates that are far from being actuarially sound. Continuation 
of subsidized rates, particularly for properties that have 
suffered repetitive losses, needs to be examined closely to 
consider whether such subsidies encourage families to remain 
living in harm's way.
    As FEMA currently lacks the reserves to pay the expected 
claims from Hurricane Katrina, I believe bringing the insurance 
fund to financial solvency is necessary to assure that all 
claims are paid in a timely and a fair manner and so that 
impacted families can rebuild their lives as quickly as 
possible.
    It also appears that many flooded homes in the Gulf region 
were located outside the 100-year floodplain. This hearing will 
help us consider whether existing program requirements are 
sufficient to address the realistic threat of flooding from 
natural disasters.
    Many of these issues were central to the Flood Insurance 
Reform Act of 2004, passed by this Committee last year. I want 
to recognize the leadership roles of both Senator Bunning and 
Senator Sarbanes in crafting that important piece of 
legislation. I am hopeful that this Committee can continue to 
build upon their efforts in addressing many of the issues 
currently facing the Flood Insurance Program.
    We have a very distinguished panel of witnesses that I 
would like to welcome to the Committee at this time.
    Our first panel this morning includes Mr. David Maurstad, 
Acting Director of the Mitigation Division, FEMA; Mr. William 
Jenkins, Director of Homeland Security and Justice, GAO; and 
Mr. Chris Landsea from the National Oceanic and Atmospheric 
Administration's National Hurricane Center.
    Our second panel will include Mr. Robert Hunter, Consumer 
Federation of America; Mr. Doug Elliott, Center on Federal 
Financial Institutions; Mr. Robert Hartwig, Insurance 
Information Institute; Mr. Chad Berginnis, on behalf of the 
Association of State Floodplain Managers; and Professor Mark 
Browne from the University of Wisconsin.
    I again want to thank today's witnesses here, and we will 
start with the first panel, but first I want to recognize 
Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman. I want 
to commend you for holding this important hearing on the 
National Flood Insurance Program, which currently insures over 
4.7 million properties in the United States.
    Regrettably, I have had experience dealing with FEMA on the 
National Flood Insurance Program over the past 2 years, and 
given these interactions, I am very deeply concerned about 
FEMA's ability to handle not only flood insurance claims but 
also the other needs of the people affected by Hurricanes 
Katrina and Rita.
    Over 2 years ago, Hurricane Isabel struck the East Coast, 
wreaking havoc on the lives of thousands. FEMA was clearly 
overwhelmed then, let alone now. Many of my constituents 
reported having problems settling their flood insurance claims, 
and, in fact, some are now suing FEMA over their flood 
insurance settlements.
    In addition, almost 50 Maryland families remain in FEMA 
trailers. These are not the conditions people should have to 
suffer through after losing their homes and possessions. These 
were problems experienced after Hurricane Isabel, a much 
smaller event than the ones FEMA is currently dealing with, 
where the estimates are that a million people have been 
displaced. FEMA estimates that over 200,000 flood claims will 
be filed.
    I have called on the President to provide housing 
assistance to families through HUD in this Nation's housing 
delivery system. I do not think FEMA can deliver 18 months of 
housing assistance for hundreds of thousands of people. Putting 
this responsibility on FEMA, an agency already under strain, is 
a recipe for disaster. You can see it from the news reports 
every day.
    I am also concerned about the handling of flood claims, 
especially since FEMA has not implemented many of the critical 
reforms Congress passed in response to the problems after 
Hurricane Isabel. We held hearings, Senator Bunning crafted 
legislation, but FEMA has not put the provisions of that 
legislation fully into place. Almost a year since the statutory 
deadline, FEMA has not adopted minimum education and training 
requirements for insurance agencies, something Congress found 
was specifically necessary to ensure consumers receive accurate 
information about flood insurance and their policies.
    In addition, while FEMA has finally published the required 
Claims Handbook, a critical element of this handbook and the 
claims process is missing. The Committee found after Hurricane 
Isabel struck over 2 years ago that flood victims had no 
adequate means to make complaints or appeal decisions. I am 
dismayed to learn that there is still no formal appeals process 
for holders of flood insurance policies. It has not been 
formalized within the statutory timeframe, and while FEMA has 
now issued the handbook, it does not contain an appeals 
process.
    Hurricanes Rita and Katrina and the recent floods in the 
Northeast will place even greater strains on the Flood 
Insurance Program than we have seen in the past. I gather the 
current estimates are that we will have over $20 billion in 
flood insurance payouts, more than has been paid out in flood 
insurance claims since the program began in 1968.
    So, I think this review of the Flood Insurance Program is 
obviously timely. There are many issues that need to be looked 
at: Why many property owners do not have flood insurance, the 
rates of coverage are quite low. Although mortgage lenders must 
ensure that homeowners have flood insurance in flood zones, 
there is no system in place to ensure that homeowners keep the 
coverage in force. And many properties that lie outside of the 
special flood hazard areas are flooded, so we need to look at 
how we define mandatory purchase zones and assess whether 
requiring coverage only for those properties within the 100-
year flood zone makes sense.
    The state of the flood maps is apparently woefully 
inadequate. FEMA is in the midst of map modernization, but the 
State people tell us that these maps really do not fully 
reflect the true risk to life and property.
    There is some concern about FEMA staffing and resources and 
whether placing it within the Department of Homeland Security 
means that it is being neglected in that regard. I think that 
is an important issue to look at as well.
    So, Mr. Chairman, obviously a number of issues have arisen. 
Again, I want to emphasize my concern that the reforms that I 
worked with Senator Bunning and others to formulate and that we 
moved through have not been fully implemented by FEMA. And some 
of those were quite important indeed, and obviously we want to 
know why that is the case and what can be done about it. It 
ought not to take another catastrophe to put some of these 
things into effect.
    Thank you very much.
    Chairman Shelby. Senator Bennett.

             STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. I have no statement at this time. I just 
want to join the Chairman in welcoming our witnesses.
    Chairman Shelby. Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Thank you, Mr. Chairman, and I would just 
like to make two points.
    In following up on Senator Sarbanes' comment, one of the 
problems we have is that the maps that are being used, the FEMA 
map and the Corps of Engineers map, are not consistent. The 
FEMA map describes a 100-year flood. The Corps has inundation 
maps of actually used scenarios of Class 2 and 3 hurricanes. 
And in my home State of Rhode Island, in fact, in every area in 
the country, you can think you are secure if you look at the 
FEMA map because you are outside the flood zone. But if you 
look at the Corps of Engineers map, a Class 2 hurricane, you 
are going to get flooded. I am working on legislation. I think 
these maps should be coordinated, and the information should be 
provided to homeowners and to insurers. And I think also we 
should be encouraging more homeowners who could be flooded to 
get this insurance, as Senator Sarbanes suggested. And that is 
something I think we can do very practically and we should do.
    The other point is the fact that we all recognize that 
there is increased building along wetlands, oceans, and 
beaches. Again, I think my State is not unique. I would expect 
that along the Alabama coast you have seen a lot more houses, 
and the Maryland coast. I do not know about you, Senator 
Bennett, but certainly along our coast we have seen a lot of 
building along the coastline.
    Senator Bennett. We have had some rivers go out of their 
100-year----
    Senator Reed. Floodplains.
    Senator Bennett. And cause floods.
    Senator Reed. Into the new subdivisions.
    Senator Bennett. That is right.
    Senator Reed. And so we have to begin to think very 
seriously about how we balance this new growth with the dangers 
of flooding and are we giving incentives that complicate our 
problems with flooding. And I think that is something that, in 
a general topic, we should address.
    But I thank you very much, Mr. Chairman. This is a very 
important hearing. As we speak--and I think everyone is aware 
of it if you watched some television this morning--there is a 
dam that is under great stress in Taunton, Massachusetts. If it 
gives way, there could be serious flooding up the 10-plus miles 
from the Rhode Island border. So this is not an academic 
subject today.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Bunning.

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. Thank you, Mr. Chairman, for holding this 
very important hearing, and I would like to thank all of our 
witnesses for coming before us today.
    We all saw the heartbreaking images of the devastation 
caused by Hurricanes Katrina and Rita. Americans have opened 
their hearts and their wallets to help those whose lives have 
been turned upside down by those storms. I know the Chairman 
has been personally affected by the plight of his constituents. 
We are still cleaning up the mess, but we are also starting to 
rebuild the homes and lives of those affected.
    One critical tool to rebuild the Gulf is the National Flood 
Insurance Program. On June 30 of last year, the President 
signed into law the Reauthorization of the National Flood 
Insurance Program. We worked very hard on that bill, and I 
think we made a good product.
    Mr. Chairman, you were instrumental in passing that bill, 
as was Senator Sarbanes. After Hurricane Isabel devastated 
parts of Maryland, we learned a lot about what improvements 
could be made to the Flood Insurance Program to make it work 
better for policyholders. Senator Sarbanes was instrumental in 
writing Title II of the bill.
    Title II, when implemented, will provide policyholders with 
much needed protection, including, I think most importantly, an 
official appeals process. Unfortunately, the key words in that 
last statement is ``when implemented.'' Despite it being almost 
16 months after the President signed the bill and 10 months 
after the statutory deadline, FEMA has not implemented the 
consumer protection called for in this law. FEMA has not even 
put out proposed regulations for comment.
    I know they finally put out the guidebook that Senator 
Sarbanes talked about for Title II last month, but that booklet 
is incomplete because it does not tell policyholders about an 
appeals process. Of course that appeals process does not exist 
yet, which is a violation of the law. This is completely 
unacceptable.
    After the Isabel experience we tried to learn from our 
mistakes and make the program more user friendly before the 
next storm. Unfortunately, FEMA did not. The protections are 
still not in place. Many policyholders do not know that unlike 
in homeownership insurance, the contents of their homes are not 
covered unless they bought a separate content policy, and as I 
already mentioned, there is no official appeals process. 
Hopefully, our witnesses can answer some of the $64,000 
questions that have plagued this program.
    How do we get more people to participate in the program, 
and how do we make sure everyone who should be in the program 
is in the program? We must assure the program is shored up 
after this hit, and maybe FEMA will tell us if they ever have 
any idea when they will put out for comment the proposed 
regulations required under last year's reauthorization. I may 
ask when the final rules will be implemented, though I am 
pretty sure they do not have a clue.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you.
    Senator Carper, you have any comments?

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Just briefly. I have a sense of deja vu, a 
long time ago when the Chairman and I served on the House 
Banking Committee, this was an issue that I had a great deal of 
interest in, and that was almost 20 years ago, and we are still 
back at it and trying to figure out----
    Chairman Shelby. We were younger then.
    Senator Carper. Yes, we were.
    But I was pleased to support Senator Bunning's legislation 
last year in a belief that it would help get us close to where 
we tried to go some 15 years ago, and I am very much looking 
forward to the testimony of our witnesses today to find out 
what is being done, what needs to be done, how do we get this 
thing moving so we can better protect homeowners, but at the 
same time better protect the Treasury.
    With that having been said, I welcome our witnesses, and we 
look forward to your testimony and a chance to ask you some 
questions.
    Thank you.
    Chairman Shelby. Thank you, Senator Carper.
    I have introduced the panel already. We will start with Mr. 
Maurstad.
    Senator Dole. Mr. Chairman.
    Chairman Shelby. Senator Dole, sorry. You do have a lot of 
coastline in North Carolina.

              STATEMENT OF SENATOR ELIZABETH DOLE

    Senator Dole. Thank you, Mr. Chairman. I first want to 
associate myself with Senator Bennett's statement earlier this 
morning on the importance of moving forward with TRIA.
    I ask unanimous consent that a statement from the National 
Association of Realtors on the Flood Insurance Program be 
entered into the record.
    Chairman Shelby. Without objection, it will be made part of 
the hearing record.
    Senator Dole. I am particularly pleased that we are 
examining the future of the National Flood Insurance Program 
this morning, Mr. Chairman. Folks in North Carolina know that I 
have been a strong advocate of this program, which covers 
approximately 147,000 homes in our State.
    North Carolina has certainly felt the impact of flooding, 
as you mentioned, in the wake of powerful hurricanes like 
Isabel, Frances, Ivan, and just last month, Ophelia. Ophelia 
hit the coast, resulting in a great deal of flooding as well. 
Indeed, no one could have foreseen the strains that Hurricanes 
Katrina and Rita would place on the program. As of September, 
FEMA has $3\1/2\ billion in borrowing authority to help pay the 
claims resulting from these two hurricanes. But according to 
FEMA, we now expect between $15 and $25 billion in claims. This 
makes it clear that we are going to again need to raise the 
borrowing authority for the program, and we should not hesitate 
to do so.
    In the aftermath of these most recent tragedies, we must 
redouble our efforts to make certain that wherever possible 
homes are rebuilt stronger, higher, and safer than before to 
prevent repetitive losses and to save lives in the future.
    In my 8 years as 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, and we also co-sponsored FEMA's biannual National 
Mitigation Conferences. We appointed the first ever Assistant 
Director for Mitigation, who worked closely with FEMA's Deputy 
Federal Coordinating Officer for Mitigation and advocated for 
these policies and actions at the local, State, regional, and 
national levels. After all, mitigation not only prevents or 
greatly minimizes damage, mitigation but also saves lives.
    Now more than ever we must ensure that this important work 
on mitigation is emphasized as we rebuild, and that it 
continues in the areas most vulnerable to flood loss across the 
Nation.
    Finally, mapping plays an integral role in mitigation 
efforts. Last year's reauthorization included nearly $1\1/2\ 
billion in flood map modernization funding through 2008. These 
maps helped determine the exact size of our floodplains and 
they are essential to proper planning for our communities. The 
Government has committed to a 50/50 partnership with the States 
and it is essential that these efforts continue.
    I am proud that North Carolina has one of the most advanced 
mapping programs under way. I look forward to continuing our 
work on these issues as our recovery efforts continue, Mr. 
Chairman. Families certainly deserve the security and the peace 
of mind that the National Flood Insurance Program provides.
    Thank you.
    Chairman Shelby. Thank you, Senator Dole.
    All of your written testimony will be made part of the 
hearing record in its entirety. Mr. Maurstad, we will start 
with you.

                 STATEMENT OF DAVID I. MAURSTAD

             ACTING DIRECTOR AND FEDERAL INSURANCE

              ADMINISTRATOR, MITIGATION DIVISION,

              FEDERAL EMERGENCY MANAGEMENT AGENCY,

        EMERGENCY PREPAREDNESS AND RESPONSE DIRECTORATE,

              U.S. DEPARTMENT OF HOMELAND SECURITY

    Mr. Maurstad. Good morning, Chairman Shelby, Ranking Member 
Sarbanes, and Members of the Committee. I am David Maurstad, 
Acting Mitigation Division Director and Federal Insurance 
Administrator for FEMA within the Department of Homeland 
Security. I appreciate the opportunity to appear today before 
the Committee.
    Hurricanes Katrina and Rita left devastation in their wake 
beyond any natural disaster in our Nation's history. The impact 
of these events will be felt for some time, and my thoughts and 
prayers are with those who have been personally impacted.
    The magnitude and severity of flood losses related to 
Katrina and Rita are unprecedented in the history of the NFIP. 
The challenges these storms have presented in terms of flood 
insurance claims handling, floodplain management, mitigation 
planning, and grants management, have never been encountered on 
this scale before.
    Let me provide a context for what the NFIP and the Nation 
is facing. Since the NFIP's inception in 1968, $15 billion has 
been paid out to cover more than 1.3 million losses. In 2001, 
Tropical Storm Allison resulted in the NFIP's first billion-
dollar storm with over 30,000 claims received, totaling $1.1 
billion. Just last year, the 2004 hurricane season resulted in 
a record number of claims, over 75,000, totaling close to $2 
billion paid out in NFIP coverage, again, a record amount.
    We estimate that Hurricanes Katrina and Rita will result in 
flood insurance claims at least 8 times the highest number 
filed from any single event in NFIP's history, and well more 
than triple the total number of claims filed in 2004. 
Currently, there are 20,100 communities in all 50 States and 
U.S. territories participating in the NFIP. The program 
collects slightly more than $2 billion in premium and fees from 
4.7 million policyholders, insuring in excess of $800 billion 
in assets. It is important to note that since 1986 the NFIP has 
been financially self-supporting. During periods of high 
losses, the NFIP has borrowed from the U.S. Treasury, and this 
is an essential part of NFIP's financing for heavy loss years. 
These loans have been repaid with interest from policyholder 
premium and related fees at no cost to the Nation's taxpayers.
    This catastrophic event goes well beyond what the NFIP was 
intended to address from premium revenues alone. A recent 
claims payment projection, which was submitted for the record, 
indicates that more than 225,000 flood insurance claims may be 
filed, resulting in an estimated $23 billion in payments. This 
$23 billion in estimated claims from those whose homes and 
businesses have been damaged or destroyed by these hurricanes 
is not a new obligation. It is the result of a legal promise we 
made to these homeowners and business owners when Congress 
passed the National Flood Insurance Act of 1968 and subsequent 
revisions.
    Homeowners and business owners agreed to pay premiums. 
Communities agreed to adopt building codes to mitigate flood 
damages, and the Federal Government agreed to provide insurance 
coverage to policyholders after a disaster. Every single one of 
these claims represents someone who has taken a responsible 
course of action by purchasing flood insurance and faithfully 
paying the premiums. We not only have a legal obligation to 
honor our commitments, but we also have a moral obligation to 
provide the coverage that we promised.
    On September 20, 2005, the President signed H.R. 3669, 
which increased the program's borrowing authority from $1.5 
billion to $3.5 billion. However, as Hurricanes Katrina and 
Rita related claims will exceed this amount by a substantial 
margin, we request that an additional $5 billion be added to 
this authority. This stopgap measure should allow sufficient 
borrowing authority to cover claims through mid- to late-
November, and also would enable us to work with this Committee 
and others to complete meaningful program reform 
recommendations.
    The NFIP has been a long-term commitment for changing the 
way we reduce the Nation's flood risk. As we move forward 
toward the future we are using the following principles to 
guide us in formulating those recommendations: Protecting the 
NFIP's integrity by covering existing commitments and 
liabilities, charging fair and actuarially sound premiums for 
all policyholders by phasing out subsidized premiums, 
increasing program participation incentives and improving 
enhancements where mandatory participation is warranted, 
increasing risk awareness among homeowners and consumers by 
improving information quality, and reducing future risks 
through a combination of mitigation measures, and by exploring 
opportunities to reduce risk through enhanced protective 
measures.
    Consistent with the first principle, I have established 
policies that enabled, simplified, and streamlined processes to 
help policyholders settle their claims quickly. Using these 
streamlined methods we expect to substantially reduce our 
adjustment times from what you would expect under such extreme 
circumstances.
    Starting September 1, to help policyholders through the 
claims process, two updated documents have been made available, 
the NFIP Summary of Coverage, and the Flood Insurance Claims 
Handbook. With the Committee's permission, I would like to 
submit copies of these documents into the record.
    Chairman Shelby. Without objection, will be made part of 
the record.
    Mr. Maurstad. As the focus shifts from response to 
recovery, the areas impacted will begin to consider 
opportunities for rebuilding a less vulnerable coast. However, 
the overwhelming desire to rebuild immediately must be balanced 
with the need to rebuild wisely. A significant part of FEMA's 
Gulf Coast mitigation strategy is based on effective planning 
and encouraging communities to rebuild stronger and safer.
    The NFIP Community Rating System will play a major role in 
this effort. FEMA will also continue to address repetitive loss 
properties including severe repetitive loss properties as 
authorized by Title I of the 2004 Flood Insurance Reform Act. 
Removing repetitive loss properties from the NFIP policy base 
will be a significant step toward improving the financial 
health of the National Flood Insurance Fund.
    Sound floodplain management, planning, regulation, save 
this country an estimated $1.1 billion in prevented flood 
damages annually. This means that since 1996 the Nation has 
reduced the risk of flood loss by $10 billion.
    After seeing the devastation of the hurricanes firsthand, I 
have a clear understanding of the challenges we face as a 
Nation. The Department of Homeland Security, FEMA, the NFIP, 
and our partners are committed to working closely with the Gulf 
Coast States, local governments, communities, and private 
sector entities during what will be a long recovery and 
rebuilding process.
    I will be pleased to answer any question Committee Members 
may have.
    Chairman Shelby. Thank you.
    Mr. Jenkins.

              STATEMENT OF WILLIAM O. JENKINS, JR.

        DIRECTOR, HOMELAND SECURITY AND JUSTICE ISSUES,

             U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Jenkins. Chairman Shelby, Mr. Sarbanes, and Members of 
the Committee, I appreciate the opportunity to be here today to 
discuss the challenges facing the National Flood Insurance 
Program.
    The devastating effects of Hurricanes Katrina and Rita have 
placed unprecedented demands on the NFIP. As of October 13, 
FEMA reported that 192,809 claims had been filed, and NFIP had 
paid almost $1.3 billion to settle 7,664 of these claims.
    The NFIP combines property insurance for flood victims, 
maps to identify the areas at greatest risk of flooding, and 
incentives for participating communities to take actions that 
reduce future flood damage. Two key goals of the NFIP are, one, 
to maximize the use of insurance rather than taxpayer funded 
disaster assistance for repairing and replacing flood-damaged 
property, and two, reduce the potential for future flood damage 
through floodplain management and building code regulations and 
enforcement.
    A key characteristic of the NFIP is the extent to which 
FEMA must rely on others to achieve the program's goals. FEMA's 
role is primarily to, one, establish policies and standards 
that others generally implement on a day-to-day basis, and two, 
provide financial and management oversight of those who carry 
out these day-to-day responsibilities. Those daily 
responsibilities include ensuring that property owners who are 
required to purchase flood insurance do so, developing and 
revising flood maps, enforcing floodplain management and 
building code regulation in participating NFIP communities, and 
selling and servicing flood insurance policies.
    Our prior work has identified several NFIP challenges. 
First is reducing program losses resulting from policy rate 
subsidies and repetitive loss properties. The NFIP does not 
collect sufficient premium income to build reserves to meet 
long-term future expected flood losses, in part because 
Congress authorized subsidized insurance rates to be made 
available for some properties, many of which have had 
repetitive claims.
    Premiums are set to cover losses for an average claim year, 
which until 2004 has generally been sufficient to pay claims. 
Repetitive loss properties account for approximately 1 percent 
of all insured properties, but as much as 30 percent of all 
claims payments. To address this issue, the Flood Insurance 
Reform Act of 2004 established a pilot program that would 
provide funds to elevate, relocate, or demolish such properties 
with NFIP bearing a substantial portion of the cost. Those who 
refuse to participate can have their premiums raised up to the 
actuarial rate for the area in which they are located.
    The success of this program should be carefully evaluated 
to determine how well it works and what changes if any are 
needed to increase its effectiveness in reducing costly 
repetitive loss properties in the program.
    Second, increasing property owner participation in the 
program has been a historic challenge. Half, perhaps less, of 
eligible properties may be covered by flood insurance. In 2002, 
we found it was not possible to reliably determine the extent 
of compliance with the applicable mandatory purchase 
requirement. Our work also suggests that higher premiums, which 
could enhance the program's financial stability, may result in 
fewer voluntary insurance purchases, thus increasing taxpayer 
exposure when flooding occurs.
    Third is the challenge of developing and maintaining 
accurate digital flood maps which are the very foundation of 
the NFIP. FEMA must ensure that floodplain maps accurately 
identify the areas at highest risk of flooding, the areas in 
which flood insurance is required. It must also ensure that 
communities at comparable risk of flooding have maps of 
comparable and useful accuracy.
    Fourth, providing effective oversight of flood insurance 
operations. In the report we that are releasing today, we note 
that FEMA faces a challenge in providing effective oversight of 
the 95 insurance companies that are primarily responsible for 
selling and servicing flood insurance policies. The record 
number of claims resulting from the recent hurricanes only 
reinforces the importance of effective oversight and the need 
for a clearly defined, understandable, and consistently applied 
process for policyholders to file and appeal claim settlements.
    In conclusion, FEMA and Congress face a complex challenge 
in assessing potential changes to the NFIP that would improve 
its financial stability, increase the proportion of property 
owners at risk of flooding to purchase flood insurance, reduce 
losses from repetitive loss properties, and maintain accurate 
and current maps of floodplain boundaries. These issues are 
complex, they are interrelated, and addressing them is going to 
involve tradeoffs and the cooperation and participation of all 
key stakeholders, both public and private.
    That concludes my statement, Mr. Chairman. I would be 
pleased to respond to any questions you or other Members of the 
Committee may have.
    Chairman Shelby. Thank you, Mr. Jenkins.
    Dr. Landsea.

                   STATEMENT OF CHRIS LANDSEA

                  TROPICAL PREDICTION CENTER/

                   NATIONAL HURRICANE CENTER,

                   NATIONAL WEATHER SERVICE,

        NATIONAL OCEANIC AND ATMOSPHERIC ADMINISTRATION,

                  U.S. DEPARTMENT OF COMMERCE

    Mr. Landsea. Good morning, Mr. Chairman and Members of the 
Committee. Thank you for inviting me the discuss the outlook 
for hurricane activity and the storm surge and flooding 
associated with hurricanes. I am Chris Landsea, the Science and 
Operations Officer at the National Hurricane Center, part of 
the National Weather Service of NOAA.
    With the Chairman's permission, I request the that clerk 
provide these handouts to the Committee.
    Chairman Shelby. The clerk will do that.
    Mr. Landsea. Hurricanes are fueled by warm water as they 
travel across the ocean. If atmospheric winds allow, an 
abundance of warm water provides more energy, causing the storm 
to increase in strength. In recent decades, the United States 
has experienced relatively few hurricane landfalls, and in 
particular, very few major hurricanes, those of Category 3 or 
higher on the Saffir-Simpson Hurricane Scale.
    Our good fortune ended last year when 6 hurricanes hit the 
United States and 3 of those were major hurricanes. The 2005 
season has been one of the most active on record with 21 
tropical storms, 11 of which have become hurricanes, and 5 of 
those have been major hurricanes. Three of these major 
hurricanes, Dennis, Katrina, and Rita, struck the United 
States.
    Based upon changes in oceanic and atmospheric conditions, 
we believe this increased activity is due to a natural cycle 
called the Atlantic Multidecadal Mode. It is a shift in the 
surface temperature and the wind structure of the North 
Atlantic and Caribbean Sea between warm and cool phases, each 
phase lasting 25 to 40 years. Data suggests that we are 
currently in a warm Atlantic phase, thus an active Atlantic 
hurricane era is under way similar to that last seen from the 
late 1920's to the late 1960's.
    Our research suggests that many of the hurricane seasons in 
the next two to three decades may be much more active than they 
were in the 1970's through the early 1990's. Warmer sea surface 
temperatures and less destructive atmospheric winds are 
expected to contribute to conditions that foster increased 
hurricane development over this period.
    While anticipating a busy era in coming hurricane seasons, 
we do not expect every year to be hyperactive. But because of 
this heightened storminess, we should continue to be threatened 
by destructive hurricanes with the potential for loss of life 
when they do strike. This is of particular concern because of 
the increasing populations living in vulnerable coastal 
regions.
    Both storm surge and inland flooding pose significant 
challenges to both coastal and inland companies. Storm surge is 
where the water is pushed over the shoreline by the force of 
the winds associated with the hurricane. Because much of the 
densely populated U.S. Atlantic and Gulf coastal communities 
lie less than 10 feet above sea level, the danger from storm 
surge is tremendous. As experienced with Hurricane Katrina, 
storm surge can be a deadly aspect of hurricanes for which we 
need to be prepared.
    Freshwater floods from rain present another great threat to 
life and property in hurricanes. Two types of inland flooding 
occur from these storms, flash flooding and river flooding. 
Flash flooding occurs in creeks, streams in urban areas within 
a few minutes or hours of excessive rainfall. Rapidly rising 
water in confined valleys or canyons can reach heights of 30 
feet or more. River flooding occurs from heavy rains associated 
with decaying hurricanes or tropical storms, and in extreme 
cases, river floods can last a week or more.
    We have taken steps to improve our forecasts of rainfall 
amounts, extended those forecasts out for 5 days, and 
incorporated those rainfall forecasts into our river and flood 
predictions. The National Weather Service conveys the magnitude 
of observed or forecast flooding using flood severity 
categories, including minor, 
moderate, and major. Each category has a definition based upon 
property damage and public threat.
    The National Weather Service precipitation frequency 
estimates are used as design standards for civil infrastructure 
built to cope with rainfall and runoff, such as stormwater 
drainage systems, roads, and small dams. These precipitation 
frequency estimates also contribute to computing flood 
insurance rate maps and various planning activities.
    NOAA strives to improve the reliability, accuracy, 
timeliness, and specificity of predictions of hazardous 
weather, such as hurricanes, to help our society cope with 
these phenomenon.
    Over the last 15 years, hurricane track forecast areas have 
decreased by 50 percent, largely due to advances in hurricane 
modeling and technology, a better understanding of hurricane 
dynamics and increased availability of data from the region 
around the hurricanes.
    In addition, using a combination of atmospheric and oceanic 
hurricane observations from satellites, aircraft, and all 
available 
surface data over the oceans, we conduct experiments to better 
understand internal storm dynamics, interactions between a 
hurricane and its surrounding atmosphere and ocean.
    Predicting hurricane intensity remains one of our acute 
challenges. To advance hurricane prediction, NOAA is developing 
the Hurricane Weather and Research Forecasting System. This 
system uses a collaborative approach among the research 
community with a goal of coupling an advanced wave model with a 
dynamic storm surge model to better predict coastal impacts of 
waves and storm surge.
    We have also increased our efforts to transfer research 
into operations. The U.S. Weather Research Program Joint 
Hurricane Testbed was formed in 2000. The mission of this 
testbed is to facilitate the transfer of new technology, 
research results, and observational advances for improved 
hurricane analysis and prediction. A large portion of my job at 
the National Hurricane Center is to facilitate and test these 
new projects for possible implementation.
    Thank you, Mr. Chairman, and Members of this Committee, for 
the opportunity to discuss the outlook for hurricane activity 
and the storm surge and inland flooding associated with 
hurricanes.
    I would be happy to address any questions. Thank you.
    Senator Sarbanes. Mr. Chairman, could I just put a 
technical question?
    Chairman Shelby. Go ahead.
    Senator Sarbanes. Is the definition of a hurricane, as 
reflected in this chart, consistent from 1944 forward?
    Mr. Landsea. It is. The definition of a hurricane is with 
winds of at least 74 miles per hour. The graph that you have is 
the major hurricanes, the Category 3's, 4's, and 5's. Those are 
with winds of at least 111 miles per hour.
    Senator Sarbanes. They were defined the same way back here 
as they are now; is that correct?
    Mr. Landsea. Well, that is part of the problem, is knowing 
the past data is sometimes problematic because our 
understanding has changed of hurricanes in the past. So we 
think it is equivalent, but it does need to be reanalyzed.
    Senator Sarbanes. Thank you.
    Thank you, Mr. Chairman.
    Chairman Shelby. That was a good question.
    Mr. Maurstad, I believe the hurricane forecast we just 
heard from Dr. Landsea is quite a sobering one. Throughout most 
of the existence of the Flood Insurance Program, we have been 
in a period of relative calm hurricanes. That period appears to 
be over, at least for the future. To what extent does FEMA take 
future weather forecasts into account when setting rate 
premiums?
    Mr. Maurstad. The actuarial basis is a look at what the 
experience has been for the particular rate classes, and tries 
to anticipate----
    Chairman Shelby. And experience how far back? How far do 
you relate back on this?
    Mr. Maurstad. We use what data is available based on 
experiences for the program, and that changes as different 
events--for example, in 2004 when that data is included in our 
rates for the upcoming year, that will certainly change the 
experience and the numbers that the actuaries will use in 
trying to determine what the appropriate amount of premium to 
generate should be. There is an element of also trying to look 
to what the future may hold, but it is not as great an element 
as the mathematical statistics that are developed.
    Chairman Shelby. Dr. Landsea, your testimony, among other 
things, pointed out that an active hurricane season does not 
necessarily mean more storms make landfall. Could you expand on 
that for the Committee, on some of the factors that determine 
whether a hurricane reaches land or not? Is that just luck if 
it does not?
    Mr. Landsea. It is partly luck. What we see is that ones 
that hit land are a factor of whether they form, the steering 
that they undertake. And so some years, like 1995, we have a 
large number of hurricanes, but because of the steering 
patterns pushing them back out to sea, we do not have a lot of 
issues in the United States. And then there are years like this 
year and last year where most of them seem to be heading toward 
the United States.
    Chairman Shelby. Mr. Maurstad, this Committee has heard a 
variety of assertions about who in the Gulf States, including 
my State of Alabama, had flood insurance, who did not, and 
whether areas impacted by Hurricane Katrina were within special 
flood hazard areas. To what extent did families in Katrina 
areas have flood insurance, and do we know how many homes were 
flooded by Katrina, and how much of the impacted area was 
considered to be within a special flood hazard zone, and hence, 
subject to the mandatory purchase requirements?
    Mr. Maurstad. Well, First if I could, I want to make sure 
that my previous question that we look at more than just the 
insurance experience in determining what the rates are, that 
there are engineering studies, a full range of expectations are 
included in that actuarial determination of what the rates are.
    Chairman Shelby. And by engineering studies, what do you 
mean, what the Corps does?
    Mr. Maurstad. What engineering studies relative to the 
amount of damage that is caused by surge, by collecting data at 
the site of the damaged area, that type of information. And 
that actual hurricane data that we use goes back 100 years. So 
it is more than just since the program started.
    But to get at your question of how many people had flood 
insurance in the affected areas, in the special flood hazard 
area, what I would like to do is--because we are continuing to 
gather that information--get that information and provide it to 
your Committee.
    Chairman Shelby. Will you provide that for the Committee?
    Mr. Maurstad. Yes, I will, sir. I can say that--if I can 
move from Louisiana east, that in the parishes affected in 
Louisiana, there is a higher percentage of people with policies 
than what you generally will see in most areas of the country.
    Chairman Shelby. Is that because there are so many more 
areas below sea level?
    Mr. Maurstad. Yes, sir. And in the Mississippi Gulf Coast 
area the estimation is, and the Alabama Coast area, about a 
third of the people had a flood insurance policy. One of the 
challenges that we have is to make sure that people here--what 
we are trying to communicate to them as accurately as possible, 
in that the special flood hazard areas are those areas on the 
rate maps that are at the highest risk, and that just because 
you are not in a special flood hazard area does not meant the 
you are not subject to risk of a flooding event.
    Chairman Shelby. Did we not witness some of that in 
Mississippi, that areas that had never been flooded, not that 
we knew about?
    Mr. Maurstad. Our current gathering of the data at this 
time shows that in some of the areas across the Gulf Coast area 
this was 1,000-year event or beyond. In some of the areas it 
was a 250-year event, and so areas were affected by storm surge 
that previously had not been considered at that great of a 
risk, not at zero risk, but not at that great of a risk. And so 
we use events like this to learn and to try to make 
improvements as we move forward.
    Chairman Shelby. Under current law, mortgage lenders are 
required to make sure federally related mortgages have flood 
insurance. Mr. Jenkins, you stated in your testimony that the 
existing data on lender compliance with the Flood Insurance 
Program's mandatory purchase requirement is inconclusive. Do 
you have any suggestions as to how either the bank regulators 
or FEMA could better measure compliance with this requirement, 
and are there additional statutory changes that could increase 
the level of compliance with the mandatory purchase 
requirement?
    Mr. Jenkins. There are a couple of issues here I think. One 
of the things that affects being able to track compliance is 
the fact that the agency that services the mortgage changes. 
Very rarely is it the person or the agency that initially 
issues the mortgage. This does not seem to be much of a 
compliance issue in terms of when the mortgage closes. In other 
words, you close on the house or the property, and usually 
flood insurance is included at that point. It is maintaining 
the flood insurance and knowing that you maintained the flood 
insurance that is an issue. As the servicer changes, that can 
get lost in the shuffle and people then can drop it without it 
being known that they have dropped it.
    So one of the issues is making sure that there is a central 
point of accountability, whether it is the initial lender or 
some other person that has responsibility for making sure that 
this----
    Chairman Shelby. Is it today? Is that central point of 
accountability prevalent?
    Mr. Jenkins. It is not clear that it is prevalent. I mean 
it is certainly true that as a result of the 1994 Act, that a 
lender has to make sure that that insurance is retained, but it 
is not clear exactly to the extent to which that is actually 
the case, and that is what we found. It was very difficult to 
find out.
    Chairman Shelby. Who checks on that? Who is accountable 
here to make sure this Act is complied with?
    Mr. Jenkins. The lender that made the loan is, at least 
under the 1994 Act, accountable for that. So they are the ones.
    And then the other issues, which is not so much whether or 
not they maintain the mandatory insurance, but as you know, the 
mandatory requirement is only for the outstanding balance of 
the mortgage. So as the mortgage is paid down, if you are just 
doing what you need to do, then the amount of your coverage is 
going to go down and your exposure is going to go up for the 
uninsured portion of your property----
    Chairman Shelby. Have you done studies, or do you have 
access to studies, where once the mortgage is paid off, for 
example, that that is the end of the flood insurance, that the 
homeowner does not carry the insurance anymore?
    Mr. Jenkins. I really do not have any data. We have not 
done any studies looking----
    Chairman Shelby. Should we not have that data?
    Mr. Jenkins. I think we should have that data, yes, but we 
do not. It is very difficult and there are lots of different 
studies out there. The studies that we looked at were not 
nationwide for the most part, they were in specific counties or 
specific groups of counties, or a particular lender had done 
its own study to look at what was going on with its loans. So 
there is no source of national data which----
    Chairman Shelby. No definitive study.
    Mr. Jenkins. Right, no definitive study of which we are 
aware.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    Mr. Jenkins, this report which the GAO is releasing that 
was mandated by the Act, as part of that study, GAO was 
supposed to look into the problems experienced by policyholders 
after Hurricane Isabel.
    Mr. Jenkins. Right.
    Senator Sarbanes. Now, as I understand it from your 
testimony, the report was based on interviews with FEMA 
officials as well as with review of FEMA data and files; is 
that right?
    Mr. Jenkins. That is correct.
    Senator Sarbanes. In GAO's review, were interviews held 
with policyholders, those who had direct experience with FEMA 
after Hurricane Isabel?
    Mr. Jenkins. No, we did not interview policyholders 
specifically.
    Senator Sarbanes. Why not?
    Mr. Jenkins. Part of the problem with interviewing the 
policyholders is the time that the work started, the time we 
got work started. We were concerned about being able to 
validate the information that we got, and so what we wanted to 
do is be able to look at information that we could get from 
those people, or at least from those files of people who 
appealed their policy claims to FEMA through the appeals 
process and what happened. That was what was documented 
consistently in terms of what their concerns were, what issues 
that they raised, why they thought their initial claim 
settlement was----
    Senator Sarbanes. Documented by whom?
    Mr. Jenkins. By the policyholder, that is, the policyholder 
who filed the appeal, put in writing why they thought the 
initial claim was unsatisfactory. And so we wanted to look at 
that because that is what they documented, it is what they had 
on record, it is what they considered their most serious 
concerns with regard to their initial settlement and why they 
thought that settlement should be changed.
    Senator Sarbanes. I know, but you are reviewing the whole 
FEMA process. I have difficulty in understanding why you would 
not talk to some of the people who had these complaints and 
were the victims.
    Mr. Jenkins. We decided, as I said, and we discussed this 
with the Committee, I mean with Committee staff as we were 
going forward with the study, that we were concerned about the 
consistency of the data.
    Now, we do have, as a result of what is going on now, teams 
in each of the four Gulf States, who are interviewing hurricane 
victims as well as Federal, State, and local officials, and 
flood insurance is one of the issues that they are getting. 
That information is more real time, and that was one of our 
concerns with Isabel, was the time that had passed since the 
events had occurred.
    Senator Sarbanes. Well, it seems to me you should revisit 
that. I mean I think, as I understand it you had some concern 
about whether the victims' views would, ``be objective,'' but 
your job is to weigh what you hear, but I mean they are going 
to bring things to your attention that you might otherwise be 
aware of. These complainants are being left out of the process 
everywhere we turn. Do you agree with us that there is not a 
formal appeals process that has been put in place by FEMA?
    Mr. Jenkins. At this point, that is correct.
    Senator Sarbanes. That is correct, right. The statute 
required a formal appeals process. We do not have that in 
place. So the people cannot work up a ladder and get through 
process, so to speak. In fact, I am told FEMA says to them, 
``Well, you can go to court.'' Of course they can go to court, 
but that is a big step to go to court. It costs a lot of money. 
A lot of people cannot entertain that step, and they have been 
hit hard, and they are struggling and then they run into all 
these kind of problems.
    So, I commend to you maybe the possibility of revisiting 
this judgment about talking to the complainants.
    The next question I want to put to both you and Mr. 
Maurstad, is that I am told that the administrative fees in 
writing these flood insurance policies, the so-called ``write-
your-own-insurers,'' run as high as 30 percent. Is that 
correct?
    Mr. Jenkins. That is right, about 30 percent of the 
premium, and then they get about 3 percent of any claims that 
are paid.
    Senator Sarbanes. How does that compare with the 
administrative costs of other types of insurance?
    Mr. Jenkins. I am not really quite sure. It depends on the 
instruments. For example, certain kinds of whole life policies, 
that the agent gets 100 percent of the first-year premium, so 
in those cases it is lower. I do not know how it compares to 
other kinds of casualty policies or property loss policies.
    Senator Sarbanes. Would you regard these administrative 
costs as being particularly high?
    Mr. Jenkins. Because we have not looked at that compared to 
others, I really do not have a fact basis for answering that.
    Senator Sarbanes. Mr. Maurstad, what is your take on this?
    Mr. Maurstad. Well, the issue is, other than maybe some 
State wind pools, there is not a circumstance that is similar 
to how an insurance program is provided. We rely on the 96 
write-your-own insurance companies to administer this program 
on behalf of the Federal Government. They write the policies 
under their name. They market the policies. They sell the 
policies. They reimburse their agents. They handle the claims. 
They administer the program. Ninety-five percent of all the 
policies written, they administer, and that is the cost to the 
program for using the private insurance sector as our 
administrator of the program.
    Senator Sarbanes. On what basis do you evaluate whether the 
administrative costs incurred in this program are reasonable or 
whether FEMA is being--I do not want to use a pejorative term 
like ``ripped off'' or something, but is FEMA overpaying with 
respect to administrative costs.
    Mr. Maurstad. We rely on those 96 write-your-own companies 
to--in fact, they are the basis, the foundation for the 
National Flood Insurance Program. It has been tried other ways, 
but they in fact are the mechanism by which we can distribute 
policies to people in all 50 States. We look at the A.M. Best 
rating for the cost associated, the expense cost associated, 
put out by the A.M. Best Company, and use that as a guide. I 
suggest sense that part of that is the agent commission 
reimbursement that is more than likely in the 15 percent range. 
So believe me, we watch and oversee this very carefully to make 
sure that there is an appropriate balance in making sure that 
there is enough paid to the companies so that they in fact 
voluntarily choose to participate in this program.
    Senator Sarbanes. Mr. Hunter is going to be on the next 
panel. Mr. Maurstad, are you familiar with Mr. Hunter?
    Mr. Maurstad. Yes, sir.
    Senator Sarbanes. He says about this program, ``It appears 
to be terribly expensive.'' Then in a footnote to that he says, 
``I have not been able to get current data from FEMA on this 
point. I have a call in to FEMA for the latest information, 
will supply it to the Committee when I get it, if I do get it. 
The Committee should ask for this information from FEMA to 
determine the program's actual cost. I suggest not only looking 
at the cost of service compared to that of a competitively bid 
contractor, but also to compare the cost of that of private 
insurers selling homeowner insurance, a more complex problem 
than flood insurance, and more costly to produce, since 
homeowners insurance is not simply added to a policy as WYO 
flood insurance is.''
    Mr. Maurstad. Well, sir, we look at the expense allowance, 
and that expense allowance is set primarily with 15 percent 
under the premise that 15 percent goes to the agent that is out 
in the field, and 15 percent goes to the company, and that 
expense allowance is set based on the review of equivalent 
lines of business, the homeowners, farm owners, a commercial 
multiperil, so that we are compensating the companies fairly, 
again for them to provide a very valuable service to the 
program because, for example, a single contractor would not 
have the distribution system in place, the thousands of agents 
across the country that these 96 write-your-own companies have, 
just to start with just the distribution of it, the 
availability regardless of where one lives, to have flood 
insurance be made available to them.
    Again, we look at this very carefully. I believe that we 
are fairly compensating the companies for the valuable service 
that they provide this program.
    Senator Sarbanes. We will have a chance to explore that 
when the next panel comes before us.
    Mr. Maurstad. Yes, sir.
    Senator Sarbanes. Let me just run through very quickly--my 
time is up--but FEMA was required to develop an acknowledgement 
form to be signed by every insured person that they have 
received the flood insurance policy detailed description of its 
coverage. Has that been done?
    Mr. Maurstad. That is in the process of being implemented. 
Effective October 1, the companies will be doing that on the 
first batch of renewals that will occur either late November or 
early December, so that is in place.
    Senator Sarbanes. It was supposed to have been implemented 
last December; is that correct?
    Mr. Maurstad. Yes, sir.
    Senator Sarbanes. FEMA is required to establish a formal 
appeals process by December 30, 2004. Was that done?
    Mr. Maurstad. No. Well, if I could take a moment, Mr. 
Chairman, and respond to that.
    Chairman Shelby. Go ahead.
    Mr. Maurstad. Of course, right on the heels of the Congress 
signing the reauthorization and the President signing this, 
very early on in my tenure I recognized the importance of the 
appeal process based on discussions that I had with you, sir. 
And the 2004 hurricanes hit. And even though we did not have a 
formal appeals process in place, what occurred to me that was 
most important was that there be visibility that there was an 
appeal process, and that there be common knowledge that this 
appeal process exist. And we began last year during the 2004 
hurricanes, our largest claim year ever, of making sure that 
that information was made available through disaster relief 
centers, disaster field offices, through the adjusters, by 
handing out that appeal process. We have closed 98 percent of 
the claims associated with the hurricanes of last year.
    We continued this year to work on establishing that through 
the formal rulemaking process. I am committed to doing that. I 
am also looking at including the possibility of adding dispute 
resolution to the appeal process. I did not want to implement 
the formal appeal process and then amend it shortly thereafter.
    So, I believe there are legitimate reasons as to why that 
formal appeal process has not been established yet, but I want 
to assure you and the Committee that we are implementing it in 
the spirit of which the Congress has asked us to.
    Senator Sarbanes. You do not assert that there is in place 
a formal appeals process, do you?
    Mr. Maurstad. In the claims handbook that I----
    Senator Sarbanes. I am looking at this claim pamphlet, and 
let me get very direct to the question. Do you assert that 
these four steps to appealing your claim constitute a formal 
appeals process?
    Mr. Maurstad. Sir, I do not want to argue with you. I 
believe that from my perspective, the four----
    Senator Sarbanes. I am just asking you a question.
    Mr. Maurstad. Yes, sir. The formality of it would be that 
it be completed through the rulemaking process. This is an 
appeal process. We are looking at----
    Senator Sarbanes. This is not much of an appeals process. I 
mean you are told----
    Mr. Maurstad. Well, Congress has indicated----
    Senator Sarbanes. Contact the adjuster, and then if you do 
not like the adjuster, contact the supervisor, and then you go 
back to your insurance agent. But where is the appeals process 
within FEMA where someone can say, ``Well, you know, I was able 
to get it off of that level. They were not really giving me 
justice at that adjuster and supervisor level, and I was able 
at least to get into a process there, where some people in a 
sense from outside, maybe outside of that particular FEMA chain 
of command heard my claim, so I have some fairness in this 
appeals process.''
    Mr. Maurstad. The Congress at this point has indicated that 
the Insurance Administrator is responsible for settling those 
claims, and so the appeal process that goes to FEMA and through 
our system, once it has been determined by the policyholder the 
company or the adjuster has not met their needs, comes with the 
responsibility--to me with the responsibility that you have 
given through statute.
    Senator Sarbanes. What hearing process is there for the--I 
do not want to--I will close on it.
    Chairman Shelby. Go ahead.
    Senator Sarbanes. What hearing process is there for the 
complainant?
    Mr. Maurstad. Right now the hearing process--I mean there 
is not a formal hearing process such as this. The process would 
be that the information is provided by the policyholder to the 
Administrator. The recommendation is provided to the 
Administrator on what the issues are, and if need be, then the 
Administrator makes a decision as to what the appropriate 
amount of that claim should be given the provisions of the 
standard flood insurance policy.
    Senator Sarbanes. I have used a lot of time, but that does 
not strike me as being----
    Senator Bunning. I will follow up, Paul.
    Senator Sarbanes. Okay. It does not strike me as being 
anywhere near satisfactory.
    Chairman Shelby. Senator Bunning, thank you for your 
indulgence.
    Senator Bunning. Thank you very much.
    Mr. Maurstad, I am going to follow up some provisions that 
Senator Sarbanes talked about, and I want specific answers. I 
do not want all of your talking around the issue. Why haven't 
you implemented the provision of the law we passed 16 months 
ago? Why haven't FEMA implemented what was in the law?
    Mr. Maurstad. From the first day that the law was signed we 
began the process. If you would like, I can provide the 
Committee with a status of each of the actions, where it is in 
the process, and provide that to you and to the Committee in 
response specifically as to where various aspects of the 
sections of the reauthorization are, but is the resources that 
we have available to us given the 2004 hurricane season----
    Senator Bunning. We did not give you that option.
    Mr. Maurstad. Yes, sir.
    Senator Bunning. We passed the law and said it is up to you 
to get the regulations out for comment and passed, and you have 
not done it. I want to know who is responsible for the 
noncompliance. You? Michael Brown? Secretary Chertoff or 
someone else?
    Mr. Maurstad. It would be me.
    Senator Bunning. It is you.
    Mr. Maurstad. Yes, sir.
    Senator Bunning. When will you be putting out proposed 
regulations for comment?
    Mr. Maurstad. On the appeals process?
    Senator Bunning. That is correct.
    Mr. Maurstad. I hope to have that through----
    Senator Bunning. We did not do that in the law. We did not 
say, ``Here is the new law. Here is the reauthorization.'' We 
said, ``You are responsible for doing this.'' We did not give 
you a chance to say, ``Oh, by the way, we are going to take 2 
years to do this.''
    Mr. Maurstad. Yes, sir.
    Senator Bunning. You are responsible for getting it done, 
and there should be a time limit to get it done. Now we have 
had two major hurricanes, and now we do not have an official 
appeals process. In fact, we do not have one for Hurricane 
Isabel that hit Maryland. You are explaining all of these 
things, and they still do not get to the bottom line. Under an 
official, where they can say, ``I had a fair hearing through 
FEMA, and I got either satisfied or not satisfied.'' No, you 
tell them, ``Go to court.'' Do you know how expensive it is to 
go to court to get a claim filed and an appeal done? The people 
that have flood insurance cannot afford it.
    When will FEMA be in compliance with our law?
    Mr. Maurstad. As soon as I can make it happen. I understand 
your----
    Senator Bunning. When is that?
    Mr. Maurstad. If I could give you a specific date, sir, I 
would.
    Senator Bunning. It is 16 months. How much more time do you 
need?
    Mr. Maurstad. Your concerns have been----
    Senator Bunning. No. My concerns were when we passed the 
law, that you were going to get the job done, and so far you 
have not got the job done.
    Mr. Maurstad. Well, I would say we have got the job done.
    Senator Bunning. You have not got the job done. Go into 
Maryland and talk to the people. Go into Louisiana, 
Mississippi, and Alabama and talk to the people. You have not 
got the job done.
    How far along are you in updating the flood maps that have 
caused problems?
    Mr. Maurstad. We are about halfway through the process, the 
5-year plan that was adopted in the Map Modernization effort. 
We continue to work very closely with the States, the 
cooperating technical partners within those States to try to 
update and modernize those maps according to the schedule that 
has been provided.
    Senator Bunning. What about the maps of the area hit by 
Katrina and the updating before the storm? Where were you with 
that?
    Mr. Maurstad. We were near providing those on a preliminary 
basis to the communities to start to adoption process. As a 
result of Katrina hitting, we suspended that activity so that 
we can use the information and the data that will be gathered 
by these storms to make sure those maps can be as pertinent as 
possible. So we are right in the midst of it.
    Senator Bunning. I am going to ask you the question again. 
When will FEMA be in compliance with the new law that we passed 
16 months ago?
    Mr. Maurstad. Sir, as I indicated before, I would love to 
be able to give you a specific date.
    Senator Bunning. Well, do you not think we have a right as 
the people who passed the law? The Congress got it through the 
Senate and it went through the House of Representatives. The 
President signed the law. Do you not think the agency that is 
in charge of enforcing and implementing the law should take it 
seriously?
    Mr. Maurstad. We have taken it seriously and we are 
working----
    Senator Bunning. Sixteen months does not----
    Mr. Maurstad. We are working as diligently as we can to 
enact----
    Senator Bunning. I do not accept that, sir. I am sorry, I 
do not accept 16 months delay as being a reasonable time to 
implement the law.
    That is all.
    Chairman Shelby. Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman.
    And, Mr. Maurstad, I want to follow up some of the issues 
about the FEMA maps. Our maps are around 20 years out of date. 
As I understand the program, you provide a certain amount of 
money to the local agency to update the maps. A lot has changed 
in Rhode Island in 20 years, and I do not think we are 
atypical. How long is it going to take to get Rhode Island in 
again--you might not know the--but to get up to a point where 
the maps are current within a year or two of data?
    Mr. Maurstad. I can get you the specific information that 
we are working with the State of Rhode Island on, on 
implementing the plan that we have jointly agreed to on when 
the maps would be updated.
    Senator Reed. Do you have an estimate?
    Mr. Maurstad. It is a 5-year program now, and we are on 
target to have the first phase of that modernization done at 
the end of that 5-year program.
    Senator Reed. There is I think a digitization component, 
where all the data will be digitized. But will the maps be 
actually updated with taking into consideration all of the 
changing environmental conditions and coastal building?
    Mr. Maurstad. Yes, sir. Again, that is what is agreed to 
between FEMA generally at the regional level, and the State 
level, in identifying which areas have had substantial changes 
where new studies need to be done as opposed to just taking the 
paper maps and digitizing them, which is appropriate in some 
circumstances, but certainly in a minority of circumstances.
    Senator Reed. My sense from talking to our State officials 
is that they get several hundred thousand dollars a year, and 
that is insufficient to do this mapping. Is there a problem 
here with appropriate funding levels so that it can be done in 
a timely way?
    Mr. Maurstad. We continue to look at and take information 
from the individual States and the various stakeholders that 
were a part of the Map Modernization effort from 1995 to 2000, 
and look at that information now that we have been into the 
program for a couple of years, and are determining whether or 
not the current appropriation is going to be sufficient to 
completely get the job done to the extent that all of our 
stakeholders want to see it done. So we are using the first 
couple of years to assess. We now have actual data to determine 
what the costs are associated with mapping in different 
circumstances across different parts of the country, and are 
reviewing that.
    Senator Reed. When will you have a conclusion about how 
much money you need to get these maps updated, including not 
just digitization, but I would hope, particularly in sensitive 
areas, all the new information? When will you have that figure?
    Mr. Maurstad. We are trying to identify those high-risk 
areas where new engineering studies, hydrology information 
needs to occur. We are in the process right now of working with 
DHS and OMB on the budget for next year, and we will be 
proposing something through that.
    Senator Reed. We have been told by the Association of State 
Floodplain Managers that even though in the Gulf Coast you do 
have new data that would require building outside of some 
zones, that you are going to use the old maps in terms of 
rebuilding, which raises the possibility people could go right 
back in and build houses in areas which under new maps would be 
prohibited; is that correct?
    Mr. Maurstad. For Katrina?
    Senator Reed. The Gulf Coast today.
    Mr. Maurstad. The Gulf Coast today. We have provided 
advisory elevation information to the Mississippi coast area, 
shared that with the local governments so that they can have 
that information on which to base their building permit 
circumstances. We are looking at doing the same thing in the 
New Orleans area. So we are in the process. We have provided 
the advisory information to Mississippi. We are in the process 
in Louisiana. And we will also be coming out in about 3 weeks 
with recovery mapping information that will be another tool 
that they will be able to use to make sure that they can make 
decisions and rebuild stronger.
    Senator Reed. Let me understand this. I will ask the 
question because I do not know the answer. It is advisory so 
that they do not have to follow this new data; is that correct?
    Mr. Maurstad. It is advisory information, and as is the 
same with the normal flood maps, the local communities are 
responsible for adopting and enforcing ordinances to adopt 
floodmaps. If they were to pass an ordinance that would reflect 
this advisory data, then it would be required.
    Senator Reed. What is the consequence of this data with 
respect to the Flood Insurance Program?
    Mr. Maurstad. If they use this data and build to the higher 
elevations that the data shows, then it will be a benefit to 
them when the new maps come out because they may be above what 
was required, and they would have lower flood insurance 
premiums as a result. So it is actually more of a benefit than 
it is a hammer, so to speak.
    But the communities, when I have been down there, the 
information that we are getting from the field is the 
communities want this data because they want to rebuild at a 
higher level. They do not want to rebuild in the fashion in 
which they were just harmed.
    Senator Reed. How close are you to implementing the 
repetitive loss mitigation programs authorized last year?
    Mr. Maurstad. The appropriation for that pilot program was 
included in the DHS budget that was just passed. So we have 
begun the process of developing the necessary rules, so we are 
hopeful during the next year that we will be able to get that 
program up and rolling.
    Senator Reed. Finally, the Corps of Engineers maintains 
maps and data with respect to inundation maps, storm scenarios. 
Are you trying to integrate your information? I think we have 
seen obviously in Katrina where the 100-year floodplain map did 
not actually describe the flooding, and the Corps of Engineers 
maps might not either, but they seem to be more sensitive to 
these major storm phenomena. Are you trying to get all that map 
on one page or at least make people aware of it? All the 
information, I should say.
    Mr. Maurstad. Well, the inundation maps are used primarily 
for hurricane evacuation planning, and our maps are done to the 
100-year flood level, and so they are developed for different 
purposes, but we certainly recognize that in some areas the 
100-year flood levels reflected on the maps levels were too 
low. We certainly look at using, when appropriate, the maps 
that are provided by the Corps. So it is not like we do not 
consider them.
    Senator Reed. But, you know, the phenomenon--and I will 
conclude now because the Chairman has been very kind. But the 
situation is there are people down in the Gulf and people all 
over the country now who thought they were outside the flood 
zone, when, in fact, the Corps of Engineers maps would show in 
certain cases they were going to be flooded. And it seems to me 
that if we have that information at the Federal level, we would 
somehow make it available. Maybe it would not be tied to 
requiring insurance, but it would be made available.
    Mr. Maurstad. People generally, as it has been relayed to 
me, look at the special flood hazard area, the highest-risk 
area, the 100-year flood area and they believe that if they are 
not--we do not tell them this, but they believe that if they 
are not in that mandatory purchase area, then they do not have 
to buy it.
    The maps show varying levels of risk, and we communicate to 
people in our public awareness campaigns two things: One, a 
flood can happen to you; and, two, your homeowner's policy does 
not cover you for flood damage. And so it is a tool and it is 
important that the communities have accurate information and 
the policyholders have accurate information. But we need to 
dispel the perception that if you are not in the highest-risk 
area then you do not need to buy a flood insurance policy.
    Senator Reed. I agree, but I think the perception, frankly, 
is that and we have to do much more.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you, Senator Reed.
    Mr. Maurstad, you head FEMA's Mitigation Division, correct?
    Mr. Maurstad. Yes, sir.
    Chairman Shelby. How do we deal with the problem--I think 
it goes to the beginning here--of continuously bailing out 
people who build in these flood-prone areas, including 
Louisiana, Mississippi, Alabama, especially like Dolphin Island 
that you are familiar with and a lot of other areas?
    Mr. Maurstad. Yes, sir.
    Chairman Shelby. How do we do this? Do we ever learn, I 
guess? Have we learned anything? Because if you are going to go 
back into these areas that are more than likely going to be 
flooded again, your beach is going to be destroyed or what land 
you have there, more than likely, a good chance. Isn't that 
some of the underlying question we have to grapple with here? 
You deal with mitigation.
    Mr. Maurstad. Yes, sir, and, in fact, as far as rebuilding 
goes, if a home or a business is damaged at least 50 percent of 
its pre-flood market value, then it has to build back--the 
lowest elevation has to be built back to base flood elevation 
or higher. Seventy-five percent of the policies in the National 
Flood Insurance Program are at those higher levels. We have 
made a lot of progress over the last 37 years in reducing the 
number of properties that are not at base flood elevation or 
higher, that are not at less risk. We certainly need to 
continue, as I indicated in my remarks, to address the 
repetitive loss properties, and we do that both through the 
National Flood Insurance Program, but also through the Hazard 
Mitigation Grant Program, post-disaster, and also a significant 
number of the predisaster mitigation grant programs also target 
repetitive loss properties. So it certainly is an issue, and we 
want to continue to work with the Committee in dealing with it.
    Chairman Shelby. But that is a big public policy issue that 
faces us, is it not, up here?
    Mr. Maurstad. Yes, sir. The whole issue of----
    Chairman Shelby. I guess the real question I am asking: 
Have we learned anything? Are we going to repeat mistakes of 
the past? Are we going to continue to bail out people who will 
continue to build in very hazardous areas?
    Mr. Maurstad. Well, if they rebuild in those areas and they 
do not rebuild according to our regulations, they either will 
not have insurance or they will have very expensive insurance.
    Chairman Shelby. I appreciate, gentlemen, all of your 
participation here today, and maybe we are learning something. 
I hope so.
    Thank you.
    I am going to call up the second panel: Robert Hunter, as 
we all know, is Director of Insurance, Consumer Federation of 
America, no stranger to this Committee; Doug Elliott, 
President, Center on Federal Financial Institutions; Robert 
Hartwig, Senior Vice President and Chief Economist, Insurance 
Information Institute; Chad Berginnis, Chief Financial Manager, 
Immediate Past Chair, State of Ohio, on behalf of the 
Association of State Floodplain Managers; and Professor Mark 
Browne, the Gerald D. Stephens CPCU Chair in Risk Management 
and Insurance, School of Business, University of Wisconsin.
    Gentlemen, we appreciate your indulgence here today. I 
think this is all very important testimony for this record, and 
you can tell from the participation.
    I want to tell you at the outset all of your testimony will 
be made part of this hearing record in its entirety. We are 
scheduled to have a vote on the Senate floor probably in about 
20 minutes, 25 minutes, so if you would shorten your testimony 
as much as you can, make your chief points, we would appreciate 
it.
    Mr. Hunter, we will start with you.

                 STATEMENT OF J. ROBERT HUNTER

                     DIRECTOR OF INSURANCE,

                 CONSUMER FEDERATION OF AMERICA

    Mr. Hunter. Mr. Chairman, I have served as Federal 
Insurance Administrator during the decade of the 1970's, and 
other jobs at the FIA, and I have been in this very room tarred 
and feathered.
    [Laughter.]
    I believe that the National Flood Insurance Program is an 
ingeniously designed program of carrots and sticks that by this 
time should have covered most of the flood-prone properties in 
the Nation, but, to my great disappointment, has not. And I 
have several serious questions to raise, Mr. Chairman, about 
how the program is going and some proposals which are really 
more in the form of questions but for your consideration.
    Chairman Shelby. Raise them quickly.
    Mr. Hunter. Yes. The first question, how do you move from 
subsidy to soundness? I think that you should consider moving 
to a 500-year requirement for mitigation and purchase. You 
should eliminate subsidies immediately on high-valued 
structures. Mid-valued structures should have their subsidy 
phased out over some intermediate term. Subsidies should be 
eliminated on homes with multiple floods in the past. I know 
you have moved in that direction. Low-valued structures should 
have their subsidies removed as the building is sold; maybe 
over three sales, the subsidy would be removed. Homes that 
would be in floodplains except for flood works such as levees 
that could fail should be required to buy coverage, at lower 
rates but should be required.
    Rates should not be based solely on history. Modeling and 
more scientific methods should be used. You should consider 
giving private insurers skin in the game for the actuarially 
priced part of the business, the original excuse insurers use 
for not covering floods that they could not price in a way to 
avoid adverse selection. If you had a program where the 
insurers took 50 percent of the risk and the Federal Government 
took 50 percent of the risk, you could continue the purchase 
requirement. You could use modern technology to get actuarially 
priced business, and insurers can afford it. Even with 2005 
events of Katrina and Rita, this will be their third highest 
profit year in history.
    If insurers refuse to share the risk, then I think you 
should look at the excessive expense of write-your-own. We have 
already touched on that. You could go to the big contractor, 
but here is a very Republican idea. How about have FIA just 
establish the risk part of the rate, how much is for the risk, 
and let the private insurers compete for the expense part of 
the rate and by offering for lower money. Why not move in that 
direction?
    Chairman Shelby. Move the risk away from the taxpayers as 
much as we could?
    Mr. Hunter. Yes, not only move the risk away from the 
taxpayer, but also allow the insurance companies to compete on 
the expense portion of the rate by just establishing the pure 
premium of the rate.
    The flood insurance policy should be redesigned to offer 
lower-cost policies for consumers choosing higher deductibles 
and other reduced coverage operation, but make it their choice. 
If they want to pay more, give them better coverage.
    The second question, where is the market penetration? There 
should be an expansion of the coverage to the 500-year 
standard, as I mentioned. You have to find out why the 
percentages--every time there is a flood, 15 percent, 20 
percent, 30 percent coverage. What is going on? I would find 
ways to make purchase required by all lenders, not just 
federally backed lenders, perhaps by offering incentives to the 
States to require purchase by State-regulated lenders. And I 
would require tracking to assure that the coverage is in place. 
I believe some of the bank institutions do require it. But I 
believe you need to make sure it is working.
    Consideration should be given perhaps to requiring builders 
to buy a 5- or 10-year policy when they sell the structure in 
the first place. Then they would build it more wisely.
    The third question, is mitigation working? GAO should be 
tasked with going out to the communities and seeing if the maps 
are really being enforced. When I walk along barrier islands, I 
doubt it. And I think it needs to be studied. In the meantime, 
you should require FIA to upgrade maps every 5 years, 3 years, 
something like that, and the maps should project the effects of 
development over the 3- to 5-year period, so that there is a 
freeboard to assure safety both of lives and property.
    Fourth question, who will assure in the current situation 
proper wind versus water allocation? You must make sure that 
the write-your-own insurers do not hurt taxpayers by 
overstating flood damage in their claims adjustments as opposed 
to wind. You can see the conflict of interest. If it is flood 
damage, they do not pay anything. They just adjust it and send 
the bill to us as taxpayers. If it is wind damage, it affects 
their bottom line. There are serious questions about where wind 
stops and flood starts. Many lawsuits have already been filed, 
and there will be more. It is not a slam-dunk that these 
damages are not wind-related, and our research says that 
oftentimes the insurers are going to be wrong.
    Question: Is FEMA challenging the write-your-own insurers 
as strongly as the attorneys for those without flood insurance 
are? And if not, why not? If insurers underpay wind, the 
taxpayers will suffer. But, equally bad, the next-door neighbor 
will suffer because if they can point to that and say, hey, 
look, they only paid 25 percent over there and FEMA does not 
push them to 50 where it belongs, that is going to hurt the 
next-door neighbor as well.
    I think GAO--I am glad to hear they are there. You should 
make sure they do a really good audit, and it is vital that 
these kinds of questions be responded to, and this hearing is a 
very important first step, Mr. Chairman, and I congratulate you 
for it.
    Chairman Shelby. Thank you.
    Mr. Elliott.

                STATEMENT OF DOUGLAS J. ELLIOTT

      PRESIDENT, CENTER ON FEDERAL FINANCIAL INSTITUTIONS

    Mr. Elliott. Mr. Chairman, I will give you the 2-minute 
version.
    First, our focus as an institution is on the Federal 
Government's lending and insurance activities. That is all we 
look at. Looking at the Federal Flood Insurance Program in that 
light, we see three major problems. One, we cannot persuade 
most of the target market to buy the policies.
    Chairman Shelby. Persuasion will not work, will it?
    Mr. Elliott. No, and I will talk about that. Unfortunately, 
I fear it is going to have to be more mandatory provisions. 
Second, the insurer does not have the financial resources to 
pay the claims that they expect to occur. And third, budget 
accounting is structurally misleading in this case.
    The participation problem is worst because that hits real 
people directly. To answer Bob's question, there has been a 
fair amount of research about why people do not buy, and there 
seem to be two key reasons. One is there are rational economic 
reasons not to buy. It is one of the few insurance policies 
where if you do not buy, there is substantial money coming from 
other sources.
    Chairman Shelby. As opposed, say, to a regular homeowner's 
policy?
    Mr. Elliott. Exactly. If your house burns down, people will 
be sorry for you, but they probably will not give you much 
money; whereas, with flood insurance the NFIP calculates that 
the Federal Government provides an uninsured homeowner with a 
third of the value that they would have received from insurance 
without their ever having paid for the insurance. And that does 
not take account of State and local aid, charitable aid, and 
the fact that insurance premiums are not deductible but 
insurance losses are. So there are rational reasons not to buy.
    In addition, research shows that most people irrationally 
do not want to buy insurance against catastrophic loss, anyway. 
I do not have time to go into that now.
    The mandatory provisions, as you know, are leaky. A big 
reason they are leaky is because a third or more of people in 
these areas do not have mortgages, so you are not going to get 
them through provisions that tie to mortgages.
    In terms of what can be done, I am certainly in favor of 
things that will increase voluntary participation, but it is 
unlikely to do much. In terms of mandatory provisions, there is 
a limit to what you can achieve with tightening current rules, 
partly because so many people do not have mortgages. A more 
radical solution would be to require that homeowner's insurance 
in these areas include flood insurance.
    Very few people have no insurance at all on their house----
    Chairman Shelby. Based on the maps and the tendency to 
repeat ourselves.
    Mr. Elliott. Yes, exactly. You just say in flood-prone 
areas to have you have flood insurance if you buy a homeowner's 
policy. NFIP would still take the financial risk.
    Chairman Shelby. There would be a lot less risk to the 
taxpayer, wouldn't there?
    Mr. Elliott. Absolutely. There would be much less risk 
there.
    Finally, in terms of the subsidy, we need much greater 
transparency than there has been. I have been able to calculate 
from figures provided by NFIP that they would need to charge 
about $1.3 billion more a year in order to cover the fully 
expected losses over time, including the occasional very bad 
catastrophe. That is basically a 40-percent subsidy on the 
whole program. It is concentrated, obviously, on those people 
in older houses, but it is very large in terms of the program.
    I do not have a feeling about whether there should be that 
subsidy, but I know it should be obvious. Right now, there is a 
misconception that the program is self-supporting although we 
have designed it so it cannot be, because many of the 
homeowners are paying a fair price, while everybody else, the 
people with older homes, are getting heavily subsidized.
    Chairman Shelby. Basically the way it is set up today, it 
is set up to fail, is it?
    Mr. Elliott. Yes, it is set up to require the taxpayer to 
write a check every so often.
    Thank you, Mr. Chairman.
    Chairman Shelby. Mr. Hartwig.

                 STATEMENT OF ROBERT P. HARTWIG

           SENIOR VICE PRESIDENT AND CHIEF ECONOMIST,

      INSURANCE INFORMATION INSTITUTE, NEW YORK, NEW YORK

    Mr. Hartwig. Thank you, Mr. Chairman. My name is Robert 
Hartwig. I am Chief Economist for the Insurance Information 
Institute, a property/casualty insurance trade association, and 
I, too, will cut to the chase. And I think many of my comments 
actually echo Mr. Elliott's.
    Despite what we have heard today, since the NFIP has been 
in existence, in 1968, over the past 37 years much has actually 
been accomplished, and in many respects the NFIP does operate 
like a private insurance company combining concepts of 
insurance protection with hazard mitigation. So in exchange for 
federally backed flood insurance, communities must agree to 
adopt and enforce floodplain management ordinances to reduce 
future flood losses.
    However, as we can see from the heavy borrowing NFIP must 
do this year, there are problems. And, in fact, the principal 
problem associated with the price of coverage today, it is not 
sufficient to account for the catastrophic events which we know 
will occur occasionally. And so I basically have two or three 
recommendations.
    The first is the need to reflect the true cost of insuring 
against the peril of flood by adopting a policy of charging 
actuarially sound rates, thereby reducing the risk to 
taxpayers; and, second, an urgent need, as we have already 
heard several times, to dramatically increase participation 
rates in the Federal Flood Insurance Program in order to avoid 
a repeat of future human and economic tragedies on the scale of 
Katrina or worse.
    I will concur with Mr. Elliott in terms of what factors are 
in play in the sense that--why people do not buy flood 
coverage. I believe that in some sense denial or a 
misperception of risk is ubiquitous and it is everywhere. We 
see it all across the country. For example, if people 
understand they live in a one-in-100-year floodplain, they 
typically interpret that as thinking they are not likely to see 
anything but one flood in the course of a century, when, in 
fact, in the course of a 30-year mortgage, you have a 26-
percent chance of actually being flooded out.
    Cost. Even given the option of buying coverage, no matter 
how modestly priced, most people will decline. Government aid 
also, large amounts of Government aid are routinely made 
available after disasters and will continue to be so, no matter 
what is done in the wake of Katrina. And so many people 
rationally reason that there is little point in buying flood 
coverage.
    And then in a new twist we have legal action, Attorneys 
General in several States, in some Katrina-impacted areas, are 
now trying to sue homeowner's insurance companies to force them 
to pay flood losses that are clearly not covered under the 
terms of the contract, giving them false hope, and that is very 
tragic indeed.
    And so to overcome these obstacles, which I believe 
generally are probably beyond the NFIP itself, I think that the 
most efficient way to substantially increase the NFIP's 
penetration rate among property owners is to expand mandatory 
participation through a lender-based system that ensures that 
the flood coverage is in force at all times for all mortgaged 
properties, and perhaps even for properties where the mortgage 
has already been paid off, within the 100-year floodplain and 
beyond. Lapse rates, from what I can tell, are 10 to 15 percent 
on an annual basis, and I will tell you that for private 
homeowner's insurance, which covers fire and wind and so on, 
approximately 96 percent of homes have it, and it is not 
significantly different whether or not there is a mortgage 
present on a property.
    And it is also very important that these rates, which also 
allow the NFIP to accumulate a reserve, are placed in an NFIP 
lockbox, which would effectively help eliminate the risk to the 
U.S. taxpayers for the vast majority of disaster scenarios.
    I think I will conclude there, sir, and thank you very much 
for the opportunity to appear today.
    Chairman Shelby. Thank you.
    Mr. Berginnis.

                  STATEMENT OF CHAD BERGINNIS

         CHIEF FINANCIAL MANAGER, IMMEDIATE PAST CHAIR,

                         STATE OF OHIO

    Mr. Berginnis. Thank you, Mr. Chairman. On behalf of the 
Association of State Floodplain Managers, its 21 chapters and 
8,000 members representing State and local officials and other 
professionals engaged in all aspects of floodplain management, 
we thank you for the opportunity to offer our views on the 
program.
    I first want to talk about the impact of the recent 
hurricanes. The anticipated claims do not indicate necessarily 
a failure of the NFIP. As Director Maurstad had mentioned, we 
are facing our first through catastrophic loss year, and now we 
need to look at future changes.
    One set of these changes revolves around moving all policy 
premiums toward actuarial rating. As you are aware, a large 
percentage of flood insurance policies are pre-FIRM for 
structures built before the mapping and construction codes.
    Chairman Shelby. In other words, they are not based on 
current risk.
    Mr. Berginnis. That is correct. And the original thought 
there was that we would reduce the older housing stock and 
replace it with flood-resistant stock, and that just has not 
happened as quickly. We believe there are at least two ways to 
reduce the pre-FIRM subsidy. First is through all available 
FEMA mitigation programs, including the reform act that was 
passed last year, and also reducing or eliminating the pre-FIRM 
subsidies for certain classes of structures, for instance, like 
vacation homes.
    Mitigation is the best way, in our opinion, to reduce the 
susceptibility of flooding to pre-FIRM structures. It is a set 
of techniques that include elevating buildings, moving them out 
of harm's way, and from a mitigation standpoint, we would urge 
the Committee continue full funding and support for the 2004 
reform act programs.
    We also would urge FEMA to expedite the writing of the 
rules for implementation of the reform act provision. Since 83 
percent of the repetitive loss properties are pre-FIRM, 
implementation of the reform act will reduce subsidized 
premiums by taking those structures out of harm's way. 
Similarly, we hope that Members will support FEMA's ongoing 
mitigation programs through the Robert T. Stafford Act.
    Another set of recommendations revolves around the 
mandatory purchase requirement. I would like to take the 
opportunity to point out to the Committee that the first part 
of a comprehensive evaluation of the NFIP has been released as 
of March of this year through the American Institutes of 
Research. In that document are contained several excellent 
recommendations on the mandatory purchase provision.
    The ASFPM, though, has several specific recommendations in 
our written testimony, and one such recommendation would be to 
examine alternatives to require lenders not currently subject 
to the mandatory purchase requirement to require their 
borrowers to obtain flood insurance. Some estimates put the 
number of new mortgages not subject to the mandatory purchase 
requirement as high as 40 percent, while for certain types of 
loans, such as those from manufactured homes, it might be as 
high as 70 percent.
    It is also time that we consider changing the mandatory 
purchase requirement and extending it to areas beyond the 1-
percent-chance floodplain. It is interesting to note that the 
actual act itself is not necessarily tied just to the 100-year 
floodplain. Although the 1-percent floodplain was identified 
along the Gulf Coast, areas subject to lower probability 
flooding from major storm surges was not shown on the flood 
maps. Similarly, areas behind protective levees and downstream 
of dams that would be inundated when a levee or dam fails are 
also not shown on flood maps.
    Chairman Shelby. So the maps are basically inadequate.
    Mr. Berginnis. Correct. I would say probably inadequate as 
much as anything.
    Chairman Shelby. That is a mild word.
    Mr. Berginnis. They just are not showing the true risk.
    All of those areas have a common trait: They are areas of 
low probability flooding, yet they are areas of potential 
catastrophic damage. The ASFPM advocates the mapping of these 
areas nationwide, putting this information on the FEMA flood 
maps which are the most widely used tools for property owners 
and lenders to assess flood risk to an area, and institute a 
mandatory purchase insurance requirement for structures in 
those areas.
    As I was watching television last night, for instance, in 
Massachusetts, property owners are being evacuated last night 
and today downstream of a dam that was anticipated to likely 
breach or overtop sometime today. So it does point out not only 
is this happening in the Gulf Coast, but also even in the 
Northeast.
    There are also measures that can improve the effectiveness 
of current NFIP approaches. The NFIP is a quid pro quo program. 
It not only is an insurance program, but also requires new 
construction to be built to at least minimum standards of flood 
resistance. The first thing we need to do is get the flood maps 
in order. FEMA's map modernization program is underfunded and 
being haunted by program performance metrics that are resulting 
in maps that do not have the appropriate level of accuracy or 
detail.
    There are thousands of miles of floodplains not yet mapped. 
Many flood hazard areas need detailed data, and many more need 
updated detailed information. We urge the Committee to support 
a map modernization program that will extend current funding 
levels for a total of 10 to 15 years, reflecting a total cost 
of $2 to $3 billion mapping program.
    Finally, there are a few recommendations that we would also 
have in building standards. We would advocate the institution 
of a national freeboard standard--a freeboard meaning the 
lowest floor of a building would be elevated to one foot above 
the existing flood elevation. Nationally, not only would this 
result in an increased safety factor, but also it actually 
reduces flood insurance rates for the people complying with the 
code. It is now time that we change the minimum standard there.
    We appreciate the opportunity to testify on this, and I 
would be happy to answer any questions. Thank you.
    Chairman Shelby. Thank you.
    Professor Browne.

                  STATEMENT OF MARK J. BROWNE

            PROFESSOR, GERALD D. STEPHENS CPCU CHAIR

                 RISK MANAGEMENT AND INSURANCE,

      SCHOOL OF BUSINESS, UNIVERSITY OF WISCONSIN--MADISON

    Mr. Browne. Thank you, Senator Shelby. We appreciate the 
opportunity. You asked earlier what we have learned, and so I 
am going to take 30 seconds and tell you what I think we have 
learned and that will be my testimony.
    First of all, people do not buy flood insurance, and they 
should. And, second, if we move to actuarially sound rates, 
without a mandate people are not going to purchase it. So we 
are shooting ourselves in the foot if we are trying to 
protect----
    Chairman Shelby. We are playing games with ourselves.
    Mr. Browne. We are playing games, and we are going to hurt 
ourselves. We are trying to protect the Treasury funds of the 
United States, and I am afraid that if we do not have a 
mandate, we are not going to do that. I am also afraid that we 
need to think about earthquake, not just flood, and we need to 
think about manmade disasters, and we need to have an insurance 
program that addresses all of these, not just flood, or we are 
going to be in serious problems.
    Earlier panelists have also indicated they support a 
mandate. They have suggested making it part of the homeowner's 
policy. They have also suggested making it a lender-based 
program. I am concerned about those. I think if you make it 
part of the homeowner's policy, then what you are going to do 
is discourage people from purchasing homeowner's insurance. 
What I would prefer to see is a mandate that is based on a 
property tax, a national property tax to cover risk. It could 
be adjusted for different areas with different rates.
    Chairman Shelby. Would that be difficult to pass, a 
national property tax?
    Mr. Browne. I am sure it would be, but you know more than I 
do. I am an economist here, Senator.
    [Laughter.]
    I think it would work in terms of economics, and if you 
think it is a worthwhile idea, I guess you would need to build 
the consensus for it.
    [Laughter.]
    Chairman Shelby. Well, I hope you could build consensus for 
it.
    Mr. Browne. You would have my vote.
    Chairman Shelby. Well, I would vote against that.
    [Laughter.]
    Mr. Browne. Thank you.
    Chairman Shelby. I do have a few questions.
    Mr. Elliott, to you first. You suggest in your testimony 
that tougher mandatory provisions are likely needed to increase 
program participation. Do you have specific suggestions as to 
which program provisions should be made tougher? In other 
words, are the current civil money penalties of $385 maximum 
per violation sufficient to ensure lender compliance?
    Mr. Elliott. You know, the American Institute of Research 
report was mentioned earlier, which is very good. The thing 
that struck me reading through that is the problem does not 
seem to be so much getting it set up in the first place. It is 
that these mortgages are sold all the time, and it seems that a 
central authority whose job was to make sure that mortgages 
were followed along would probably do more good than changing 
the money penalties.
    Chairman Shelby. If you did increase the pool--in other 
words, first you have to do the mapping and you have to do it 
right. That is very important. And if it were mandatory, as a 
lot of you suggest, that people that are in these high-risk 
areas buy this insurance, flood insurance, and other 
catastrophic insurance, the more people in the pool, the 
premium goes down, does it not? You are the economist.
    Mr. Browne. The problem that you have with these types of 
situations is what is known as simultaneous destruction. You 
have the potential for wiping out the pool, and that is one 
reason that economists feel this might not be a risk that is 
transferred to the private market. So the risks are correlated.
    Chairman Shelby. So you want to transfer it all to the 
taxpayer?
    Mr. Browne. No. What I really think is important is for the 
individuals at risk, those who are deriving the benefit from 
living in an area, to bear the cost. I think that is 
fundamentally important.
    Chairman Shelby. That is true of most other things, is it 
not?
    Mr. Browne. Yes, it is.
    Chairman Shelby. Isn't that what insurance is based on, in 
a sense?
    Mr. Browne. Actuarially fair pricing is what is mandated by 
private markets.
    Chairman Shelby. Sure.
    Mr. Hartwig, I believe you also suggested expanding 
mandatory participation. Do you have some suggestions or one 
specific suggestion here?
    Mr. Hartwig. Yes, basically going well beyond the 100-year 
floodplain. I think the interpretation among the average person 
out there is that if you live in a one-in-100-year floodplain 
you are not going to even live long enough to actually see a 
flood. But as I mentioned in my testimony, you actually have a 
26-percent chance of seeing a flood in the course of a 30-year 
mortgage. And so when you go beyond that one-in-100-year 
floodplain, the risk is not one in 250 years in the course of 
the mortgage either. The risk is much, much higher than the 
average person perceives, and hence that gets into the 
mandatory requirement.
    Chairman Shelby. It is just common sense that we all know 
that in these low-lying areas, Louisiana particularly, but 
parts of Texas, even some areas in my State, with the hurricane 
season seeming to pick up more and more, there is more of a 
likelihood that there is going to be more hurricanes, more 
damage, than there are going to be in, say, Wyoming or Utah and 
places like that. That is common sense, is it not?
    Mr. Hartwig. Yes, it is. But I would argue that the NFIP 
could not have gotten into the financial mess that it is in 
today by itself. It had a lot of help. And there are literally 
hundreds of thousands of structures today that would have never 
been built were it not for the implicit guarantees of a myriad 
of Government-run insurance enterprises, of which the NFIP is 
one. And, in fact, there are such plans in about 30 States, 
most of which operate at deficits, and collectively, along with 
the NFIP, they write 6.6 million policies with a face value of 
$1.2 trillion. And when they suffer losses, most of those 
cases, they are assessed back on people who live nowhere near 
the water, or in the case of the NFIP, it goes to the taxpayer.
    Chairman Shelby. Professor Browne, the pricing of insurance 
premiums. In your research on the demand for flood insurance, 
you characterized the demand for policies--and these are your 
words--as ``relatively insensitive to changes in price.'' If 
prices were increased as a result of reducing subsidies, what 
impact do you think this would have on participation? Do you 
believe this impact would differ across incomes?
    Mr. Browne. Yes, I do. I did not test if it would change 
across incomes. And when I was saying that it was relatively 
inelastic, it was still elastic. It was just in comparison to 
some other goods and other types of insurance products. So we 
should expect that if the price increases, there will be 
decreases in the amount of insurance purchased.
    Chairman Shelby. Mr. Berginnis, Mr. Hunter earlier has 
suggested using a 500-year floodplain mandatory purchase 
standard instead of the current 100-year standard. How feasible 
do you think this would be to implement? Are 500-year 
floodplains as commonly mapped as the 100-year floodplains? And 
what would it take as far as mapping to get there?
    Mr. Berginnis. Well, it would certainly take an increased 
focus from a mapping standpoint, but in terms of 
implementation, I think what--and, again, some of the other 
panelists have talked about it. Property owners seem to get 
very wrapped around this concept of I am either on one side of 
the hazard line or on the other. And I think that it might be 
good for us as we explore some of these larger mapping areas, 
not only is it feasible but we also change the terminology, 
just say this is a high-risk flood hazard area, this is a 
catastrophic risk flood hazard area, and get away from this 
100-year or 500-year, because I have had homeowners call me up 
and say, well, I am 76 years old, and I still have a good 24 
years left before I am going to experience a 100-year flood.
    Folks really have a deep misconception of that. I do not 
think it would be difficult at all, quite frankly, to extend 
the mandatory purchase to a 500----
    Chairman Shelby. I think a lot of those people that say 
they have not experienced a flood, they need to go to the Gulf 
Coast and look around right now.
    Mr. Berginnis. Yes, sir.
    Chairman Shelby. I thank all of you. We have a vote that I 
have to make on the Senate floor. Thank you very much for your 
impact here.
    The hearing is adjourned.
    [Whereupon, at 12:21 p.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional material supplied for the record follow:]

                PREPARED STATEMENT OF DAVID I. MAURSTAD
          Acting Director and Federal Insurance Administrator
        Mitigation Division, Federal Emergency Management Agency
            Emergency Preparedness and Response Directorate
                  U.S. Department of Homeland Security
                            October 18, 2005

    Good morning Chairman Shelby, Ranking Member Sarbanes, and Members 
of the Committee. I am David Maurstad, Acting Mitigation Division 
Director and Federal Insurance Administrator for the Federal Emergency 
Management Agency (FEMA) within the Department of Homeland Security. I 
appreciate the opportunity to appear today before the Committee to 
discuss the status of the National Flood Insurance Program (NFIP), 
particularly after the devastating effects of Hurricanes Katrina and 
Rita.
    FEMA's Mitigation Division manages the NFIP--the cornerstone of the 
Nation's strategy to prepare communities for flood events. When I 
accepted the position of Acting Director of Mitigation, the NFIP became 
one of my most important responsibilities and a top priority. During my 
tenure, I have used my 25 years of experience in the insurance industry 
to help guide the successful implementation of this program.
    This year's hurricane season represents a significant challenge for 
the NFIP. Hurricane Katrina was a monumental flooding event that was 
further exacerbated by the impact of Hurricane Rita. The magnitude and 
severity of flood losses related to these storms are unprecedented in 
the history of the NFIP. The challenges these storms have presented to 
the Mitigation Division--in terms of flood insurance claims handling, 
floodplain management, and mitigation planning and grants management--
have never been encountered, on this scale, before.
    Let me provide a context for what the NFIP, and the Nation, is 
facing. Since the NFIP's inception in 1968, $15 billion has been paid 
out to cover more than 1.3 billion losses. In 2001, Tropical Storm 
Allison resulted in the NFIP's first billion-dollar storm with over 
30,291 claims received totaling $1.1 billion. Just last year, the 2004 
hurricane season resulted in over 75,022 claims totaling close to $2 
billion paid out in NFIP coverage.
    We estimate that Hurricanes Katrina and Rita will result in flood 
insurance claims that significantly exceed the highest number of claims 
filed from any single event in the NFIP's history, and well more than 
triple the total number of claims filed in 2004. The Katrina and Rita-
related NFIP claims could exceed $22 billion, far surpassing claims 
paid in the entire history of the NFIP.
    These claims from those whose homes and businesses have been 
damaged or destroyed by Hurricane Katrina are not a new obligation--
they are the result of a legal promise we made to these homeowners and 
business owners when Congress passed the National Flood Insurance Act 
of 1968 and subsequent revisions. Homeowners and business owners agreed 
to pay premiums, communities agreed to adopt building codes to mitigate 
flood dangers, and the Federal Government agreed to provide insurance 
coverage to policyholders after a disaster. Every single one of these 
claims represents someone who has taken the responsible course of 
action by purchasing flood insurance and paying premiums to the 
Government. We not only have a legal obligation to honor our 
commitments, but we also have a moral obligation to provide the 
coverage we have promised to provide.
    Since the tragic events of the past 6 weeks, I have traveled to the 
Gulf Coast to meet and work closely with the Insurance Commissioners 
from the affected areas. After seeing the devastation first hand and 
listening to State and local government representatives, insurance 
industry representatives, and flood victims, we have developed a post-
disaster mitigation strategy that will carry us forward in the days, 
months, and years ahead. Now, more than ever, we must build on these 
already strong partnerships and remain engaged in developing and 
implementing innovative approaches and solutions to meet the many 
challenges we will face as we help the Gulf Coast rebuild stronger, 
safer, and smarter.
    Today, I will focus on the National Flood Insurance Program's 
financial status, and highlight several aspects of our post-disaster 
mitigation strategy. This strategy aggressively provides critical flood 
insurance information to State and local officials, adjusters, home and 
business owners, and policyholders in the affected areas so that they 
may rebuild a stronger, less vulnerable Gulf Coast.
NFIP Financial Status and Related Issues
    Congress authorized NFIP in 1968 following a series of hurricanes 
in the 
mid-1950's and 1960's. At that time, affordable flood insurance was not 
generally available from the private insurance industry. The concept 
was that the Federal Government would make flood insurance available to 
the people if local governments would adopt and enforce measures to 
make future construction safer from flooding.
    Today, more than 20,100 communities in all 50 States and U.S. 
Territories voluntarily participate in the NFIP, representing about 95 
percent of all properties in the Nation's Special Flood Hazard Areas. 
The NFIP provides these communities with maps that identify flood risks 
and help local government decisionmakers determine how flood-prone 
areas are used and how buildings in these areas should be constructed. 
These maps, that we are in the process of modernizing and making more 
accessible to homeowners, are also used to determine flood insurance 
rates.
    As previously stated, $15 billion have been paid out since the 
NFIP's inception to cover more than 1.3 billion losses. Many of these 
claims occurred as a result of smaller flood events where no other 
Federal disaster assistance was available. Yet these property owners 
endured as much of an individual loss as those in larger events. In 
this regard, studies have indicated that insurance is the most 
efficient and equitable method of providing disaster assistance.\1\ 
Since 1986, the NFIP has been financially self-supporting for the 
average historical loss year. During periods of high losses, consistent 
with the law, the NFIP has borrowed from the U.S. Treasury. These loans 
have been repaid, with interest, from policyholder premiums and related 
fees, and at no cost to the Nation's taxpayers. Last year's claims 
activity represented a significant loss year for the NFIP, and the 
program exercised its borrowing authority in the amount of $225 
million. This was only the fourth time since 1990 that the Program was 
in a borrowing position.
---------------------------------------------------------------------------
    \1\ See GAO Report, PAD-80-39.
---------------------------------------------------------------------------
    The NFIP currently insures in excess of $800 billion in assets. 
This covers more than 4.7 million policies for homes, businesses, and 
other nonresidential property owners. Each year the NFIP collects 
approximately $2 billion in premiums and fees.
    Hurricane Katrina was a catastrophic event. More than 200,000 flood 
insurance claims are likely to be filed.
    The NFIP provides insurance at actuarial (risk-based) rates, 
including consideration for catastrophic losses, for newer 
construction, with approximately 76 percent of policyholders paying 
actuarial rates. For structures built prior to the mapping and 
imposition of NFIP floodplain management requirements less than full-
risk rates are charged because flood risks were not fully known when 
these structures were built. Approximately 24 percent of policyholders 
pay less than full-risk rates. It is important to note the NFIP has 
never been capitalized.
    Our authority to borrow from the Treasury is an essential part of 
the NFIP's financing for heavy loss years. Because of Hurricane 
Katrina, on September, 20, 2005, the President signed into law H.R. 
3669, which increased the NFIP's borrowing authority by $2 billion.\2\ 
Current flood insurance claims projections for Hurricanes Katrina and 
Rita indicate additional borrowing authority will be necessary. The 
total payout for Katrina alone may be as much as 10 times the highest 
annual loss, and 20 times the program's average historical annual 
losses.
---------------------------------------------------------------------------
    \2\ See Pub. L. 109-65.
---------------------------------------------------------------------------
Streamlining the NFIP Claims Process
    It is my job to ensure that, consistent with statute and 
regulations, flood insurance claims are handled fairly, equitably and 
in a timely manner. Given the 
catastrophic impact these events have had in the Gulf, a critical first 
step was to implement a simplified and streamlined claims process to 
help policyholders settle their claims quickly.
    Utilizing state-of-the-art aerial imagery, up-to-date water-depth 
data, and information from extensive underwriting files, the Write-
Your-Own (WYO) companies are rapidly identifying insured properties 
that have been washed off their foundations, have had standing water in 
them for an extended period, or have only pilings or concrete slabs 
remaining. Under such circumstances, adjusters are waiving proof of 
loss requirements and fast-tracking claims up to the maximum insured 
value.
    Using these streamlining methods, we expect to substantially reduce 
our normal adjustment times from what one would normally see under such 
extreme circumstances. To ensure all claims are handled quickly and 
fairly, we are closely monitoring the performance and procedures of the 
WYO carriers that are using these Katrina-specific processes.
    Immediately following Hurricane Katrina, we distributed two 
documents to policyholders to help them through the claims process: The 
NFIP Summary of Coverage and the Flood Insurance Claims Handbook. With 
the Chairman's permission, I would like to submit copies of these 
documents for the record.
    These easy-to-understand documents have been available in our Joint 
Field Offices, Disaster Recovery Centers, and Flood Response Centers--
as well as in Town Meetings--since September 1, 2005. I have personally 
handed these materials to State Insurance Commissioners in Alabama, 
Mississippi, and Louisiana, and we have distributed an informational CD 
containing these documents and other ready-to-print materials to field 
offices, State and local government offices, and the media.
    Recognizing that a significant number of policyholders were 
displaced, FEMA has implemented four systems to reach policyholders 
early in the claims process. These systems have been particularly 
useful to those who are cut off from their usual sources of information 
and communication.
    In the days immediately following Katrina, we cross-referenced a 
National Processing Service Center report of all callers who applied 
for disaster assistance and indicated they had flood insurance. We 
matched the addresses of damaged properties to NFIP policy addresses 
and connected insurance companies to their flood insurance 
policyholders. This system will now become standard operating procedure 
in future flooding events. It has enabled the WYO Companies to reach 
out to their NFIP policyholders and help them immediately when they 
needed it most.
    A help line staffed with insurance specialists has been established 
in our Jackson, Mississippi Joint Field Office to provide telephone 
support to all Disaster Recovery Centers (DRC's). These insurance 
specialists provide general information on the NFIP and can assist 
policyholders with their flood insurance policy questions. They can 
also transfer callers to their specific insurance companies, if 
necessary.
    Additionally, we have set up a General Insurance Center, which can 
be reached by calling 1-800-427-4661, to provide policyholders with 
service access from anywhere, since many have been relocated to areas 
where DRC's are not available. This center will answer the insureds' 
claims and coverage questions, as well as guide them through avenues of 
recourse if they dispute their claims estimates.
    To ensure that our policyholders are provided with maximum access 
to our services, we have partnered with the Insurance Information 
Institute's Disaster Insurance Hotline. By calling 1-800-942-4242, 
callers will be given flood insurance information as well as their 
specific insurance company's direct phone number.
    These systems reflect FEMA's effort to reach out to policyholders 
as early in the claims process as possible and recognize the sooner 
claims are settled, the sooner people can start rebuilding their lives 
and communities. For comprehensive information on the NFIP and flood 
insurance, policyholders can access our FloodSmart website at 
www.floodsmart.gov.
NFIP and Mitigation Reconstruction/Rebuilding Support
    As the focus shifts from disaster response to disaster recovery, 
areas impacted by Hurricanes Katrina and Rita will begin to review and 
consider the opportunities for rebuilding a less vulnerable Gulf Coast. 
However, the overwhelming desire to rebuild immediately must be 
balanced with the need to rebuild wisely.
    Effective planning--based on updated risk assessments, sound 
floodplain management, solid mitigation principles, and applicable 
environmental management and historic preservation considerations--will 
be a critical first step in the Gulf's recovery process. We are teaming 
up with our Federal, State, and local partners to (1) provide 
communities with the resources they need to get the job done right; (2) 
provide communities with incentives to rebuild stronger; (3) work with 
the affected States and communities to mitigate properties that have 
repeatedly flooded; and (4) integrate NFIP code compliance assistance 
into our mitigation grant processes.
Providing Resources
    FEMA is committed to working with its partners to provide 
communities with state-of-the-art tools and resources they need to make 
informed planning and rebuilding decisions. We are working closely with 
our Federal partners, such as the Army Corps of Engineers and the 
National Oceanographic and Atmospheric Administration, to gather and 
use the best available data for developing advisory information and 
NFIP recovery maps. We are also working with the Environmental 
Protection Agency and the Department of Health and Human Services on 
cleanup issues related to reconstruction. Finally, we are engaged with 
the Heritage Emergency Task Force to ensure that mitigation strategies 
in the Gulf region adequately consider historic preservation and 
related matters.
    Our Mitigation Assessment Teams are in the field gathering data on 
the performance of buildings and infrastructure. These teams are 
working closely with State and local officials to recommend improved 
building design and construction techniques, advocate new building 
codes and enforcement measures, and suggest mitigation activities that 
will improve community-wide disaster resistance.
    Overall, FEMA, along with its Federal, State, community, and 
private sector partners, is making sure that technology, information, 
and resources are expeditiously provided to the Gulf Coast and properly 
used during the rebuilding process.
Rebuilding Stronger through Higher Standards
    A significant part of FEMA's Gulf Coast Mitigation Strategy is 
development of measures to encourage communities to rebuild stronger. 
Our Community Rating System (CRS) will play a major role in this 
effort. CRS provides insurance discount incentives to communities that 
are actively reducing their flood risk by implementing comprehensive 
floodplain management criteria that go beyond the NFIP's minimum 
requirements.
    CRS communities that continually reduce their flood risks receive 
flood insurance premium discounts representative of the degree of risk 
reduction achieved. Over 66 percent of the NFIP's policy base reside in 
CRS communities, and 3.1 million NFIP policyholders residing in these 
communities receive over $150 million in discounts annually.
    There are currently 68 CRS communities in the Gulf Coast area. Our 
goal is to increase that number as our Gulf Coast area participating 
communities become engaged in a process that focuses on rebuilding 
stronger and smarter.
Addressing Repetitive Loss through Mitigation
    FEMA also will address the issue of repetitive loss properties 
(properties with two or more $1,000 flood insurance claims within a 10-
year period) as Gulf Coast reconstruction gets underway. The Alabama 
and Mississippi areas affected by Katrina have about 2,200 and 2,500 
repetitive loss properties respectively (as of October 5, 2005). The 
Louisiana Parishes affected by Katrina contain nearly 20,000 repetitive 
loss properties. FEMA will work with the States, local governments, and 
CRS communities to mitigate these properties through elevation, 
relocation, flood proofing, localized flood control, and acquisition/
demolition.
Increased Cost of Compliance and Mitigation
    FEMA also is coordinating with States, local governments, and CRS 
communities to integrate Increased Cost of Compliance funds--money for 
NFIP policyholders to bring their structures up to existing flood-
related building codes--into all relevant mitigation efforts. Finally, 
our Federal, State, and local government partnership will ensure that 
all Gulf-area mitigation proposals are based on sound risk assessments 
and approved mitigation plans.
    Sound floodplain management planning and regulations save this 
country an estimated $1.1 billion in prevented flood damages annually, 
and structures built to NFIP criteria experience 80 percent less damage 
than structures not built to such standards. FEMA is determined to help 
Gulf Coast communities make reconstruction decisions that are based not 
only on sound floodplain management, risk assessment, and mitigation 
planning principles, but also on higher protection standards. Creating 
stronger and safer communities reduces loss of life and property, 
enables individuals and localities to rapidly recover from future 
events, and lessens the financial impact on State, Tribal, and local 
governments, as well as the U.S. Treasury.
Conclusion
    In the wake of Hurricanes Katrina and Rita, FEMA is committed to 
supporting the Gulf Coast's recovery. In the near-term, this will 
require ensuring adequate funding to fulfill our commitment to our NFIP 
policyholders. For the longer-term, it will require working closely 
with the Gulf Coast's affected States, local governments, communities, 
and private-sector entities to support a reconstruction effort that 
results in safer places to live, work, and do business.
    I would be pleased to answer any questions Committee Members may 
have.




                  PREPARED STATEMENT OF CHRIS LANDSEA
          Tropical Prediction Center/National Hurricane Center
                        National Weather Service
            National Oceanic and Atmospheric Administration
                      U.S. Department of Commerce
                            October 18, 2005

    Good morning, Mr. Chairman and Members of the Committee. Thank you 
for inviting me to discuss the outlook for hurricane activity in the 
future and the storm surge and inland flooding associated with 
hurricanes. I am Chris Landsea, with the National Hurricane Center in 
the National Weather Service (NWS) of the National Oceanic and 
Atmospheric Administration (NOAA), within the Department of Commerce.
    The devastation along the Gulf Coast from Hurricane Katrina and 
Hurricane Rita is like nothing I have witnessed before. Words cannot 
convey the physical destruction and personal suffering in that part of 
our Nation. However, without NOAA's forecasts and warnings, the 
devastation and loss of life would have been far greater.
    NOAA's forecasts and warnings for Hurricane Katrina demonstrated 
the abilities of the state of the art of hurricane prediction. Our 
continuous research efforts at NOAA, and in partnership with 
universities and other Federal agencies, have led to our current 
predictive capabilities and improved ways of describing uncertainty in 
prediction. Hurricanes pose a major threat to our Nation's coastal 
communities. The impacts of hurricane winds, storm surge, and inland 
flooding remain major threats to the Nation. Accurate and timely 
hurricane forecasts provide emergency managers and the public 
information needed to prepare for an approaching storm, including 
considering evacuations, if necessary. Understanding the location and 
severity of hurricane landfall is the key to planning long before the 
event.
    NOAA strives to improve the reliability, accuracy, timeliness, and 
specificity of predictions of hazardous weather, such as hurricanes, to 
help society cope with these phenomena. Over the last 15 years, 
hurricane track forecast errors have decreased by 50 percent, largely 
due to advances in hurricane modeling, an increased understanding of 
hurricane dynamics, improvements in computing and technology, and 
increased availability of data from the region around the hurricane. 
Today's 5-day forecasts of a hurricane track are as accurate as 3-day 
predictions were 20 years ago.
    Recently there have been questions raised about NOAA's Hurricane 
Program. Given the importance to the Nation, NOAA and the Department of 
Commerce appreciate any insights to improve our forecasts and warnings. 
NOAA continues to develop new satellite technologies, procure and 
deploy new buoys, upgrade radiosonde instruments, and invest in 
additional modeling efforts. The result has been that Hurricane 
predictions are better today than they have ever been and will continue 
to improve in future.
    While the North Atlantic hurricane season officially lasts from 
June 1 to November 30, tropical systems have formed in every month of 
the year. The tropical storms that turn into hurricanes and threaten 
the East and Gulf coasts of the United States form in the Gulf of 
Mexico, Caribbean Sea, and Atlantic; many of these storms develop from 
tropical waves moving off the west coast of Africa. Hurricanes are 
fueled by warm water as they travel across the ocean; an abundance of 
warm water provides more energy allowing the storm to increase in 
strength. However, data indicate that warm water alone is not enough to 
determine whether a storm will intensify. The winds between the upper 
and lower levels of the atmosphere (from just above the ocean to about 
eight miles up) also play a major role. Strong vertical shear (that is 
a large difference in the speed and direction of the wind between these 
two levels) in the wind inhibits the formation or intensification of 
tropical cyclones whereas, weak wind shear encourages them.
    An active hurricane season does not necessarily mean more storms 
make landfall, nor does an inactive period mean no landfalling 
hurricanes. In 1992, a relatively quiet year, Hurricane Andrew became 
the costliest disaster in U.S. history at the time, and was the only 
hurricane to make landfall that year. While anticipating a higher level 
of activity during hurricane seasons for the next few decades due to 
multidecadal fluctuations, we do not expect every year to be 
hyperactive. With more active hurricane seasons, the risk for ``major'' 
hurricanes (Category 3 or greater on the Saffir-Simpson scale) to 
impact the United States or our neighbors in the Caribbean and Central 
America does increase. It is also important to note that even a weak 
landfalling storm can cause devastating inland flooding, such as Agnes 
in 1972 and Allison in 2001. The increase in population and development 
along our coastline increases the damage potential for an area impacted 
by a hurricane. The hurricanes of this year and last year provide vivid 
reminders of the destruction these storms can inflict on our society.
Outlook for Future Hurricanes
    In recent decades, the United States had experienced relatively few 
hurricane landfalls and, in particular, very few ``major'' hurricanes 
-- those of Category 3 or higher on the Saffir-Simpson hurricane scale 
(Category 1-5). Our good fortune ended last year when six hurricanes 
hit the United States, and three of those were major hurricanes. This 
year to date we have had 20 tropical storms, 11 of which have become 
hurricanes, and 5 of those have been major hurricanes. Of these five, 
Dennis, Katrina, and Rita struck the United States as major hurricanes. 
Most of the deadliest and costliest Atlantic tropical cyclones are 
major hurricanes. Today, major hurricanes account for just over 20 
percent of the landfalling United States tropical storms and hurricanes 
but cause more than 80 percent of the damage.
    The 2005 hurricane season has already been one of the most active 
on record. In the last 10 years, we have experienced a higher level of 
North Atlantic hurricane activity. Compared with the previous two and a 
half decades, more than twice as many major hurricanes have occurred 
annually (3 to 4 hurricanes on average since 1995 versus 1 to 2 during 
the period from 1971 to 1994).
    Based on changes in oceanic and atmospheric conditions, we believe 
this increased activity is due to a natural cycle called the Atlantic 
Multidecadal Mode, a shift in the surface temperature of the North 
Atlantic and Caribbean Sea between warm and cool phases, with each 
phase lasting 20 to 40 years. Data suggest we are currently in a warm 
Atlantic phase; thus, an active Atlantic hurricane era is underway, 
similar to that last seen from the late 1920's to the late 1960's. Our 
research suggests that many of the hurricane seasons in the next two or 
three decades may be much more active than they were in the 1970's 
through the early 1990's. Warmer sea surface temperatures are expected 
to contribute to conditions that foster increased hurricane development 
over this period (see chart below).
    Recent research papers by respected scientists have linked global 
warming changes to increased hurricane intensity. While these 
researchers have brought up very important questions that need to be 
addressed, it can still be concluded that the increase in hurricane 
activity in recent years is due to a natural cycle, rather than man-
made causes.



Inland Flooding and Storm Surge
    Both storm surge and inland flooding pose significant challenges to 
both coastal and inland communities. As experienced with Hurricane 
Katrina, storm surge can be a deadly aspect of hurricanes for which we 
need to be prepared. Storm surge is water pushed over the shoreline by 
the force of the winds associated with a hurricane. An advancing storm 
surge combines with normal tides to create a hurricane storm tide, 
which can increase the water level to as much as 30 feet or more above 
normal levels. The direct and indirect effects associated with the 
massive storm surge from Katrina were responsible for hundreds of lives 
lost in Louisiana and Mississippi. Loss of life is a function of the 
physical factors of a storm surge and inland flooding, as well as storm 
frequency and many sociological conditions, including population 
density, land use, design and implementation of local and regional 
preparedness plans, past storm experience, communication, and forecast 
accuracy.
    For coastal counties, storm surge has historically represented the 
primary tropical cyclone threat. The dangers associated with storm 
surge apply along the coast, bays, sounds, and coastal sections of 
rivers. The severity of a surge, as measured by the depth and how far 
inland the water reaches, depends on a number of natural factors, such 
as cyclone intensity (surface wind speed) and forward speed of motion, 
local bathymetry, coastal topographic gradients, and barrier (for 
example, dune) structure. The level of surge in a particular area is 
also determined by the slope of the continental shelf. A shallow slope 
off the coast will allow a greater surge to inundate coastal 
communities. This rise in water level can cause severe flooding in 
coastal areas, particularly when the storm surge coincides with the 
normal high tides. Because much of the densely populated U.S. Atlantic 
and Gulf coastlines lie less than 10 feet above mean sea level, the 
danger from storm surge is tremendous. Communities with a steeper 
continental shelf will not see as much surge inundation, although large 
breaking waves can also cause serious damage in those areas. Storm 
surge, waves, and currents in confined harbors result in severe damage 
to ships, marinas, and pleasure boats.
    Freshwater floods from rain present another great threat to life 
and property in tropical cyclones, and these effects occasionally 
exceed the coastal impact. While public attention often shifts away as 
hurricanes move inland, additional death and property damage can occur 
due to inland flooding from excessive rainfall. For example, the 
devastation experienced throughout much of eastern North Carolina in 
the wake of Hurricane Floyd in 1999 was a result of inland flooding. 
Such floods can occur hundreds of miles inland. As tropical cyclones 
move inland, their environments, structures, and risks can change 
markedly from their marine forms. Intense rainfall, not directly 
related to the wind speed of a tropical cyclone, often causes 
significant damage. In our Nation, inland flooding is the second 
leading cause of loss of life from tropical cyclones, behind storm 
surge. Typically, greater rainfall amounts and flooding are associated 
with tropical cyclones that have a slow forward speed or stall over an 
area. Significant rainfall and inland flooding are not only associated 
with hurricane-strength storms. Some of the more severe flood events 
have been associated with tropical cyclones which only reach tropical 
storm strength. The devastation in southeast Texas and the Houston area 
in 2001 was a result of Tropical Storm Allison.
    Two types of inland flooding occur from tropical cyclones: Flash 
flooding and river flooding. Flash flooding occurs in creeks, streams, 
and urban areas within a few minutes or hours of excessive rainfall. 
Rapidly rising water in confined valleys or canyons can reach heights 
of 30 feet or more. Streets can become swift moving rivers and 
underpasses can become death traps. River flooding occurs from heavy 
rains associated with decaying hurricanes or tropical storms, and in 
extreme cases, river floods can last a week or more.
    Since Hurricane Floyd and Tropical Storm Allison, we have taken 
steps to improve our forecasts of rainfall amounts, extended those 
forecasts out to 5 days, and incorporated those rainfall forecasts into 
our river and flood predictions. The NWS conveys the magnitude of 
observed or forecast flooding using flood severity categories. These 
flood severity categories include minor flooding, moderate flooding, 
and major flooding. Each category has a definition based on property 
damage and public threat. Minor Flooding indicates minimal or no 
property damage, but possibly some public threat or inconvenience. 
Moderate Flooding indicates some inundation of structures and roads 
near streams. Some evacuations of people and/or transfer of property to 
higher elevations may be necessary. Major Flooding is defined as 
extensive inundation of structures and roads. Significant evacuations 
of people and/or transfer of property to higher elevations may be 
necessary. NWS precipitation frequency estimates are used as design 
standards for civil infrastructure built to cope with rainfall and 
runoff, such as storm water drainage systems, roads, bridges, culverts, 
small dams, etc. These precipitation frequency estimates also 
contribute to computing flood insurance rate maps and support various 
planning activities. The estimates help ensure an objective assessment 
of the probability of heavy rainfall in planning and design.
    The impacts of a flood vary locally. For each NWS river forecast 
location, flood stage and the stage associated with each of the NWS 
flood severity categories are established in cooperation with local 
public officials. Impacts vary from one river location to another 
because a certain river stage (height) in one location may have an 
entirely different impact than the same level above flood stage at 
another location.
Future Plans
    A key program for increasing our ability to monitor hurricanes, 
particularly over the data-sparse ocean areas, will be addressed 
through the Global Earth Observation System of Systems (GEOSS), a 10-
year international endeavor of which the United States is a member and 
NOAA, the National Aeronautic and Space Administration (NASA), and U.S. 
Geological Survey are key participants.
    Using a combination of atmospheric and ocean observations from 
satellites, aircraft, and all available surface data over the oceans, 
NOAA, NASA, the National Science Foundation, other Federal agencies, 
and universities conduct experiments to better understand internal 
storm dynamics and interactions between a hurricane and the surrounding 
atmosphere and ocean. Much of NOAA's improvement in tropical cyclone 
forecasting is attributed to advances in Numerical Weather Prediction 
(NWP). In collaboration with many scientists and developers in the 
domestic and international operational NWP centers, the NOAA 
Environmental Modeling Center develops state of the art numerical 
modeling systems.
    Predicting hurricane intensity, which includes wind structure, 
storm surge, and rainfall amounts, remains one of our acute challenges. 
For example, even though we knew conditions were favorable for Katrina 
and Rita to intensify, and we forecast strengthening, there was some 
error for both storms in the intensity forecast for the eastern Gulf 
due to their rapid intensification. To advance hurricane prediction, 
especially hurricane intensity and size forecasts, NOAA is developing 
the Hurricane Weather and Research Forecasting (HWRF) system. The HWRF 
system uses a collaborative approach among the research community and 
will apply advanced model physics as HWRF couples the atmosphere, land, 
and ocean into an integrated model. Our goal is to couple an advanced 
wave model with a dynamic storm surge model to better predict coastal 
impacts of waves and storm surge.
    We have increased our efforts to transfer research into operations. 
The United States Weather Research Program (USWRP) Joint Hurricane 
Testbed (JHT) was formed in late 2000. The mission of the JHT is to 
facilitate the transfer of new technology, research results, and 
observational advances of the USWRP, its sponsoring agencies, the 
academic community, and the private sector for improved operational 
tropical cyclone analysis and prediction. A large portion of my job at 
the National Hurricane Center is to facilitate and test these new 
projects for possible implementation into operations. While there are 
no quick fixes, we expect our continued efforts along these lines will 
continue to improve predictions of the path of these storms, their 
intensity, and inland flooding caused by the precipitation from these 
tropical systems.
Conclusion
    Thank you Mr. Chairman and Members of the Committee for this 
opportunity to discuss the outlook for hurricane activity in the future 
and the storm surge and inland flooding associated with hurricanes, and 
how we are working to better prepare our country for these changes. I 
would be happy to address any questions you may have.

                               ----------

                 PREPARED STATEMENT OF J. ROBERT HUNTER
         Director of Insurance, Consumer Federation of America
                            October 18, 2005

    Mr. Chairman and Members of the Committee, I appreciate the 
invitation to appear before you today to discuss current issues 
regarding the National Flood Insurance Program. I am J. Robert Hunter, 
Director of Insurance for the Consumer Federation of America. CFA is a 
nonprofit association of 300 organizations that, since 1968, has sought 
to advance the consumer interest through research, advocacy, and 
education. I am a former Federal Insurance Administrator under 
Presidents Ford and Carter and have also served as Texas Insurance 
Commissioner. As Administrator, I ran the National Flood Insurance 
Program (NFIP) in the 1970's.
Background--My Decade with the Flood Insurance Program
    Congress created the NFIP as a result of President Truman's concern 
that flood insurance was unavailable in areas of Missouri affected by 
significant flooding. Truman's question led to a major study by the 
National Academy of Sciences (NAS), the so-called ``feasibility 
study,'' that determined that there was a way for the Federal 
Government to underwrite flood insurance.
    The NAS approach was elegant: In exchange for a land-use control 
agreement by a community to steer new construction away from high-risk 
locations and to otherwise mitigate construction in hazardous zones, 
the Federal Government would make subsidized flood insurance available 
to already existing at-risk buildings in the community that agreed to 
participate. The Federal Government would map each community to show 
the probability of flooding in a particular area within 100 years.\1\ 
In the 100-year zone, the first floors of new construction would be 
elevated to the elevation of the 100-year storm. In the highest-risk 
zones, where water moved with velocity (the floodways of rivers and the 
storm surge areas) there would be no construction. New construction 
would not get the subsidized rate but would pay full actuarial rates. 
If a community granted a variance and allowed a structure to be built 
below these standards, flood insurance would be available but the price 
could be extreme. Lenders were required to protect the collateral with 
flood insurance if the mortgage was on a structure in a high-risk flood 
zone.
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    \1\ The 100-year standard was a compromise between those who felt a 
tougher standard was required to save lives and property and those who 
felt the standard should be low to encourage community participation. 
The 100-year concept is also somewhat misleading in that it is a 
probabilistic standard of a 1 percent risk of an occurrence within a 
year. Such an event could actually happen twice in a year, while the 
average occurrence remains only once in a century (much like flipping a 
coin could produce five heads in a row while the probability remains at 
50 percent).
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    During my tenure at the helm of the NFIP, I learned that Congress 
was not fully committed to the implementation of the program they 
designed. I once took a lot of heat from a Congressional delegation 
when I priced the cost of flood insurance for a well-connected 
individual's $200,000 home at $50,000 a year because it was built 
outside of the dunes on a beach and was therefore far more vulnerable 
to flooding. On another occasion, I almost lost my job as Administrator 
because I refused to bend in my determination to fully implement the 
land-use provisions that one powerful senator felt were harmful to some 
special interests (developers and land owners) in his state. 
Fortunately, William Proxmire, then the Chair of this Committee, stood 
by me through these political hurricanes.
    In fact, my experience has shown me that political pressure from 
Congress (sometimes offered with the best of intentions) can threaten 
the overall viability and effectiveness of the flood insurance program. 
One danger is the potential for the program to turn into either a back-
end disaster relief program (as you know, there have been well-intended 
but misguided proposals to grant retroactive flood insurance to victims 
of Hurricane Katrina) or, even worse, a front-end relief program that 
sells below-actuarially priced insurance to new construction before the 
flood, exposing taxpayers to unnecessary risk and encouraging unwise 
construction.
    Another danger I have experienced is program error. An 
environmental group complained to me that the coastal storm surge 
projections appeared to be too low on our maps. The flood insurance 
program (the program) engineers were sure they had done the mapping 
properly, but we discovered that they had left the wave-height off of 
the storm surge heights, making them far short of the actual 100-year 
surge. It was a serious scientific error but an even more disastrous 
political one, as we had to go back to communities that had fought 
developers to put in place the first maps and raise the required 
elevations significantly.
    During my tenure, I also had to remove private insurers from 
administering the program for two reasons that are important to reflect 
on today: A conflict of interest in claims handling and excessive costs 
for program administration.
    The conflict of interest was that insurers, functioning through an 
association--the National Flood Insurers Association (NFIA)--refused to 
pay claims the General Counsel of HUD (where the program was housed in 
the 1970's before it was moved to FEMA) had ruled were covered by the 
flood insurance policy. Insurers would not pay because they feared that 
if they paid claims under the flood program that were similar to those 
they sought to deny under their privately written homeowners' policies 
with similar policy language, they would have to pay the homeowners' 
policy claims as well.
    The expense problem was that we determined that noncompetitive bids 
for servicing flood insurance policies had largely been granted by the 
NFIA's executive committee to the very companies on NFIA's executive 
committee (that is, self-dealing) and were very expensive. Since the 
program entailed a subsidy, these excess costs would fall upon 
taxpayers. We asked for competitive bids but NFIA refused. Ultimately, 
we removed NFIA from the program. The cost of administering the program 
fell by half and all claims that were declared to be legitimate by HUD 
were paid.
    Finally, before I was Administrator, I was the Chief Actuary of the 
NFIP and had the task of making the rates using a multidisciplinary 
team of hydrologists, land-use experts, underwriters and others. It is 
a complex job, but the process should be well established by now. 
Technological developments should make the task easier and more 
accurate, raising serious questions about why private sector insurers 
could not develop properly priced flood insurance policies at this 
juncture and take on at least some of the risk.
    I accompanied the first Administrator, George Bernstein, to 
Mississippi to witness the devastation of Hurricane Camille. At that 
time, we were briefed by the Corps of Engineers that had Camille struck 
one degree to the west, New Orleans would have been flooded--in exactly 
the fashion that occurred with Katrina 35 years later--after the 
hurricane passed the city and the wind pushed Lake Pontchartrain back 
over or through the levees. I remember the briefing in great detail 
because I was born in New Orleans and was shocked at the potential for 
huge damage and loss of life in my hometown. I am very sad that this 
happened; particularly given the knowledge we had as a Nation at least 
as early as 35 years ago, if not since Hurricane Betsy in 1965. It is a 
tragedy and a scandal that the Federal, State, and local governments 
did not deal effectively with this known risk in all the intervening 
years.
NFIP Issues in the Wake of Katrina
    Mr. Chairman and Members of the Committee, I have more questions 
than answers to give to you today since we are all still assessing the 
full effects of Hurricane Katrina and watching how the NFIP will 
function in the after-flood runoff of claims. For instance: How will 
FEMA deal with and audit the obvious conflicts of interest that the 
Write Your Own insurance companies have in handling, on the same 
properties, both wind claims adjustments (where the insurer pays 100 
percent of the damage found) and flood claims adjustments (where the 
insurer pays no part of the damage found and indeed gets an adjusting 
fee for services in handling the claim)? \2\ Will claims be paid 
promptly? How will complaints from policyholders be handled? Will FEMA 
raise some of the same concerns being raised by attorneys for those 
without flood insurance when it comes to determining the allocation of 
flood and wind losses? Were the maps accurate in their 100-year 
projection . . . if not, why not?
---------------------------------------------------------------------------
    \2\ Attached is our September 12, 2005 letter raising this concern 
with FIA/FEMA, to which we have had no response.
---------------------------------------------------------------------------
    I do, however, have several ideas for your consideration on some of 
the key questions that this tragic hurricane raises.
Long-Term Solvency
    Obviously, Congress cannot decide not to pay legitimate claims to 
those persons holding flood insurance policies. These policies have the 
full faith and credit of the country behind them. But Katrina and Rita, 
with payouts likely to be measured in the tens of billions of dollars, 
raise the question of how best to make sure the program works in ways 
that do not bust the Federal budget in the future and indeed minimize 
taxpayer exposure. In this context, the subsidy of existing structures 
is an important consideration. When the flood insurance program began, 
it was assumed that existing structures would, over time, be ``washed 
out'' (literally or figuratively) from the program. But there are many 
subsidized structures still in the program.
    I believe that the time has come to find ways to lower the subsidy 
over the relatively short-term. I submit the following ideas for your 
consideration:

 A 500-year mitigation and purchase requirement, rather than 
    the current 100-year standard (as I explain below), would mean no 
    subsidies in the areas that have experienced storms between 100-
    year and 500-year storm levels.
 Subsidies should be immediately ended on structures with 
    market values in excess of some significant amount (for instance 
    $500,000).
 Subsidies should be eliminated on all additional homes for an 
    insured with more than one home.
 Subsidies should be phased out over a certain number of years 
    (perhaps 10) on all structures with market values greater than, for 
    example, $250,000 but less than $500,000.
 Subsidies should be eliminated on all structures that have 
    experienced more than one flood with over $5,000 in program losses 
    in the past.
 Subsidies should be reduced for homes with market values under 
    $250,000 each time the home is sold. This should be done in 
    increments that will eliminate the subsidy over three sales of the 
    structure. Persons who have received flood insurance claims 
    payments or flood disaster relief should not get a subsidy when 
    purchasing a new home.

    These ideas require study of course, particularly to assure that 
they are crafted, as I tried to in the above list, to avoid adversely 
impacting truly low and moderate-income individuals.
    I must raise the question of why private insurers cannot assume a 
greater role in writing flood insurance? The original reason insurers 
objected to a private role when NAS conducted the feasibility study was 
that they said they could not price policies to avoid adverse 
selection--attracting properties that were extremely likely to be 
flooded. This concern could be resolved today by using technology to 
better assess risk and by requiring the purchase of the coverage 
(perhaps up to the 500-year storm level) to assure the spread of risk. 
Congress should explore a long-term program to shift flood insurance 
back into the private sector where political pressures to bring rates 
below the actuarial level will not be present.
    However, if the program is to remain a fully Federal one, then why 
continue the Write Your Own Program (WYO)? It appears to be terribly 
expensive \3\ and has not accomplished what insurers said it would 
(that is, increasing market penetration of flood insurance). It results 
in wind/water claims adjustment conflicts of interest that could be 
avoided by using competitively bid contractors. When I was Texas 
Insurance Commissioner, I was shocked that the then Administrator of 
NFIP refused to give out the program's toll-free telephone number out 
of fear that agents selling WYO coverage would be upset if the number 
was publicized. (I had to wait until the Administrator left a press 
conference to give the number out so Texans who sought to buy flood 
coverage would have the information and taxpayers would get a break on 
costs of administration).
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    \3\ I have not been able to get current data from FEMA on this 
point, but I looked at it a few years ago and this was the case. I have 
a call into FEMA for the latest information, and I will supply it to 
the Committee when I get it, if I do get it. The Committee should ask 
for this information from FEMA to determine the program's actual cost. 
I suggest not only looking at the costs of service compared to that of 
a competitively bid contractor but also to compare the cost to that of 
private insurers selling homeowners insurance (a more complex product 
than flood insurance and more costly to produce since homeowners 
insurance is not simply added to a policy as WYO flood insurance is). 
In 2004, underwriting expenses for the homeowners line were 28.4 
percent of written premium, of which commissions were 13.0 percent and 
State taxes were 2.6 percent--so that the comparable figure for 
servicing to compare to flood insurance is 12.8 percent (28.4 percent -
(13.0 percent + 2.6 percent)). Source: Best's Aggregates & Averages, 
2005 Edition.
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    I urge this Committee to immediately request a GAO study of the 
efficiency of the WYO program compared to those of competitively bid 
contractor programs. Such a study would likely show that the costs of 
the WYO program are too high, use of contractors should be expanded and 
the WYO contracts should be renegotiated to save significant taxpayer 
cost. At the very least, the payment of commission dollars to insurers 
who do not use commissions (such as USAA) should stop. Why should 
taxpayers pay agent commissions when no agent receives such 
commissions?
    Coverage levels should also be variable, at the consumer's option. 
The use of a higher deductible policy with a lower premium is one 
option that should exist. Policyholders could also be permitted to 
raise the $250,000 cap on coverage, but only at full actuarial prices, 
even for currently subsidized structures.
    The 100-year storm standard for the elevation of new structures and 
the purchase requirement within that area should be revisited. 
Requiring coverage up to the 500-year storm for the Nation would result 
in greater spread of risk, fewer surprises when storms occur and 
greater market penetration. The price for flood insurance outside the 
100-year area would be very reasonable.
    A very serious concern is the low market penetration that the flood 
insurance program has achieved. Over 2 million homes were insured in 
the 1970's when I left the program. In 2004, there were only 4.4 
million, about double the 1970's level. In less than 10 years, we sold 
what it took an additional 15 years to match despite amazing population 
growth along the coasts and lender requirements to purchase insurance 
in the high flood hazard zones. Something is wrong.
    One of the rationales for allowing insurers back into the NFIP was 
that they would achieve greater market penetration. They have failed to 
do a very good job other than to receive costly reimbursement for their 
servicing of policies. Further, the success of the lenders in requiring 
coverage on properties receiving new loans in flood prone areas is 
questionable and also needs to be studied. Are lenders failing to 
follow through to keep homes covered after they are purchased? I am 
aware that many lenders do have tracking programs to assure continuous 
coverage. However, questions persist because of the continued low 
penetration of flood coverage 35 years after the founding of the 
program. Better market penetration will help assure NFIP solvency.
    Consideration should also be given to increasing the amount of 
mandatory coverage in at least the 100-year flood risk zone. Flood 
after flood shows market penetration of 10 to 20 percent. This is a 
serious problem. What is the ``hook'' for expanding mandatory coverage 
beyond the purchase requirement on federally backed mortgages, which 
appears not to work very well all by itself ? This is a tough question, 
but an answer must be found. Perhaps non-Federal lenders could be 
required by States to get flood cover on high-risk homes. As an 
incentive, Federal benefits for flood plain management programs in 
participating States could be increased in those States that required 
their banks to require flood insurance coverage. A review of Federal 
benefit programs in high-risk flood areas might reveal other ways to 
obtain greater mandates on structures/inhabitants in the flood plains. 
Also, communities could, as part of their flood management requirements 
to qualify for the NFIP, demand covenants on the sale of properties in 
flood plains stipulating that flood insurance must be carried in the 
future. I am not expert in these matters, but it is clear that experts 
on Federal benefit programs and real estate should help find the answer 
to this vital question of expanding coverage in high-risk areas.
    I have always thought that some of the burden for obtaining 
coverage for new structures should fall on the builders of these 
structures. Consideration should be given to requiring builders of new 
homes to purchase a 30-year (or at least a 5 or 10-year) policy. There 
are many advantages to this idea, including an immediate infusion of 
higher premiums into the program; but most important is the mitigation 
effect that such a requirement will have. Consider the difference in 
purchase price of two identical homes with builder-purchased flood 
coverage if one is built in harm's way the other is not. It won't take 
long for contractors to learn not to build in high-risk areas if they 
cannot market the high-risk homes.
    There should also be verification by a GAO audit that participating 
communities forbid building in floodways and other ``V'' Zones, such as 
storm surge areas. GAO should study the actual development that has 
taken place after the Flood Insurance Rate Maps (FIRM) were put in 
place in participating communities to see how the development conforms 
to the requirements of the FIRM's. If mitigation is not working, costs 
will go up and people will be killed. Mitigation failures must be fixed 
or the program will just encourage unwise construction into the future.
    Finally, the act to reduce losses to repetitively flooded 
properties passed by Congress last year should be a significant help in 
controlling costs.
Map Accuracy
    Serious questions have been raised about the accuracy of the maps 
in Katrina-affected areas. Congress should order a review of the 
mapping methods and results using actual storms compared to predicted 
storms in recent years. A team of expert agencies (NAS, NOAA, and 
others) should review mapping to assure that the most scientifically 
advanced methods are being used and that errors are not being made. To 
the extent that maps are not up-to-date and accurate, construction may 
be occurring at elevations that are dangerous to life and property, and 
the program may be effectively subsidizing unwise building practices 
through inadequate flood insurance rates.
    While we await this study, I recommend that two steps be taken: (a) 
Maps should be upgraded at least once every 3 years. (b) Maps should 
include a 3-year projection of increased flood heights due to 
development.
WYO Conflicts of Interest: Wind v. Water
    Since Hurricane Katrina devastated the Gulf Coast, there has been 
much public discussion about whether damage to homes was caused by wind 
and rain, or by flooding. Many policyholders have policies covering 
wind and rain damage (under homeowners' policies), but not flooding, 
which is a separate policy underwritten by NFIP.
    Despite press releases and public pronouncements by the insurance 
industry that those without flood insurance should get nothing if their 
homes were eventually flooded,\4\ the situation is far from clear-cut. 
Some consumers purchased what they were told was full hurricane 
coverage and were not clearly notified by insurance representatives 
that flood coverage was not included. They may have been misled. Others 
were told flood insurance was unnecessary.\5\
---------------------------------------------------------------------------
    \4\ The Property Casualty Insurance Association of America, the 
major industry trade association, issued its first press release with 
this message on August 31, 2005, and has issued similar press releases 
nearly every day since.
    \5\ Reports to the Americans for Insurance Reform Katrina Insurance 
Hotline indicate that when policyholders were purchasing homeowners' 
insurance, insurance agents said that additional flood insurance would 
not be necessary, as the policyholders did not live in flood zones.
---------------------------------------------------------------------------
    Moreover, even though a property may have been washed away by the 
storm surge, it was likely first hit by heavy winds, so that by the 
time the water wiped out the property, some percentage of the property 
was already destroyed by wind and rain. And suppose the storm surge, 
caused by low pressure, was 10 feet, but wind caused waves on top for 
another 5 feet. If someone's home is at 12 feet and damaged, was not 
wind the ``proximate'' cause of the damage?
    Indeed, the outcome of the litigation that is being pursued on this 
question is not the ``slam dunk'' that the insurance industry says it 
is. Some courts have found that where wind and flooding both cause 
damage, as long as the wind damage is a ``proximate'' or ``efficient'' 
cause of the damage, insurers cannot dodge paying on a claim.

 After Hurricane Camille, this issue was litigated in the 
    Mississippi State courts. The State's highest court confirmed that 
    it was essentially up to a jury to decide whether wind was a 
    proximate cause of the damage and to appropriately apportioned the 
    damage: ``[i]t is sufficient to show that wind was the proximate or 
    efficient cause of the loss or damage notwithstanding other factors 
    [that] contributed to the loss.'' \6\ In that case, the policy 
    read: ``This coverage does not insure against loss . . . caused by, 
    resulting from, contributed to or aggravated by . . . flood, 
    surface waters, tidal water, or tidal wave, overflow of streams or 
    other bodies of water, or spray from any of the foregoing, all 
    whether driven by wind or not.'' \7\
---------------------------------------------------------------------------
    \6\ Grace v. Littitz Mutual Ins. Co., 257 So.2d 217, 224 (Sup. Ct. 
Miss. 1972) (citing Lititz Mut. Ins. Co. v. Boatner, 254 So.2d 765 
(Miss. 1971); Kemp v. American Universal Ins. Co., 391 F.2d 533 (5th 
Cir. 1968)).
    \7\ Id. at 219.
---------------------------------------------------------------------------
 Mississippi is not the only State where this approach is 
    taken. Other courts have also found that in cases of total damage 
    caused by a possible combination of a covered peril (wind) and 
    other excluded perils (flood), where the proximate cause of damage 
    is a covered peril, insurers must pay the claim.\8\ As the Ninth 
    Circuit has explained, ``in determining whether a loss is within an 
    exception in a policy, where there is a concurrence of different 
    causes, the efficient cause--the one that sets the others in 
    motion--is the cause to which the loss is to be attributed, though 
    the other causes may follow it, and operate more immediately in 
    producing the disaster.'' \9\
---------------------------------------------------------------------------
    \8\ Murray v. State Farm Fire and Casualty Co., 509 S. E.2d 1, 11 
(W.Va. 1998) (When a loss is caused by a combination of covered and 
specifically excluded risks, the loss is covered if the covered risk 
was the proximate cause of the loss.); Bartholomew v. Cameron Country 
Mut. Ins. Co., 882 S. W.2d 173 (Mo. Ct. App. W.D. 1994).
    \9\ Berry v. Commercial Union Ins. Co., 87 F.3d 387 (9th Cir. 1996) 
(quoting Sabella v. Wisler, 377 P.2d at 895).

    Courts have repeatedly held that disputes over ambiguous contract 
language, such as in a homeowner's policy, are to be resolved in the 
---------------------------------------------------------------------------
policyholder's favor.

 It has been settled law for over 100 years that where language 
    in insurance policies is ambiguous, questions will be resolved in 
    favor of the policyholder.\10\
---------------------------------------------------------------------------
    \10\ McMaster v. New York Life Ins. Co., 22 S. Ct. 10 (2001).
---------------------------------------------------------------------------
 According to a West Virginia court, ``[a] provision in an 
    insurance policy may be deemed to be ambiguous if courts in other 
    jurisdictions have interpreted the provision in different ways. 
    This rule is based on the understanding that one cannot expect a 
    mere layman to understand the meaning of a clause respecting the 
    meaning of which fine judicial minds are at variance.'' \11\
---------------------------------------------------------------------------
    \11\ Murray, at FN5.

    The attitude of the insurance industry in the aftermath of 
Hurricane Katrina, as they force policyholders to fight to get their 
claims paid, is consistent with the industry's efforts to limit claims 
---------------------------------------------------------------------------
payouts in other hurricane situations.

 In Florida, in the aftermath of Hurricane Andrew, a court 
    ordered insurance companies to pay their full claims, relying on an 
    explicit statutory provision called a ``value added'' law, which 
    stated that a policy that covers one peril, even if it expressly 
    excludes another possible contributing peril, must be paid in 
    full.\12\ The insurance industry's response was to lobby the 
    legislature to change the law, which occurred.\13\
---------------------------------------------------------------------------
    \12\ Mierzwa v. Florida Windstorm Underwriting Assoc., 877 So.2d 
774 (Fla. Dist. Ct. App. 2004).
    \13\ http://www.independentagent.com/VU/NonMember/DisasterFAQs.htm; 
http://www.insur ancenewsnet.com/print.asp?a=top-pc&lnid=5390280.

    The importance of this legal dispute to the flood insurance program 
is obvious. To the extent that insurers underpay wind when allocating 
damage between their homeowners' policy and the NFIP policy, taxpayers 
will suffer. It is also true that the more lax the Federal Government 
is in demanding that the allocation be fair to taxpayers, the more 
likely it is that persons without flood insurance will receive unfair 
or no compensation under their wind policies. Take the situation of two 
damaged homes next to each other, one with flood coverage and one 
without. If the Federal Government is vigilant regarding the home with 
flood coverage and the resulting allocation is 50/50 versus the insurer 
suggestion of 25 percent wind/75 percent flood, the insurer will be 
hard-pressed to assess the similarly damaged home next door at 25 
percent wind damage.
    For the benefit of taxpayers' and those with no flood insurance, it 
is essential that the Government assure a fair and proper allocation of 
the wind/flood damage by the WYO insurance companies who have a serious 
conflict of interest. CFA urges this Committee to insure that the GAO 
audits these allocations starting right now, so that any tendency of 
the insurers to diminish their wind losses for their own benefit is 
stopped quickly.
Conclusion
    It is vital to the Nation that the NFIP work efficiently and 
comprehensively to protect as many Americans as possible against floods 
that occur in the future. There are serious questions about how the 
program is working today that cry out for study and resolution. Today's 
hearing is an important first step in accomplishing this important 
task. I will be happy to respond to questions at the appropriate time.



                PREPARED STATEMENT OF DOUGLAS J. ELLIOTT
          President, Center On Federal Financial Institutions
                            October 18, 2005

    Good morning. Thank you for inviting me here today. I commend 
Chairman Shelby, Ranking Member Sarbanes, and the Committee Members for 
moving quickly to start a thorough reexamination of the flood insurance 
program.
    I am the President of the Center On Federal Financial Institutions 
or COFFI for short. This is the first time in our young history that 
anyone from COFFI has appeared before your Committee, so let me briefly 
explain who we are. We are a nonpartisan and nonprofit think tank 
focused on the Federal Government's massive 
activities as lender and insurer. Our role is educational. Federal 
financial institutions are complex and we want to help policymakers 
fully understand their options without imposing our own views. In that 
vein, The New York Times referred to our work as ``without a hint of 
dogma or advocacy.''
    The devastation wrought by Katrina underlined three major problems 
at the flood insurance program, viewed as a Federal financial 
institution:

 We cannot persuade most of the target market to buy the 
    policies.
 The insurer's financial resources are insufficient for 
    expected claims.
 Budget accounting for the program is structurally misleading.

    The greatest damage stems from the low participation rates, since 
each victim of Katrina who failed to insure their home faces a major 
financial shock on top of their other traumas. Precise figures for 
participation are difficult to come by, which is a problem in itself, 
but it appears that fewer than 30 percent of vulnerable homeowners were 
insured nationwide.
    Floods can be more frequent than fires and equally damaging, so why 
don't more homeowners carry flood insurance, as they do fire insurance? 
The full answers are complex and are discussed in great detail in an 
attachment to our written statement, but the simple version is this.
    First, there are major economic disincentives to buying flood 
insurance. Uninsured flood victims receive substantial benefits 
unavailable to insured homeowners. The National Flood Insurance Program 
(NFIP) indicates that every three dollars of flood insurance claims 
payments reduce the value of Federal disaster aid by one dollar. 
Flipping this around, insurance purchasers forego aid worth one-third 
of their entire claims payment. They may also forego State, local, and 
charitable aid. On top of this, flood losses are generally tax-
deductible, while flood insurance premiums are not. Thus, a purely 
rational homeowner has many reasons not to buy the insurance.
    Second, considerable research suggests that most people have a 
strong irrational bias against buying insurance covering infrequent 
catastrophe losses. It feels like throwing away money to them. This 
perception can be countered to some extent by how the insurance is 
framed, but the bias is difficult to eliminate completely.
    Third, our existing mandatory provisions are leaky. The main one, 
which uses mortgage lending as the trigger, suffers from three 
disadvantages:

 One study found that 34 percent of coastal dwellers vulnerable 
    to flooding had no mortgage.
 Only federally regulated mortgage lenders and GSE's are 
    covered.
 It appears that some homeowners cancel their flood coverage 
    without lenders taking action.

    Another mandatory provision, that aid recipients must carry flood 
insurance in the future, is relevant to only a portion of future claims 
and suffers from leakage problems as well.
    So what can be done? Efforts to increase voluntary purchases are 
worth considering, but, unfortunately, it will almost certainly take 
tougher mandatory provisions to significantly boost participation, 
given the economic disincentives and pyscho-
logical biases. This is not just my view. COFFI recently held a policy 
forum on flood insurance and there was a consensus that stronger 
mandatory mechanisms are the only way to sharply increase 
participation. I would add that this is even more likely to be 
necessary if premium rates are boosted to deal with the financial 
implications of Katrina.
    Enforcement of current provisions could be tightened by stricter 
review of whether mortgage borrowers maintain their flood insurance and 
possibly by expanding the mandate to non-federally regulated lenders. 
However, even these actions would still leave many uncovered--at a 
minimum the 34 percent or so who do not hold mortgages. A more radical 
solution would be to require that homeowners' policies in flood-prone 
areas include flood insurance, with the Federal program continuing to 
take the actual financial risk. Issues of Federal regulation could 
perhaps be finessed by coordination with the National Association of 
Insurance Commissioners.
    Despite the many uninsured, the flood insurance program will lose 
well over $10 billion on Katrina. This highlights a fundamental 
structural problem. The flood insurance program charges roughly one-
third less in premiums than its actuaries believe would be necessary to 
cover long-term expected costs. This is because structures which 
existed before a community signed up for the program receive a subsidy 
of roughly $1.3 billion a year while newer structures pay approximately 
their actuarial cost. That represents a subsidy of just under 40 
percent for the program as a whole.
    This subsidy is not necessarily wrong. It is for you to decide 
whether taxpayers from across the Nation should subsidize those living 
in flood-prone areas. There are reasonable arguments either way.
    What IS wrong is the lack of transparency. There is nothing in the 
budget numbers to show the subsidy. Nor does the National Flood 
Insurance Program make such a number readily available. They have an 
excellent and well-written Actuarial Review on their website that 
explains the subsidy mechanism, but stops short of providing an 
aggregate figure. The last public number I found was in a GAO report of 
a few years ago which gave a figure of $500 million a year. I had to do 
some simple math to arrive at the updated $1.3 billion figure.
    The NFIP Actuarial Review of November 2004 states that ``were the 
catastrophic contingency contemplated in establishing all rate levels, 
the Pre-FIRM subsidized portion of the business would have to pay about 
two and a half times the current premium, and the overall target level 
for premiums would have to increase on the order of 50 percent to 75 
percent.'' Those percentages correspond to $1.0 to $1.5 billion of 
extra premiums, based on 2004 levels. Our calculations from more 
detailed numbers provided in the same review put the figure at $1.3 
billion.
    Ideally, the taxpayer subsidy would be shown on-budget, but it is 
important either way that the figure be clear and readily available. 
There is currently a misconception among some that the flood insurance 
program is self-supporting, since it has been able to pay back its 
loans from the Treasury Department over the last 20 years. This is 
true, but misleading. The flood insurance program is structured in a 
way that should be expected to require taxpayer money over time. It is 
impossible to give over a quarter of policyholders, the riskiest ones 
at that, a 60 percent discount from actuarially fair rates without 
either overcharging the other policyholders an equal amount or 
eventually receiving government appropriations.
    There is a danger in underpricing insurance and not admitting it, 
as we are seeing now with another program on which COFFI has done 
considerable work, the Pension Benefit Guaranty Corporation. That 
program has never charged premiums adequate to its risks, but still 
reported contributions to Federal deficit reduction because of perverse 
budget rules. Everyone was happy with an untenable situation until PBGC 
started losing $10 billion a year on a GAAP accounting basis, losses 
that will eventually work their way through to the Federal budget.
    Finally, we must seriously consider the possibility that Katrina's 
losses were not AS improbable as the program's models would have 
suggested. It may be that all policies are currently subsidized, due to 
unrealistically optimistic assumptions about future losses from the 
most catastrophic hurricanes.
    Thank you. The remainder of my written testimony consists of a more 
thorough 17-page review of many of these issues, which we published a 
few weeks ago. We also have other material available at www.coffi.org. 
This will shortly include both a transcript and a summary of the flood 
insurance policy forum that we recently held.

                               ----------

          PREPARED STATEMENT OF ROBERT P. HARTWIG, Ph.D., CPCU
                Senior Vice President & Chief Economist
             Insurance Information Institute, New York, NY
                            October 18, 2005

    Thank you, Mr. Chairman, and Members of the Committee, my name is 
Robert Hartwig and I am Chief Economist for the Insurance Information 
Institute, a property/casualty insurance trade association. I have been 
asked to testify before the Committee regarding the future of the 
National Flood Insurance Program (NFIP). Specifically, I have been 
asked to offer observations from an insurance industry perspective on 
how the NFIP can better manage the challenges it faces, employing 
strategies, techniques, and organizational behaviors commonly found in 
the private insurance sector.
Background
    Hurricane Katrina caused death, destruction, and economic 
dislocation on a scale not seen from a natural disaster in this country 
since the 1920's. Indeed, from 2000 through the mid-1960's, hurricanes 
killed more than 15,000 people--most by drowning--and entire 
communities were washed away. Even today, flood remains the second 
leading cause of death from natural disasters, with recent floods from 
New 
Orleans to New England providing us with grim reminders. In 1968, in 
response to the rising cost of taxpayer-funded disaster relief for 
flood victims and the increasing amount of damage caused by floods, 
Congress enacted the National Flood Insurance Act, creating the 
National Flood Insurance Program (NFIP). This hearing today harkens 
back to that era, a time when the questions about what can and should 
be done about reducing flood risk were at the fore.
    Much has been accomplished over the 37 years that the NFIP has been 
in existence and, in many respects, the NFIP operates like a private 
insurance company. The Federal flood insurance program combines the 
concepts of insurance protection--which allows people and businesses to 
efficiently transfer risk in exchange for a premium--with hazard 
mitigation. In exchange for making federally backed flood insurance 
available for residential and commercial properties, communities must 
agree to adopt and enforce floodplain management ordinances to reduce 
future flood damage.
    While the approach appears reasonable, the fact remains that in the 
wake of Hurricanes Katrina and Rita, the program must now borrow an 
estimated $10 billion to $30 billion from the U.S. Treasury to meet its 
fiscal year 2005 obligations, including $2 billion already authorized 
by Congress last month, despite the fact that the overwhelming majority 
of property owners affected by the storms and who were vulnerable to 
flood losses had not purchased flood coverage. This suggests several 
serious structural and incentive-based problems not only within the 
NFIP itself, but also among other stakeholders, including lending 
institutions, State and local governments and at-risk property owners. 
Fortunately, there are solutions for most of these problems, which fall 
into two broad categories:

 the need to reflect the true cost of insuring against the 
    peril of flood by adopting a policy of charging actuarially sound 
    rates, thereby reducing the risk to taxpayers, and;
 an urgent need to dramatically increase participation rates in 
    the Federal flood insurance program in order to avoid a repeat of 
    future human and economic tragedies on the scale of Katrina or 
    worse.
Pricing: Moving Toward Actuarially Sound Rates
    As this year's significant shortfall in the NFIP's claims paying 
resources illustrates, premiums collected are insufficient to cover 
losses incurred after extreme events. This year's $10 to $30 billion in 
losses are some 5 to 15 times more than the $2 billion the program 
collected in premiums in 2004. Were it a private insurer the NFIP would 
be bankrupt. Private insurers are expected to pay up to $60 billion on 
1.6 million claims from Hurricane Katrina alone, entirely from private 
resources. While the NFIP has made strides in improving the actuarial 
soundness of rates, and in a ``normal'' year the program does not 
operate with a deficit, in the world of insurance there is no such 
thing as ``normal,'' only an average of extremes. Adopting a formal 
policy of actuarially sound pricing for all flood policies would create 
a more fair and equitable system for all plan participants that would 
minimize subsidies, discourage unwise development and greatly reduce 
the risk to taxpayers. Fortunately, data and technology exist today 
that would allow the NFIP to move swiftly in this direction. Available 
historical data on flooding is extensive, flood maps (many of which are 
decades old) could be updated to improve accuracy in underwriting and 
risk assessment and state-of-the-art catastrophe models could be 
developed to help estimate risk and cost, as is currently done for 
hurricane and earthquake risk.
    Actuarially sound rates, by definition, must fully account for the 
risk being underwritten, including the possibility of mega-catastrophes 
such as Hurricane Katrina. To that end, all private insurers accumulate 
substantial pools of claims paying capital to accommodate the 
possibility, no matter how remote, of large-scale losses. Consequently, 
the NFIP should charge premiums that, in addition to being sufficient 
to pay annual losses in most years, generate a surplus that allows the 
program to build claims-paying capacity over time. That stock of claims 
paying capital must be placed in a ``lockbox,'' untouchable for any 
other purpose.
    Finally, there are occasions when the actuarially sound decision is 
to refuse to underwrite coverage at any price--in other words to just 
say no. There are hundreds of thousands of coastal structures today 
that would have never been built were it not for the implicit 
guarantees of a myriad of government-run insurance enterprises 
including the NFIP. Today, plans in nearly 30 States plus the NFIP 
issue approximately 6.6 million policies across the United States with 
a face value of some $1.2 trillion. Many operate with deficits. Among 
27 State-run high-risk property insurers in 2003 (latest year for which 
data are available), 15 posted an operating loss, a year with 
relatively light catastrophe activity. These deficits are paid off 
through assessments levied on virtually every property owner in the 
State, including those who live hundreds of miles from the coast.
Increasing Participation in the National Flood Insurance Program
    Approximately 275,000 homes were destroyed or damaged beyond 
economic repair by Hurricane Katrina, 10 times the number destroyed by 
Hurricane Andrew or the four storms that hit Florida last year (Exhibit 
1). Hundreds of thousands of others were damaged. Despite Katrina's 
ferocious winds, water was the principle cause of economic dislocation. 
According to AIR Worldwide, a disaster modeling firm, flooding, 
including storm surge, from Katrina caused $44 billion in damage to 
structures, most of it uninsured (Exhibit 2). Tragically, however, 
fewer than 10 percent of property owners in some coastal counties had 
purchased flood coverage (Exhibit 3). This figure is astonishingly low, 
given the obvious risk in low-lying coastal communities, the fact that 
some of these same areas had been devastated by hurricanes in the past 
and the four warning shots Mother Nature fired over the bow of the Gulf 
States in 2004, not to mention the fact that the region affected by 
Katrina has a long and miserable history of river flooding (Exhibit 4). 
The NFIP also for many years has sought to increase awareness of flood 
risk through a variety of highly visible marketing campaigns.
    So the question remains, why don't people buy flood coverage?

 Denial--the belief that ``it won't happen to me'' is 
    ubiquitous and rooted in a fundamental misperception of risk. 
    People translate the risk of living in a 1-in-100 year flood plain 
    as a mere 1 percent chance of experiencing a flood over the course 
    of an entire century, for example. In reality, a property owner in 
    a 1-in-100 year flood plain has a 26 percent chance of being 
    flooded during the course of a 30-year mortgage;
 Cost--when given the option of buying coverage at a relatively 
    modest $438 per year on average--and potentially much less in low-
    risk areas (Exhibit 5), most people will decline, even though the 
    cost is small relative to the value of the home and turning down 
    the coverage amounts to playing Russian roulette with the typical 
    family's most valuable asset;
 Government Aid--why buy insurance if the Government is going 
    to bail me out anyway? There is a widespread belief that large 
    amounts of Government aid will be made available to disaster 
    victims after an event and so there is little point in buying flood 
    coverage if largely the same benefit is available for free (Exhibit 
    6). This perception would only be reinforced if property owners are 
    allowed to buy into the NFIP retroactively;
 Legal Action--attorneys general and trial lawyers in some 
    Katrina-impacted States are suing private insurance companies to 
    force them to pay flood losses, Mississippi in particular. Though 
    it is a well-known fact that flood damage has been excluded from 
    all homeowners insurance policies for decades (Exhibit 7) and that 
    private insurers have never received a dime in premiums to cover 
    flood-related losses, these suits spread false hope among desperate 
    people that clever lawyering can produce flood coverage where none, 
    in fact, exists. In the remote likelihood that such suits were to 
    be successful, an immediate national crisis in the availability and 
    affordability of homeowners insurance would ensue and the NFIP's 
    very reason for existence would be threatened (Exhibit 8). Why buy 
    flood coverage from the NFIP when you can just sue your homeowners 
    insurer and get it for free?

    For the NFIP to be truly effective, it must overcome these 
obstacles and dramatically increase the proportion of at-risk 
properties that are insured and stay insured through the program. Tens 
of millions of homes and businesses are vulnerable to at least modest 
flood risk, but in 2004 just 4.7 million property owners purchased 
flood coverage through the NFIP. Increased marketing and educational 
efforts are likely to be of only marginal value. Even mega-disasters 
such as Katrina create only a temporary surge in demand and many of the 
recently purchased policies will soon be allowed to lapse. In fact, 
approximately 10 to 15 percent of NFIP policies lapse annually. 
Moreover, the reality is that government aid will flow after major 
disasters, possibly in ever larger amounts. Therefore, the ability to 
significantly increase flood insurance penetration rates and to sustain 
them is largely beyond the NFIP's capability, given the economic 
incentives at-risk property owners have to not buy insurance.
    The most efficient way to substantially increase the NFIP's 
penetration rate among property owners is to expand mandatory 
participation through a lender-based system that ensures that flood 
coverage is in-force at all times for all mortgaged properties within 
100-year flood plains and beyond. Lenders require the 
purchase of standard homeowners insurance with the result that 96 
percent of homeowners carry the coverage. If a mortgage holder fails to 
buy insurance, the lender is legally authorized to secure the coverage 
at the property owner's expense. Such a system, when combined with 
actuarially sound rates and an accumulation of reserves in an NFIP 
``lockbox'' would effectively eliminate the risk to the U.S. taxpayer 
for the vast majority of disaster scenarios.
Implications of Inaction
    The value of privately insured coastal structures in hurricane 
exposed areas today exceeds $7.2 trillion or about 60 percent of GDP 
(Exhibit 9). But as the severe flooding in the Northeast over the past 
week illustrates, flood poses a risk virtually everywhere. The 
consequences of inaction are grave. Katrinas of the future could be far 
more devastating and occur with greater frequency, jeopardizing 
hundreds of thousands of jobs, shattering families and communities and 
saddling the U.S. taxpayer with a burden it can ill-afford, given 
current record Federal deficits.
    America's clear national interest lies in making sure that the 
National Flood Insurance Program remains financially secure and 
accessible, while sending market-based price and underwriting signals 
based on sound actuarial principles concerning risk.
    Thank you for the opportunity to appear at today's hearing. I would 
be happy to answer any questions you may have.



               PREPARED STATEMENT OF CHAD BERGINNIS, CFM
                  Immediate Past Chair, State of Ohio
                            October 18, 2005

Introduction
    The Association of State Floodplain Managers, Inc. (ASFPM), and its 
21 Chapters represent over 8,000 State and local officials and other 
professionals who are engaged in all aspects of floodplain management 
and hazard mitigation, including management, mapping, engineering, 
planning, community development, hydrology, forecasting, emergency 
response, water resources, and insurance. Many of our members work with 
communities impacted by hurricanes Katrina and Rita or work with 
organizations that are assisting those communities in rebuilding. All 
ASFPM members 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) and many others are involved in the 
administration of and participation in FEMA's mitigation programs. For 
more information on the Association, please visit http://
www.floods.org.
    The recent tragedies on most of the Gulf Coast, in Florida, and the 
emerging flood damage in the Northeast are reminders to the Nation that 
we are susceptible to hazards--especially flooding--and that we must 
have programs, policies, and institutions that can adequately handle 
these events, efficiently use taxpayer money, and build a more 
sustainable future. Nothing less than our Nation's prosperity and 
viability are at stake. The Congress and this Committee will be at the 
epicenter of this discussion, with an opportunity to make policy 
changes that can have importance and relevance far into the future. We 
would also like to recognize the tireless work and effort that 
thousands of FEMA employees have dedicated the current and past 
disasters. At this time, while we have critical debate and discussion 
on important policy issues, many FEMA staff are away from families and 
on extended deployment carrying out the important response, recovery, 
and mitigation programs of our Nation. While we continue to express our 
concern with FEMA being part of the Department of Homeland Security, 
the staff of FEMA is doing a tremendous job with the resources they 
have available.
    Thank you for inviting us to offer our views on the solvency of the 
NFIP. The following testimony addresses:

 A Reflection on the Early History of the NFIP;
 The Impact on the NFIP from Expected Claim Payments from 
    Hurricanes Katrina and Rita;
 The Desirability of Moving all Policy Premiums to Actuarially 
    Sound Rates;
 Suggestions for Reducing Future Flood Damage and Flood 
    Insurance Claims through Increased Mitigation;
 Recommendations for Increasing Voluntary Participation in the 
    NFIP & Improving the Mandatory Purchase Requirements;
 Measures to Improve Effectiveness of Current NFIP Approaches;
 The Impact of FEMA's Reorganization on the NFIP.
A Reflection on the Early History of the NFIP
    On August 1, 1968, Congress established the NFIP in enacting the 
Housing and Urban Development Act of 1968. According to Frank Thomas, a 
former NFIP official, the program cane into existence as a result of 
political compromises. Some urban interests wanted relief from property 
losses caused by recent urban riots in a number of major cities. Some 
rural interests wanted flood insurance to indemnify property owners 
from their losses. Without including urban property protection and 
reinsurance provisions in the act, the NFIP would not have been 
established at that time. In a retrospective view, the NFIP grew into a 
major national program and other provisions of the act never gained 
importance. Thomas characterized the NFIP as an accident that occurred 
from political tradeoffs that survives by every flood disaster.
    The Act created the Federal Insurance Administration (FIA) within 
HUD to oversee the program. The program was established as a ``quid-
pro-quo'' program. Through it, relief from the impacts of flood damages 
in the form of federally backed flood insurance became available to 
citizens in participating communities contingent on flood loss 
reduction measures embodied in State and local floodplain management 
regulations. Occupants of existing structures in floodprone areas would 
benefit from subsidized flood insurance premiums, but occupants of new 
structures would have to pay actuarially based premiums. This was based 
on the concept that those already living in the floodplain did not 
understand the flood risk involved in their locational decisions, but 
future occupants would through information provided by the NFIP--via 
flood studies and maps. The original program would be voluntary in 
terms of community participation and the purchase of flood insurance.
    Congress tasked the FIA to carry out studies to determine local 
flood hazard areas within which flood insurance provisions and 
appropriate land use regulations would be applied. The FIA adopted the 
1 percent annual chance as a minimum national standard for floodplain 
management, based upon a recommendation of a special review committee 
of national experts that met at the University of Chicago in December 
1968.
    By 1973, the NFIP had more than 3,000 communities participating. 
Despite this record, it became apparent that a truly ``national'' flood 
insurance program would not be achieved on a strictly volunteer basis, 
whereby localities could choose to join or not join and individuals 
could choose or not choose to purchase flood insurance coverage. Few 
incentives or requirements existed. Some form of penalty had to be 
applied to nonparticipating communities and their citizens to get 
participation. After a series of flood disasters struck the Nation in 
1972, Congress again amended the National Flood Insurance Act of 1968 
in 1973 to strengthen incentives for local participation. The Flood 
Disaster Protection Act of 1973 reaffirmed the use of the 1 percent 
annual chance flood and contained two major provisions. First, it 
prohibited Federal agencies from providing technical or financial 
assistance for acquisition or construction purposes in the designated 
floodplains of a community unless the community participated in the 
NFIP. This provision extended to financial institutions regulated or 
insured by the Federal Government, thereby covering virtually all types 
of financial assistance. Second, if a community participated, Federal 
agencies and federally regulated or insured lenders required flood 
insurance as a condition of grants and loans--giving birth to the 
``mandatory purchase'' requirement. The 1973 Act greatly accelerated 
the number of communities participating in the NFIP and the number of 
flood insurance policies purchased. An chronology of major events 
affecting the NFIP can be found as part of the documents that are part 
of the nearly completed comprehensive evaluation of the NFIP that is 
being undertaken by the American Institutes for Research (see http://
www.fema.gov/nfip/nfipeval.shtm.)
    As history would reveal, the NFIP would ultimately have a profound 
impact in two important areas: Accelerating the identification of 
floodprone areas on maps and in providing incentives for States and 
communities to enact measures to regulate development in these 
identified areas.
The Impact on the NFIP from Expected Claim Payments from Hurricanes
Katrina and Rita
    The anticipated claims do not indicate a failure of the NFIP. Since 
the late 1980's the NFIP has been self-supporting, which largely means 
it covers all expenses and claim payments out of income from premiums 
and fees. Thus, the NFIP has not received direct U.S. taxpayer support 
for nearly two decades. Although the NFIP has authority to borrow from 
the U.S. Treasury when demand for claim payments exceeds reserves, it 
has always repaid its borrowing with interest. Now we face a situation 
where estimates of claims are around $22 billion. This comes on the 
heels of a significant number of claims from the four hurricanes that 
affected Florida last year. It is highly unlikely and unrealistic to 
expect that this surge in claims can be repaid. Instead, we should look 
to future programmatic changes that will reduce the number and impact 
of claim payments. Future policy changes could include anything from 
reinforcing the existing framework (such as expanding the policy pool), 
to changes in program regulations, to exploring the replacement of the 
NFIP with another program altogether--such as an all hazard insurance 
mechanism with strong hazard recognition, hazard management, and hazard 
mitigation elements.
    Before we explore other policy options; however, we should reflect 
on some of the successes of the NFIP:

 Over 20,000 local jurisdictions recognize and manage their 
    flood hazards by adopting flood hazard maps and administering 
    floodplain management ordinances.
 Between 1978 and the end of 2004, the NFIP has paid $13.7 
    billion in losses that would otherwise have been paid by taxpayers 
    through disaster assistance or borne by home and business owners 
    themselves.
 The NFIP floodplain management standards have significantly 
    reduced the frequency and severity of flood damages to buildings 
    built in compliance with NFIP standards. Such structures experience 
    80 percent less damage than buildings that predate the standards.
 The NFIP floodplain management requirements are estimated to 
    save around $1.5 billion per year in avoided flood damages.

    It is also important to note that the first comprehensive 
evaluation of the NFIP is nearing completion. The multiyear study, 
conducted by the American Institutes of Research under a contract to 
FEMA, explores several significant issues such as the program's 
actuarial soundness, its developmental and environmental impacts, and 
compliance among participating communities with the NFIP's 
requirements. The evaluation's ultimate goal is to identify what works 
and what could be modified to improve the program's effectiveness. The 
evaluation's first study was released in March 2005 on the NFIP's 
mandatory purchase requirement. It is our understanding the study will 
be completed sometime within the next 12 months.
The Desirability of Moving All Policy Premiums to Actuarially Sound 
        Rates
    The 1968 Act separated the flood insurance ratemaking process into 
two distinct categories: Subsidized rates and actuarial rates. The 
rates for Pre-FIRM structures (constructed before a flood map was 
adopted) are subsidized. It is important to understand that the subsidy 
is actually a cross-subsidy within the program, and not a subsidy from 
the U.S. taxpayer. The rates for Post-FIRM structures (built after a 
flood map designated a property as within the floodplain) are 
actuarial. The original idea was that over the long-run the older 
buildings would reach the end of their design life and gradually be 
replaced by flood-resistant construction. In practice, this is taking 
longer than anticipated. Meanwhile, the expectation has grown that 
people who live in high-risk areas should pay based on their exposure 
to risk.

 The ASFPM believes that there are at least two ways to reduce 
    the PreFIRM subsidy: (1) Mitigate Pre-FIRM structures (discussed 
    in-depth in item D) by either eliminating the structure or turning 
    it into a Post-FIRM compliant structure and (2) reduce or eliminate 
    the Pre-FIRM subsidy for vacation homes, some rental properties, 
    and other nonprimary residences.

    Raising premiums to actuarial rates on all Pre-FIRM structures is 
not feasible and will likely be a hardship on many. According to FEMA's 
NFIP Program Description (2002):

        The long-term goal of the NFIP is to be actuarially sound, 
        including consideration for potential catastrophic loss years. 
        In the near-term, in establishing a fiscally sound program, the 
        NFIP overall is intended to generate premium at least 
        sufficient to cover expenses and losses relative to what is 
        called the ``historical average loss year.'' Since the NFIP's 
        underwriting experience does not include truly catastrophic 
        loss years, the historical average is less than the true long-
        term average.

    It can be argued that losses in the last 2 years have encroached 
into the realm of ``catastrophic.'' Those losses likely will drive a 
rate increase that will be difficult enough for home and business 
owners to absorb. However, moving some classes of structures toward 
actuarial rates may have merit. Some severe repetitive loss structures, 
based on the 2004 Flood Insurance Reform Act (2004 FIRA) will move 
toward actuarial rating but only after mitigation assistance is offered 
and if that mitigation offer is refused.
Suggestions for Reducing Future Flood Damage and Flood Insurance
Claims Through Increased Mitigation
    Mitigation is a set of techniques that can be used to reduce the 
risks to health and safety and reduce the future damage. Common 
mitigation techniques include acquiring/demolishing, elevating, 
relocating, retrofitting, or demolish/reconstruction of buildings. 
Since the 1988 Stafford Act amendments, mitigation has become one of 
the effective tools in reducing flood losses. Indeed ASFPM is eagerly 
anticipating a report on the benefits of mitigation that is currently 
under FEMA/DHS review and that is expected to show that mitigation 
techniques are very cost effective for the Federal Government, 
taxpayers, States, communities, and citizens.
    Implementation of the 2004 Flood Insurance Reform Act (2004 FIRA). 
The premise of reducing the pre-FIRM subsidy through increased 
mitigation was part of the motivation behind both the 2004 FIRA and its 
predecessor act, the National Flood 
Insurance Reform Act of 1994. It was recognized repetitively flooded 
properties (repetitive loss) are a constant drain on the resources of 
the NFIP and that reducing the number of such properties would result 
in fewer claims--thus strengthening the financial standing of the 
program. Repetitive loss properties comprise about 50,000 of the NFIP's 
4.5 million policies, yet represent nearly 30 percent of the dollars 
paid out. Of these properties, 83 percent are pre-FIRM. Nearly 10,000 
of these properties have experienced four or more losses, or two or 
more loses which combine to exceed the building's value as reported on 
the flood insurance policy. The 2004 FIRA augmented the NFIP-funded 
mitigation grant program and created a pilot program focused on the 
repetitive loss problem.
    Unfortunately, rules for implementation of the pilot program and 
the use of the demolition/rebuild option have not been written which is 
due, in a large part, to the extremely small number of staff in FEMA's 
mitigation program. Although 1 year of the 5-year program was lost 
without appropriations, the fiscal year 2006 Appropriations does 
include full funding for which we are appreciative for Congress' 
interest. Continued funding of these programs will have a positive 
impact on reducing the number of repetitive claims which will, in turn, 
enhance the financial stability of the NFIP.

 ASFPM urges the Committee to continue to support full funding 
    for the Flood Mitigation Assistance and Pilot Program and to urge 
    FEMA to expedite the writing of the rules for implementing the 
    pilot program, including the rules allowing for the demolition/
    rebuild option.

    Another important element of the 2004 Flood Insurance Reform Act 
included changes to the Increased Cost of Compliance (ICC) mitigation 
coverage that became part of the standard flood insurance policy after 
the National Flood Insurance Reform Act of 1994. However, as currently 
administered, it is being under-utilized. ASFPM supported the ICC 
reforms in the 2004 FIRA because of this under-utilization. 
Specifically:

 When paired with a mitigation grant for buyout, the ICC 
    payment for demolition must be expanded to include all elements of 
    demolition and lot restoration. Currently only certain costs 
    associated with the primary structure are eligible.
 FEMA must direct adjusters to handle ICC claims congruent with 
    the timeframe of mitigation grants to the maximum extent possible. 
    This will be even more important as a result of the 2004 Reform Act 
    which will increase the number of insured property owners 
    undertaking mitigation who will also be eligible for the ICC 
    payment.
 FEMA must not allow conflicts in determining which parts of 
    mitigation projects are eligible under ICC and which are eligible 
    under FEMA's grant programs. The two components must be made to 
    work together and the claims adjuster and the mitigation manager 
    must be in partnership focused on getting the funding invested in 
    cost-effective mitigation measures.

    The ICC claim payment can be used as the non-Federal match required 
by all of FEMA's grant programs and thus is an important component of 
making mitigation work. FEMA and its adjusters must make ICC work to 
get more buildings mitigated and to reduce future damage and claims.

 ASFPM suggests the Committee urge FEMA to make the necessary 
    administrative changes to ICC promptly. This is absolutely 
    necessary so that ICC can function effectively under all 
    circumstances and specifically as directed by the 2004 Reform Act.

    Support of FEMA's ongoing mitigation programs. Although not funded 
by the NFIP, FEMA's other ongoing mitigation programs authorized by the 
Robert T. Stafford Disaster Relief and Emergency Assistance Act (Hazard 
Mitigation Grant Program and Pre-Disaster Mitigation Program) are 
important tools in mitigating pre-FIRM structures. While these programs 
are not focused exclusively on repetitive loss structures, they 
nonetheless largely address pre-FIRM flood prone structures. Why? 
Because these are the structures that usually suffer the greatest flood 
damage and, as a result, tend to have the most favorable benefit/cost 
calculations. However, in the last 3 years, there has been an effort to 
eliminate or reduce the HMGP, which is funded only after disasters. 
Unfortunately, the formula used to determine the HMGP amounts has been 
reduced from 15 percent to 7.5 percent, a reduction that greatly 
hampers mitigation in many states.

 ASFPM urges the Committee to express support for the 
    restoration to the 15 percent basic formula for the HMGP.

    Requiring mitigation in the Gulf Coast to be tied to advisory base 
flood elevations. In the aftermath of Katrina and Rita, FEMA quickly 
provided resources to update base flood elevations (BFE's--also known 
as 1 percent or 100-year) in the Gulf Coast region. These studies 
indicate that BFE's will increase several feet throughout the region. 
This is because when current hurricanes are added to previous records, 
the statistical analysis shows the elevation of the base flood is 
higher (the previously calculated flood levels were done years ago, in 
some cases over 25 years). However, advisory documents produced by FEMA 
only encourage the use of these advisory elevations for mitigation, 
rather than require their use when obtaining rants for mitigation. 
Mitigation done without using the advisory elevations is not 
sustainable and will have a direct impact on flood insurance--creating 
a subsidized rate for these structures that are to be rebuilt with 
Federal mitigation funds, as they will then be grandfathered at lower 
flood insurance rates when new flood maps are adopted in the future. 
This is an unwise use of taxpayer funds, and will impact the long term 
actuarial soundness of the NFIP.

 ASFPM suggests that the Committee urge FEMA to make the 
    necessary changes to require that advisory base flood elevations be 
    used for all mitigation projects in the Gulf Coast region and in 
    future events.
Recommendations for Increasing Voluntary Participation in the
NFIP & Improving the Mandatory Purchase Requirements
    The mandatory purchase requirement of the NFIP has evolved through 
the years and is largely responsible for the number of flood insurance 
policies in-force today. The mandatory purchase requirement is 
implemented by federally regulated and federally insured mortgage 
lenders. The ASFPM believes that the purchase of flood insurance--
whether voluntarily or required by lenders--can be improved and 
expanded as outlined below. Not only will property owners have 
increased awareness of flood hazards but also greater financial 
protection in the event of a catastrophic flood. Although increasing 
the number of flood insurance policies is important to the actuarial 
soundness of the program, it is arguably as important to the financial 
health of each individual and family who has purchased a policy to 
protect against future financial ruin.
    Change the mandatory purchase requirement limits for property 
owners already in the 1 percent-annual chance floodplain. Although the 
current mandatory purchase requirement has had a positive effect, 
especially since passage of strengthening measures in 1994, there are 
still many issues and aspects of the process that make it less than 
effective. Current program regulations only require that a loan subject 
to the mandatory purchase requirement have flood insurance to cover the 
outstanding balance of the loan (protecting the lender's liability, not 
the owner's potential loss). Also, it is estimated that possibly up to 
40 percent of new mortgages are not subject to mandatory purchase 
because they originate from unregulated lenders. A recent AIR study 
indicates this number may be much higher for manufactured homes which 
generally are financed by dealers. Finally, the loophole which allows a 
property owner to fill a site then file for an amendment to the 
community's flood map to eliminate the requirement to purchase 
insurance consumes significant FEMA resources and promotes significant 
filling in floodpain areas which in turn increases flood elevations on 
others. The ASFPM specifically recommends:

 Require those subject to the mandatory purchase requirement to 
    insure to replacement value of the structure.
 Examine alternatives to require or encourage lenders not 
    currently subject to the mandatory purchase requirement, and 
    manufactured home dealers who make loans to require borrowers, to 
    require their borrowers to obtain flood insurance.
 Reinstate the Section 202(b) in the 1973 Flood Disaster 
    Protection Act that would prohibit regulated lenders from making, 
    increasing, renewing, extending, or purchasing loans for improved 
    real estate or manufactured homes in SFHA's in communities that do 
    not participate in the NFIP.
 Direct FEMA to amend its regulations to eliminate or modify 
    Letters of Map Revision based on Fill (LOMR-F) so that mandatory 
    purchase of insurance is required.
 Eliminate grandfathering of insurance premiums for structures 
    built to elevations on the old map once a preliminary or advisory 
    map is presented to the community. In case of Preliminary FIRMS, 
    communities sometimes stall adoption of the maps so that large 
    tracts of land can be developed based on old elevations or in the 
    absence of flood data. The result is all of these structures are 
    built to lower flood elevations, and pay lower insurance premiums, 
    and they continue to pay those lower, nonactuarial rates because 
    they are ``grandfathered.'' This grandfathering costs other 
    policyholders to subsidize their insurance.

    Change the mandatory purchase requirement to extend into areas 
beyond the 1 percent-annual chance floodplain. One of the lessons that 
can be learned from Katrina and other severe floods is that flooding is 
not confined to the areas shown on Flood Insurance Rate Map (FIRM) 
prepared by FEMA. Although the 1 percent floodplain was identified 
along the Gulf Coast, areas subject to lower probability flooding from 
major storm surges are not shown on the maps. In the case of Katrina, 
this resulted in a storm surge which extended miles inland destroying 
homes that had no flood insurance. Very few of these property owners 
had flood insurance because no flood hazard was identified for their 
property. The potential storm surge lines indicated a ``residual risk'' 
of flooding not shown on FEMA flood maps.
    Across this Nation thousands of miles of levees and thousands of 
high hazard dams exist, yet the persons living in the ``failure'' areas 
behind those levees and below those dams are usually unaware they are 
in an area that will be flooded when those structures fail or overtop. 
Interestingly, areas that are protected by levees--provided that they 
are built to meet certain criteria--can be removed from the FEMA-mapped 
floodplain, with the implication that the areas have little or no flood 
risk. Furthermore, areas downstream of hazardous dams, the failure of 
which could cause catastrophic damage, are not identified as potential 
flood hazards on FEMA's FIRM's either. These areas have some 
commonalities--they are at risk from flooding, although the probability 
of such an event is much lower than a 1 percent chance. As we see in 
every dam break or levee failure, when such an event occurs 
catastrophic damage results. The ASFPM has long advocated the concept 
of mandatory ``residual risk'' flood insurance requirements for areas 
behind levees and floodwalls and below dams. The cost of such a policy 
would be commensurate with the lower risk of flooding, yet the property 
owner, states, communities, and the U.S. taxpayer won't be faced with 
bearing the costs of a catastrophic failure. The NFIP should map and 
require flood insurance in similar residual risk areas that are prone 
to storm surge from major hurricanes or in dam/levee failure zones.

 ASFPM urges the Committee to require that residual/
    catastrophic risk areas be identified and mapped on FEMA FIRM's and 
    that the purchase of ``residual risk'' flood insurance be 
    mandatory.

    The National Flood Insurance Act as amended does not, in statute, 
identify a specification for any particular frequency of flood where 
flood insurance is required; rather it focuses on the need for flood 
insurance to be available. Such a policy change would support the 
intent of the Act.
Measures to Improve Effectiveness of Current NFIP Approaches
    As stated earlier, the NFIP is a quid pro quo program. It relies on 
flood maps to identify flood hazard areas, and the adoption/enforcement 
of community development and land use standards to ensure new 
construction is flood resistant. In 
exchange for regulating flood hazard areas, flood insurance is 
available in that community.
    In the wake of Katrina/Rita and other major flood events, it is 
logical to ask whether the regulatory basis, the 1 percent chance 
flood, is adequate. Recently, the ASFPM Foundation held the 2004 
Gilbert F. White National Flood Policy Forum where this very topic was 
debated by 75 of the Nation's experts. The Forum concluded that the 1 
percent chance flood standard, although in hindsight perhaps not a 
perfect choice, has nevertheless stood the test of many decades of use 
in a varied and changing nation. It was noted that there are areas in 
which specific scientific and technical knowledge are still lacking, 
and filling those gaps could help improve implementation.
    Forum participants also observed that the Nation has changed and 
grown rapidly and that in some ways it has not been possible for the 
policies and practices associated with the 1 percent standard to keep 
pace. The Forum noted positive results, some apparent shortcomings in 
the standard and its use, and some broad approaches and specific 
actions that could be taken to help address deficiencies. Many of the 
Forum recommendations converge with ASFPM policy positions on improving 
the effectiveness of the current NFIP approaches.
    First, it is important that we bring the 1 percent standard 
approach up to the 1 percent standard. In particular, this means we 
need to have an accurate portrayal of the 1 percent floodplain 
nationwide. There are gray areas of uncertainty 
surrounding the calculations and the mapped floodprone zone resulting 
from inadequate data, lack of consideration of changing and future 
conditions within watersheds, and oversimplified assumptions. 
Currently, FEMA is undertaking the Map Modernization program. The 
original vision of the program was to update the Nation's inventory of 
flood maps in terms of areas that still need to be mapped (where the 1 
percent floodplain exists but is not yet identified), updating areas 
already mapped (1 percent flood may be higher due to watershed 
development), and updating the basic quality of the map so a floodplain 
does not appear to go 40 feet up a hillside. Additionally, it makes 
sense to convert all the maps into a Geographic Information System-
based format to make future updates easier and create a seamless 
national flood layer. However, under current constraints, this vision 
will not be realized. The budget is too small, existing performance 
metrics of mapping so many communities in a period of time are driving 
the program in a way that results in less than adequate flood maps. It 
must be remembered that there is a legitimate national interest in 
mapping and as such, mapping partners at the State and local level, 
while contributing to enhance their basic inventory of flood maps, 
should not be viewed as a replacement for the national mapping program 
in terms of resources and overall responsibility. ASFPM continues to 
support partner contributions and delegation of mapping programs to 
qualified entities; however, just like EPA's Clean Water Act programs, 
the Federal Government should retain overall programmatic 
responsibility.

 The Committee is urged to support full funding for FEMA's Map 
    Modernization program. ASFPM recommends that current funding levels 
    be continued for a total of 10 to 15 years consistent with a total 
    program cost of $2-$3 billion. Furthermore ASFPM urges the 
    Committee to seek alignment of the performance metrics with such a 
    funding level and timeline.

    Another approach to improving the overall effectiveness of the NFIP 
is to enhance the existing 1 percent flood standard. Improvements could 
be made in the policies, regulations, and implementation of the 1 
percent annual chance standard to make it more accurate and effective 
in achieving its goals. The National Flood Insurance Act, as amended 
simply outlines some performance measures for criteria. The ASFPM 
recommends the following regulatory changes to the NFIP:

 Require floor elevations of new and substantially improved 
    buildings to be at least 1 foot above the Base Flood Elevation. 
    Freeboard is a factor of safety that accounts for some uncertainty 
    in our engineering methods, future upland development that 
    increases runoff, and increases that are anticipated due to 
    floodplain development. Additionally, construction with a freeboard 
    results in significantly lower flood insurance premiums on the 
    structure.
 Require critical facilities and structural protective works be 
    designed and constructed to achieve protection to the .2 percent 
    annual chance flood (500-year). Critical facilities are variously 
    defined but generally include hospitals, police and fire stations, 
    emergency operations centers, water/wastewater treatment 
    facilities, and the like. Structural protective works, especially 
    levees, provide a false sense of security. Those living behind 
    levees think they will never flood, but the reality is different. 
    When the levee fails or is overtopped (and they all will at some 
    point in time), the damages are catastrophic and the human 
    suffering is immense. No one has insurance, buildings are not 
    elevated or protected at all. To ameliorate these impacts, 
    structural works must provide protection to a higher level than 
    buildings constructed in a floodplain where a flood event larger 
    than the 1 percent may cause some flooding, but will not result in 
    catastrophic damage.
 Require new development to be constructed to advisory flood 
    elevations when produced by FEMA after a significant flood event 
    immediately after the advisory elevations are released if they are 
    higher than existing base flood elevations. In the Gulf Coast, it 
    is expected that base flood elevations will rise significantly 
    after the hurricanes of the last couple of decades. It would be 
    foolish if new elevations were generated, but due to the regulatory 
    process of FEMA that provides for public comment and input into the 
    new elevations, that reconstruction would occur, protecting to a 
    level far less than the new base flood elevation.
 Conduct a review of how well Federal agencies comply with 
    Executive Order 11988, Floodplain Management. Issued in 1977, the 
    purpose of this Order is to avoid Federal investment or assistance 
    in floodplains unless there is no practicable alternative. Federal 
    agencies that take actions that may impact floodplains (for 
    example, construct facilities or provide funds or technical 
    assistance to others to construct facilities) are required to have 
    guidance or regulations for implementation. FEMA does not have any 
    authority over how agencies implement E.O. 11988 and a critical 
    review has never been done.
The Impact of FEMA's Reorganization on the NFIP
    Prior to being reorganized in 2003, FEMA was already a lean 
organization. At the same time, it had built excellent relationships 
with States and communities; was able to quickly respond to disasters 
and decide on policy matters regarding its programs; had a true 
multihazard focus; and had developed a successful track record to 
accomplish its mission.
    The ASFPM was concerned from the beginning that the inclusion of 
FEMA into DHS would not bode well for the progress the Nation has made 
in reducing our risk to natural hazards. Since the reorganization, 
there has been mounting evidence that our concerns have been realized. 
FEMA has gone from a small, independent agency with direct access to 
the President in times of major natural disasters to one of the 
Directorates in a huge organization. We have gone from ``mitigation'' 
being the cornerstone of the Nation's disaster programs to having the 
word nearly excised from the emergency management lexicon. Even though 
assurances were made that legacy missions of organizations would 
continue, terrorism was and is the primary focus of DHS. State and 
local emergency managers, especially those in areas prone to recurring 
natural hazards, are lamenting the ``loss'' of FEMA and are 
increasingly vocal about the need to restore FEMA to its previous 
state.
    The following are specific concerns: Transferring FEMA funds to 
areas of DHS (the DHS Tax); use of policyholder funds for non-NFIP 
purposes; detailing FEMA staff out of that directorate; not filling 
vacant positions throughout FEMA, including senior leadership 
positions; and extensive delays in FEMA policy decisions and guidance 
due to an added layer of DHS bureaucracy. Over 200 FEMA staff positions 
are funded through the policy service fee income as part of flood 
insurance policy dollars, giving the Committee clear authority to focus 
on this issue.

 ASFPM urges the Committee to: (1) Monitor the FEMA/DHS issue 
    to ensure that policyholder funds are not spent inappropriately, 
    (2) that FEMA and NFIP priorities are carried out in order to 
    protect the solvency of the fund, and (3) to support the 
    restoration of a Presidentially appointed/Senate confirmed Flood 
    Insurance Administrator.

    In 2004, the ASFPM Board of Directors passed a resolution that FEMA 
should be taken out of DHS and reinstated as an independent agency.
Conclusion
    The ASFPM originally formed as a result of the need to work with 
HUD and then FEMA on flooding and flood mapping issues. Today, we once 
again stand at a crossroads--in the aftermath of a catastrophic flood 
disaster with an opportunity to refine our Nation's policy for managing 
flood hazards. 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 MARK J. BROWNE
     Gerald D. Stephens CPCU Chair, Risk Management and Insurance,
          School of Business, University of Wisconsin--Madison
                            October 18, 2005

    Thank you Chairman Shelby and Senator Sarbanes for giving me the 
opportunity to be here. My name is Mark Browne. I am the Gerald D. 
Stephens CPCU Chair in Risk Management and Insurance in the School of 
Business at the University of Wisconsin--Madison. Previously, I was on 
the faculty of The Terry College of Business at The University of 
Georgia. I received my doctorate in applied economics at the Wharton 
School of the University of Pennsylvania.
    The National Flood Insurance Program, which began in 1968, is close 
to 40 years old. I think it is reasonable to expect that at least 
several catastrophic floods will occur in the United States over the 
next 40 years. The impact of these events on the affected areas, the 
finances of the government, and the economic health of the country will 
depend on the risk control and risk financing methods put in place 
prior to their occurrence.
    When the National Flood Insurance Program was enacted it had three 
goals. One was to protect policyholders from the devastating financial 
consequences of flood damage. The second was to protect lenders from 
potential loan defaults resulting from flood losses. Third, and perhaps 
most important, was to protect the Federal revenue funds of the United 
States by collecting money from those exposed to flood loss prior to 
the occurrence of the loss.
    In addition, the program serves other important purposes. It 
facilitates real estate transactions and thus promotes homeownership, 
which is a societal goal. It benefits the insurance industry as it 
relieves public pressure to provide flood insurance coverage. Finally, 
it is worth noting that the National Flood Insurance Program is popular 
in some parts of the country, although not as popular in other parts.
    The flood peril presents an important threat to the property and 
well-being of a significant portion of the world's population. Like 
earthquake it has the potential to bring economic catastrophe and death 
to a broad geographic area. Also similar to earthquake, little coverage 
against the flood peril is available through the private insurance 
market. For example, homeowners insurance policies in Australia and the 
Netherlands exclude the flood peril, and in Germany flood coverage is 
seldom bought (Business Insurance, February 6, 1995). Although Graff 
(1999) reports that since 1991 roughly two-thirds of private insurers 
in Germany technically offer some coverage against flood, less than 10 
percent of private property in that country is insured against damage 
from this peril. In the United States, individuals and small businesses 
wishing to purchase insurance against the flood peril typically obtain 
it through the National Flood Insurance Program.
    The National Flood Insurance Program (NFIP) was established with 
the passage of the 1968 Housing and Urban Development Act (Vaughan, 
1997). The NFIP is divided into two phases, emergency and regular. 
Under the emergency phase, a flood hazard map is provided and residents 
are allowed to purchase limited amounts of insurance at subsidized 
rates. Once a flood insurance map has been drawn that divides the 
community into specific zones with the probability of flooding 
determined for each zone, and the community has agreed to adopt more 
stringent mitigation and land use measures, it is allowed to enter the 
regular phase of the program (Rejda, 1998, pp. 155-156). In the early 
years of the program many communities were covered under the 
``emergency plan.'' Under that plan limits for single-family dwellings 
were capped at $35,000 (building)/$10,000 (contents) compared with 
$185,000 (building)/$60,000 (contents) under the regular plan.\1\ By 
the early 1980's the number of communities that had qualified for the 
NFIP regular program had leveled off at about 18,000.
---------------------------------------------------------------------------
    \1\ The limits were raised in 1994 by the National Flood Insurance 
Reform Act.
---------------------------------------------------------------------------
    The rationale for a government sponsored flood insurance program 
arose from the apparent failure of the private insurance market. 
Possible reasons for the failure of the private market were offered in 
an American Insurance Association study that Anderson (1974) 
references, Studies of Floods and Flood Damage, 1952-1955. The study 
concludes that ``insurance against flood cannot successfully be 
written'' for several reasons. First, losses are a virtual certainty in 
some areas. Second, flood losses can be catastrophic in nature. Third, 
consumers are not willing to pay premiums that are sufficiently high to 
cover the loss exposure. Fourth, insurers are unable to pool insureds 
with varying degrees of exposure to flood losses because lower risks 
will not purchase coverage at a pooled rate.
    While not mentioned in the American Insurance Association study an 
additional factor contributing to market failure may be a charity 
hazard. Charity hazard is the tendency of an individual at risk not to 
procure insurance or other risk financing as a result of a reliance on 
expected charity from others such as friends, family, community, 
nonprofit organizations, or a government emergency program.
    The subsidized flood insurance available through the NFIP was 
intended to appeal to property owners who did not purchase insurance in 
the private market. The subsidized insurance is only made available in 
communities that adopt permanent land-use and control programs. 
Following adoption of these measures subsidized insurance is made 
available to residents but it is not extended to new construction. 
According to the U.S. General Accounting Office (GAO), in 1994 41 
percent of NFIP policies were subsidized. Pasterick (1998) reports that 
the premiums paid on this group of subsidized policies are estimated to 
be less than 40 percent of the full-risk premium needed to fund losses 
expected in the long-run.
    Loss statistics from two major storms inflicting flood damage in 
years following the creation of the NFIP indicate that significant 
amounts of property remain uninsured against the flood peril. 
Kunreuther (1984) reports that flood damage from Tropical Storm Agnes 
in June of 1972 exceeded $2 billion. Total damages paid by the NFIP 
were approximately $5 million. In 1993, the greatest single flood event 
in the United States occurred. Eleven million acres of farmland in the 
Midwest were inundated when the Mississippi River flooded, resulting in 
more than 50 deaths and causing $12 billion in total damages. Of the 
$12 billion in damages, less than $1 billion was covered by Federal 
flood insurance. Only about $600 million of the total was covered by 
private insurance, mostly through commercial difference-in-condition 
(DIC) policies.\2\ While it is not yet known what the dollar value of 
losses from Hurricane Katrina will be, it is likely that the expenses 
of the NFIP will account for no more than 10 percent of the total.
---------------------------------------------------------------------------
    \2\ A program which is similar in many respects to the NFIP was 
established by the Federal Crop Insurance Act of 1980. The intent of 
this act was to replace Federal disaster assistance payments to farmers 
with Federal crop insurance. However, in 1993 participation levels even 
with an average premium subsidy of 30 percent were only about 35 
percent of eligible acres (Barnett and Skees, 1995).
---------------------------------------------------------------------------
    Figure 1 shows by year both total flood damage and insured flood 
damage for the period 1983 through 1993. The figure indicates that the 
percentage of flood losses that are insured varies considerably from 
year to year and that for the decade as a whole a large portion of 
flood damage was uninsured. The variation in the level of insured flood 
losses per capita by year is presented in Figure 2.




    Various explanations have been offered for why the NFIP does not 
insure a larger portion of flood losses. Kunreuther (1984) provides 
several possible reasons for individuals' failure to purchase flood 
insurance. These include the perception by some that the flood peril is 
less threatening to their property than it actually is. Individuals may 
underestimate the probability that they will suffer flood damage as a 
result of having little or no past experience with the peril. Others 
are unaware that they can purchase flood insurance coverage. Another 
possible explanation is that consumers feel the price of flood 
insurance, even when subsidized, is still too expensive. Additionally, 
Lewis and Nickerson (1989) posit a model for expenditures to mitigate 
the effects of natural disasters when individuals are partially insured 
against financial loss by a public relief program (for example, 
disaster loans, grants, etc.). Their model suggests that 
underinvestment in loss mitigation and insurance, that is, reduced 
incentives to spend personal resources on loss mitigation and 
insurance, are a consequence of the limited liability provided by 
government programs of disaster relief.
    To understand the low rates of flood insurance purchase, it is 
important first to consider demand for insurance in general. Theory 
underpinning the demand for insurance has received considerable 
scholarly attention. An extensive review goes beyond the aims of this 
discussion, but a cursory review of some of the major work in this area 
is of value. As both individuals and businesses purchase flood 
insurance, we consider the factors motivating the purchase of insurance 
by each.
The Demand for Insurance by Individuals
    Smith's (1968) theoretical model of the demand for property 
insurance by individuals implicitly assumes that individuals are able 
to form correct estimates of the probabilities associated with all 
possible loss outcomes. In his analysis, factors which are important 
determinants of insurance consumption include wealth, the probability 
of loss, the price of insurance, the value of the item exposed to risk, 
and the utility function of the individual considering the purchase of 
insurance. Smith finds that when the price of insurance per dollar of 
coverage is less than one and the probability of no loss is greater 
than zero the optimal insurance purchasing decision may entail either 
purchasing or not purchasing coverage. In this context, self-insuring 
may be optimal. Other things equal, self-insurance will be optimal the 
less risk-averse an individual is and the greater the probability of 
loss. Self-insurance will also be optimal the greater one's wealth, 
assuming the individual's utility function is characterized by 
decreasing absolute risk aversion. Given a particular price of 
insurance, utility maximization suggests that an individual is more 
likely to self-insure the lower the probability of loss. In contrast, 
given a fixed probability of loss an individual is more likely to 
insure the lower the price of insurance. Insurance purchases are also 
theorized to be positively linked to the value of the item at risk, 
other things equal.
    As mentioned above, the probability of loss parameter in Smith's 
model is assumed known to both insureds and insurers. This assumption 
is frequently made by researchers who model the demand for insurance. 
See for instance, Raviv (1979), Mossin (1968), Borch (1960), and Gould 
(1969). The adverse selection literature is based on the assumption 
that insureds form more accurate estimates of the probability of loss 
parameter than insurers. See for instance, Rothschild and Stiglitz 
(1976), Wilson (1977), and Miyazaki (1977). These models, while leading 
to different results in some aspects, all find that low risk insureds 
will purchase less insurance in a market with adverse selection than in 
a market free of adverse selection.
    In contrast to the adverse selection literature which posits that 
insureds are better informed about their actual probability of loss 
than insurance companies, Kunreuther's (1984) contention, that property 
owners may not purchase flood insurance because they underestimate 
their true probability of loss, suggests just the opposite. 
Kunreuther's suggestion points to a possible second difference between 
the flood insurance market and those insurance markets characterized by 
adverse selection. In the adverse selection literature the market is 
composed of high risk and low risk insureds, each with different 
probabilities of loss. The high risks estimate that their probability 
of loss exceeds the insurance company's estimate. The low risks 
perceive that their probability of loss is less than that estimated for 
them by the insurance company. In the case of flood insurance, 
Kunreuther's suggestion is that without distinction to risk class 
insureds underestimate their loss probability. From the perspective of 
an individual who underestimates the true probability of loss and must 
make the decision whether or not to purchase insurance as modeled by 
Smith, the price of insurance quoted by the insurer would seem high. If 
the insured underestimates the actual loss probability, subsidized 
insurance rates may even seem expensive.
    An alternative, or in some cases complement, to insurance is an 
investment in reducing the likelihood or severity of the loss. The 
Federal Government makes considerable investments each year in flood 
loss mitigation. Although mitigation can 
reduce the probability and severity of flood losses, it may also 
produce a sense of security which results in further development in 
floodplains and reduces the perceived value of flood insurance 
(Pasterick, 1998, p. 125). We do not have direct information on how 
finely NFIP reflects changes in flood risk in its premium pricing 
structure. However, the continued high level of subsidy in the program 
suggests that prices are unlikely to fully reflect changes in risk 
resulting from mitigation. If this is the case, then increased 
expenditures on mitigation would decrease the demand for flood 
insurance. Additionally, Pynn and Ljung (1999) surveyed residents in 
Grand Forks after the severe flooding in 1997 and asked them to 
evaluate the importance of 18 factors in influencing their decision not 
to purchase flood insurance. The respondents ranked as number 2, ``I 
believed the dikes and other flood control devices would protect me 
from experiencing flood damage.'' Number 1 was the ``National Weather 
Service did not predict the river to crest so high.'' This result 
provides a rather compelling argument for the expectation of a negative 
relation between mitigation and flood insurance demand.
    Finally, to the extent that individuals expect to be eligible for 
other forms of disaster assistance after suffering flood losses, their 
incentives to purchase Federal flood insurance will be reduced. This 
assistance could come in the form of disaster loans, grants, and other 
aid.
The Demand for Flood Insurance by Businesses
    The National Flood Insurance Program makes insurance available to 
businesses as well as individuals. Since businesses do not have utility 
functions, standard utility maximization arguments do not provide an 
explanation for their purchase of 
insurance. Mayers and Smith (1982) argue that profit maximization 
provides a rationale for the purchase of insurance by businesses. They 
contend that the purchase of insurance may result in greater 
profitability if it leads to more favorable terms in a variety of 
different transactions. Examples include lower interest rates on debt, 
and better relationships with suppliers, buyers, and employees. The 
business's decision to purchase insurance coverage therefore depends 
not on its own utility function but that of the parties with which it 
enters into different transactions.
    While the economic rationale for purchasing insurance is different 
for businesses than it is for individuals, the same set of factors are 
important--price, the probability of loss, the amount of loss. In the 
case of a business, the income, wealth, and shape of the utility 
functions of parties to transactions are determinants of insurance 
purchases. Just as in the case of demand for flood insurance by 
individuals, an incorrect estimate of the probability of loss may 
result in the business choosing not to purchase flood insurance.
    A colleague of mine, Dr. Robert E. Hoyt of the Terry College of 
Business at the University of Georgia, and I used data supplied by the 
National Flood Insurance Program to study what factors influence 
individuals' and businesses' purchase of flood insurance. We found that 
income is positively related to the amount of flood insurance 
purchased. Individuals with greater financial resources are more likely 
to take advantage of the Government's flood insurance program. An 
important question that could be raised is whether or not insurance is 
the best approach to providing disaster protection to the low-income 
segment of the population. The low levels of participation in the NFIP 
and our finding that income matters suggest that perhaps this is not 
the best approach.
    Our empirical results indicated that the price of flood insurance, 
measured as written premiums per $1,000 of flood insurance in force in 
the State, is negatively correlated with flood insurance purchases. Our 
analysis suggests that if the Government decreased the price it charges 
for flood insurance, more insurance policies would be sold and the 
amount of flood insurance in force would increase. However, the demand 
for additional policies is relatively price inelastic.
    Our study provided evidence consistent with Kunreuther's (1990) 
hypothesis that risk perceptions influence insurance purchasing 
behavior and Viscusi's (1991) Bayesian learning model. We found that 
the number of flood insurance policies sold during a period is 
positively correlated with flood losses during the prior period. 
Similarly, Palm et al. (1990) report that surveys taken of property 
owners before and after the Loma Prieta earthquake of 1989 revealed 
that the percent of respondents who felt earthquake insurance was 
unnecessary after the earthquake was significantly less than the number 
who held that belief before the earthquake. If, as our evidence and 
that of others indicates, perceptions of the risk of flood loss are an 
important determinant of insurance purchases, informational materials 
directed at increasing the public's awareness of the danger posed by 
the flood peril may be an effective means of increasing the purchase of 
flood insurance.
    Our study used economic data to explore the reasons why individuals 
purchase flood insurance. A number of interesting questions that we 
were not able to address await future research. We know relatively 
little about how people form estimates of the likelihood of suffering 
flood damage. The relationship between the recent occurrence of flood 
damage and the decision to purchase coverage emerges in our data 
analysis. While it is plausible that the Government could increase 
sales of flood insurance by modifying individuals' perceptions of 
potential loss, how this could be best done and the cost are open 
questions. Similarly, as mentioned above, our analysis supports the 
hypotheses that income and price are important determinants in the 
flood insurance purchasing decision. This suggests that vouchers to 
purchase flood insurance may be an effective means of increasing 
coverage. Analysis of household level data likely would yield more 
accurate estimates of price and income elasticities than we were able 
to derive. Such an analysis would help to determine what the potential 
costs of increasing participation in the flood insurance program 
through a voucher program would be.
    Our data showed that a large portion of flood losses is not insured 
by the National Flood Insurance Program. Information on how individuals 
do pay for flood losses may shed light on why individuals choose not to 
purchase flood insurance.
    A final point to consider is that the FHA requires the purchase of 
flood insurance by those seeking FHA-backed mortgages in flood zones. 
This requirement serves as a powerful incentive for the purchase of 
flood insurance. Other things equal this requirement will result in 
increased purchases of flood insurance. We included the number of FHA 
mortgages per 1,000 population in our analysis to control for this 
effect. As FHA-backed mortgages and flood insurance are essentially 
complimentary goods as a result of the FHA's requirement, we 
hypothesized a positive relationship between the two. Kunreuther (1996) 
has questioned whether FHA requirements are easily avoided. He cites a 
study by the GAO (1990) that reports that 79 percent of victims of a 
major flood in Texas in 1989 that were required to purchase flood 
insurance were not insured. The implication he makes is that it would 
not be surprising if many of these individuals bought flood insurance 
when they received their mortgage and later dropped the coverage.

       RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES 
                     FROM DAVID I. MAURSTAD

Properties Protected by Dams and Levees

Q.1. A Washington Post article entitled ``Risk Estimate Led to 
Few Flood Policies'' published on October 17, 2005, details how 
many residents of the destroyed Ninth Ward in New Orleans were 
not in mandatory purchase areas for flood insurance purposes. 
The article says the following ``. . . Federal insurance maps, 
however, were based on a vastly mistaken assumption: That the 
levees and flood walls protecting the neighborhood from 
inundation would remain intact. When the levees breached near 
the Lower Ninth, the floodwaters ravaged countless homes 
unprotected by flood insurance, and many neighbors wonder 
whether anyone will have the wherewithal to rebuild.'' As I 
understand it, areas protected by levees and dams are not 
mapped as being in the 100-year flood zones. Do you have any 
data on the amount of flooding that takes place in areas 
protected by levees and dams? If so, please provide such data 
to the Committee. What is your position on whether properties 
in these areas should be required to carry flood insurance?

A.1. FEMA does not currently assess dam failure as part of the 
National Flood Insurance Program (NFIP).
    In many cases, the U.S. Army Corps of Engineers (USACE) is 
responsible for designing, constructing, operating, 
maintaining, and providing certification for levee systems. 
FEMA's role is to provide guidance criteria for the recognition 
of levees on Flood Insurance Rate Maps (FIRM's). If the USACE 
certifies a levee to the minimum standard of providing 
protection from the base flood (also known as the 1 percent 
annual chance flood or the 100-year flood), FEMA will recognize 
it on the FIRM.
    FEMA does not have specific data concerning the amount of 
flooding that has occurred for properties protected by levees, 
because most land areas protected by levees are not identified 
with unique FIRM zone designations by which flood insurance 
claims are tracked.
    The current mapping standards require the establishment of 
a residual flood risk zone in areas protected by levees from 
the 100-year flood. Such areas are considered to be in the 0.2 
percent annual chance floodplain (also known as the 500-year 
floodplain) and at moderate risk of flooding. The 500-year 
floodplain is designated on the FIRMs as shaded Zone X. 
Currently, Federal mandatory purchase requirements do not 
extend to buildings located in areas with this designation. 
However, language on the body of the map notifies communities 
and homeowners about the potential risk in these areas.
    In his January 25, 2006, oral testimony before the U.S. 
Senate Committee on Banking, Housing, and Urban Affairs, David 
I. Maurstad, Acting Mitigation Division Director and Federal 
Insurance Administrator for FEMA, recommended that Congress 
should

    direct FEMA to study the feasibility and implications of 
expanding the standard for mandatory purchase requirement to 
include the 0.2 percent chance per year floodplain (500-year 
floodplain) and properties in areas of residual risk (areas 
protected by levees, dams, and other manmade structures).

Map Modernization Project

Q.2.a. I understand that FEMA is in the midst of a flood map 
modernization project. Clearly, it is critical that flood maps 
accurately reflect flood risks. Please provide a detailed 
update on where FEMA is in its map modernization project, as 
well as a timetable for completion.
A.2.a. The flood map modernization initiative is anticipated to 
be funded through fiscal year 2008 with mapping activities 
continuing through 2010. The planned mapping activities for 
fiscal years 2006 through 2008 are contained in the FEMA Multi-
Year Flood Hazard Identification Plan (MHIP) Version 1.5, dated 
June 2005. The plan is available on FEMA's website at http://
www.fema.gov/fhm/mh_main.shtm.
    At the end of fiscal year 2005, the following progress had 
been achieved:

 Digital flood map products are available for thirty-
    nine (39) percent of the Nation's population.
 Digital flood map products cover fifteen (15) percent 
    of the land area of the continental United States.

Q.2.b. I am concerned that FEMA may not have the staffing or 
resources to update all flood maps. GAO found in March 2004 
that although 75 staff were needed to monitor and manage the 
map modernization process, only one additional staff person had 
been hired, and there were plans to transfer 43 staff to the 
project. Please provide to the Committee the number of staff 
allocated to the map modernization project as well as the 
number of staff transferred from other FEMA offices, including 
which offices staff were moved away from.

A.2.b. In addition to the 99 existing personnel, FEMA has 
allocated 43 additional full time personnel to Map 
Modernization at FEMA headquarters and the 10 FEMA regions. 
Additionally, the FEMA-contracted National Service Provider, 
known as the Mapping On Demand Team, has established regional 
management centers at each regional office to assist in the 
production and management of flood mapping. There is also a 
system of contract support in place at FEMA headquarters and 
the regional offices which provides administrative and 
professional support to the map modernization 
effort. As part of its fiscal year 2006 mid-course review, FEMA 
is undertaking a staffing analysis for the map modernization 
program and will reevaluate resource needs.

Q.2.c. Please provide the Committee with the estimate of needed 
resources for the map modernization project over the next 5 
years.

A.2.c. The existing life cycle model for the Flood Map 
Modernization Program as currently requested for the next 5 
years, fiscal year 2007 through fiscal year 2011 in the Future 
Years Homeland Security Plan (FYHSP), is as follows:


                                             Flood Map Modernization
                                                  (in Millions)
----------------------------------------------------------------------------------------------------------------
            Appropriations                                     FYHSP  FY07-FY11                     FYHSP  Total
----------------------------------------------------------------------------------------------------------------
   FY03       FY04       FY05       FY06       FY07       FY08       FY09       FY10       FY11      FY07-FY11
----------------------------------------------------------------------------------------------------------------
 $150.0     $200.0     $200.0     $200.0     $201.2     $202.7     $204.5     $204.9     $205.3      $1,018.60
----------------------------------------------------------------------------------------------------------------


GAO Report
Q.3. GAO recently found that FEMA's quality assurance 
reinspections which are done to review Write Your Own companies 
were not being done correctly. GAO found that FEMA's approach 
``does not provide management with the information needed to 
assess the overall performance of the write-your-own companies, 
including the overall accuracy of the underwriting of NFIP 
policies and the adjustment of claims-information that FEMA 
needs to have reasonable assurance that program objectives are 
being achieved.'' Please detail FEMA's plans to address this 
deficiency.

A.3. As noted in Mr. Maurstad's response to the October 2005 
GAO report, ``Improvements Needed to Enhance Oversight and 
Management of the National Flood Insurance Program,'' FEMA 
vigorously disagrees with the conclusion of the report 
concerning its oversight of the Write Your Own (WYO) insurance 
companies. The following is a quote from Mr. Maurstad's letter 
dated October 12, 2005:

    The GAO has given prominence to a concern that is not the 
main issue and is based on only partial review of Program 
controls. With its report title and ``highlights'' section GAO 
has chosen to emphasize a rather arcane recommendation with 
regard to statistical sampling without noting, as the report 
itself states on Page 5 that ``the processes that FEMA had in 
place for operational reviews and quality assurance 
reinspections of claims adjustments met our internal control 
standard for monitoring Federal programs'' and later on Page 21 
that ``The processes FEMA followed also met our internal 
control monitoring standard that requires Federal agencies 
ensure that the findings of audits and other reviews are 
promptly resolved.'' Further, the report does not put 
operational reviews and reinspections in the appropriate 
context within the entirety of what FEMA does to provide 
oversight of the NFIP and Write Your Own (WYO) Companies. It is 
misleading to characterize the operational reviews as ``FEMA's 
primary method to monitor and oversee the NFIP'' (Page 27). 
While very important, these operational reviews, as well as the 
claims reinspections, are only parts of a comprehensive 
Financial Control Plan that has effectively provided oversight 
and control of the WYO insurance operations of the NFIP as 
discussed below. Biennial audits by CPA firms, annual Inspector 
General financial audits, monthly editing of policy and claims 
transactions along with the statistical and financial 
reconciliations provide an abundant amount of random sampling 
and thorough review of WYO transactions. This information does 
not appear to have been considered by the GAO in its study. 
However, these monitoring and control mechanisms do have a 
bearing on the design and use of operational reviews and claims 
reinspections. It is difficult to understand how the GAO can 
reach a conclusion that FEMA is not meeting an internal control 
standard without a consideration of all the controls and 
processes that FEMA has in place to provide oversight of the 
Program.

    FEMA feels that the appropriate controls are in place to 
supervise the WYO insurance companies. Furthermore, remedial 
actions in that area would be an unwise use of scarce resources 
given the large number of higher priority projects currently 
under consideration and in process.
Repetitive Loss Properties
Q.4.a. According to CRS, as of December 31, 2004, FEMA had 
identified 11,706 properties which had severe repetitive 
losses. Please detail what FEMA is doing to mitigate the flood 
losses on these properties.

A.4.a. FEMA defines Repetitive Loss properties as structures 
for which two National Flood Insurance Program (NFIP) policy 
claims in excess of $1,000 have been paid, within any rolling 
10-year period. As of November 30, 2005, there are over 63,000 
currently insured locations meeting this definition.
    The Bunning-Bereuter-Blumenauer Flood Insurance Reform Act 
of 2004 (Public Law 108-264) created a subset of the Repetitive 
Loss properties through the establishment of the Severe 
Repetitive Loss properties, which the Act defines as follows:




    As of December 31, 2005, the number of structures meeting 
the Severe Repetitive Loss (SRL) definition as provided for in 
the Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 
2004 is estimated to be over 7,700 structures. Of this total, 
4,849 structures have been verified to be SRL properties.
    FEMA has addressed repetitive flooding on many fronts: 
flood hazard mapping, floodplain management regulations, 
insurance, mitigation, and public information. Some examples 
follow:

 FEMA has made repetitive flooding an important factor 
    for determining the scope of our floodplain mapping efforts 
    under its Multihazard Flood Map Modernization Program. 
    Areas of repetitive losses outside existing floodplains are 
    being studied for possible remapping, and communities with 
    large numbers of repetitive loss properties are receiving 
    special attention.
 FEMA has provided guidance documents, new software, 
    and training to assist local officials in making 
    substantial damage determinations, which requires 
    properties to meet local codes when rebuilding.
 FEMA has increased the coverage available under 
    Increased Cost of Compliance (ICC), the additional flood 
    insurance coverage that can help pay for code-mandated 
    mitigation projects after a flood. The triggers for ICC 
    coverage are being liberalized in accordance with the 
    Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 
    2004.
 FEMA has identified the most egregious repetitively 
    flooded properties and transferred their flood insurance 
    policies to the Special Direct Facility (SDF), directly 
    administered by the NFIP. This allows FEMA to directly 
    communicate with the policy holders and to closely monitor 
    claims when they are adjusted.
 FEMA has made repetitive loss properties a national 
    priority for our mitigation grant programs. Over the past 
    10 years, FEMA has spent over $320 million to acquire, 
    elevate, or otherwise protect repetitively flooded 
    structures.
 FEMA has developed new technical publications and 
    guidance for property owners and State and local officials 
    on how they can better protect themselves and their 
    communities.
 Each of FEMA's 10 Regional offices has designated a 
    Repetitive Loss Coordinator who is working with their 
    states and communities to develop new approaches to and 
    techniques for mitigating repetitive loss properties.
 To date, approximately 8,600 of the repetitively 
    flooded properties that FEMA has identified are known to 
    have been mitigated. FEMA provided ICC and mitigation grant 
    funds for roughly one-half of these projects.
 In addition to the original mandatory requirements for 
    Community Rating System communities to identify and in many 
    cases plan for any existing repetitive loss problem, 
    additional credit points were added to those activities 
    that encourage the mitigation of repetitive loss areas and 
    individual repetitive loss properties.
 The Flood Insurance Reform Act of 2004 (FIRA 04) 
    authorized a Severe Repetitive Loss Pilot Program.  
    Congress authorized $40 million to be transferred from the 
    National Flood Insurance Fund as part of FEMA's fiscal year 
    2006 appropriation to implement this program. FEMA is 
    currently developing regulations and expects to begin to 
    allocate funds during late fiscal year 2006.
 FIRA 04 also authorized $10 million for the Repetitive 
    Flood Claims (RFC) Program to mitigate properties that have 
    at least one flood claim. RFC Program guidance is currently 
    being finalized, and all funds are expected to be awarded 
    during fiscal year 2006.

Q.4.b. Please provide data on the location of these properties 
by State, as well as breakdown of pre and post FIRM repetitive 
loss properties nationwide and by State.

A.4.b. Please see the attached table.
Second or Vacation Homes Insured under the NFIP
Q.5. Please provide data to the Committee on the number of 
properties which have flood insurance policies with NFIP which 
are second or vacation homes. Please provide this information 
on a nationwide basis, as well as by State. In addition, please 
provide data on the number of these second or vacation homes 
which are pre-FIRM on a nationwide basis, as well as by State.

A.5. Please see the attached table. The table presents data 
about ``Principal residences'' and ``Other than principal 
residences'' within the category ``Single family residences'' 
as of August 31, 2005. ``Single family residences'' are single 
family houses and condominium units. Under the Standard Flood 
Insurance Policy (SFIP) a ``principal residence'' is defined as 
the one in which the insured resides at least 80 percent of the 
time. The ``other than principal residence'' category includes 
vacation, second, and rental homes of the insured.
Mandatory Purchase Requirements
Q.6. Please provide any data or information FEMA has on 
compliance with the mandatory purchase requirements.

A.6. Past research on compliance with the mandatory purchase 
requirement has been completed by the Government Accountability 
Office (GAO), RAND Corporation, and the American Institutes for 
Research.
    The research indicated that approximately 50 to 60 percent 
of single family homes in Special Flood Hazard Areas are 
subject to the mandatory purchase requirement. Estimates 
suggest a Nationwide compliance rate of 75 to 80 percent, with 
an 80 to 90 percent compliance rate in the South and West and 
45 to 50 percent in the Northeast and Midwest.
    For more information, the completed studies are available 
on FEMA's website at:

    http://www.fema.gov/pdf/nfip/market_pen.pdf.
    http://www.fema.gov/pdf/nfip/mandpurch_0305.pdf.
    http://161.203.16.4/d23t8/142248.pdf.

    
    


        PROPOSALS TO REFORM THE NATIONAL FLOOD INSURANCE PROGRAM

                              ----------                              


                      WEDNESDAY, JANUARY 25, 2006

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

    The Committee met at 10:04 a.m., in room SD-538, Dirksen 
Senate Office Building, Richard C. Shelby (Chairman of the 
Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order.
    This morning, the hearing meets to hold its second hearing 
on the future of the National Flood Insurance Program. Congress 
established the National Flood Insurance Program pursuant to 
the National Flood Insurance Act of 1968, to provide 
policyholders with some insurance for flood-related damage, 
require mitigation efforts to limit such damage, and generate 
enough revenue through premium dollars to prevent taxpayers 
from paying for disaster-related assistance due to flooding.
    Over the course of its near 40-year history, this program 
has never approached actuarial soundness, which can be directly 
attributed to the manner in which the program was designed. 
This design failure was fully brought to bear by the recent 
hurricanes, and the program now stands bankrupt.
    Current estimates demonstrate that FEMA will pay out at 
least $23 billion in flood insurance claims for Hurricanes 
Katrina, Rita, and Wilma. This will surpass all combined 
previous payments from the National Flood Insurance Program's 
30-year history. FEMA's current borrowing limit it $18\1/2\ 
billion, which was raised from $3.5 billion in mid-November. 
Congress will need to raise this limit again in the coming 
month.
    Under the present structure, assuming no major floods, it 
would take FEMA decades or more to repay the U.S. Treasury the 
amount it borrowed for Katrina-related claims alone. We cannot, 
however, assume that there will be no major floods. To the 
contrary, the National Hurricane Center has indicated that 
intense storms are likely to continue for many years. We, thus, 
face the considerable challenge of closely scrutinizing every 
aspect of the program to determine how to restructure it to put 
it in a sustainable working order.
    One of the major problems with the program is its rate 
structure. As much as a quarter of all properties pay 
explicitly and massively subsidized rates. Hundreds of 
thousands of additional program participants receive indirect 
subsidies. There are also deficiencies in the mapping used to 
establish the pricing levels for covered properties. All told, 
the subsidies have drained billions of dollars from the 
program, leaving it financially incapable of meeting its true 
responsibilities.
    But compounding these deficiencies, the program has 
directly affected the willingness to take financial risk. 
Where, prior to the program, there were areas where 
construction did not occur because 
financing was not available for it, we now see expensive homes 
and commercial properties. By enabling these essentially risk-
free ownership propositions, the program opened the door for 
considerable development in exactly the places where flooding 
was most likely.
    In addition to these significant problems, there are also 
very real questions as to whether program participants are 
staying current with their insurance payments. It appears that 
in many cases initial payments are made, but that, over time, 
payments cease. This brings into question the nature of the 
benefits provided to those who have stopped making payments. 
There are also a large number of property holders who live in 
the floodplain who are not 
required to obtain flood insurance because they do not have 
mortgages, their mortgages were not issued by federally insured 
entities, or that they live in areas behind manmade structures 
such as levees and dams.
    While these property holders may be technically outside of 
the program, they still suffer considerable losses when 
flooding occurs. Compensation for these insured losses quite 
often comes directly from the taxpayer through ad hoc disaster 
assistance.
    There is also a question as whether all the appropriate 
land areas are covered under the program. It appears that many 
of the homes destroyed by flooding in the Gulf region were 
located outside of the 100-year floodplain as determined by the 
Flood Insurance Rate Maps. The flood elevation levels on the 
current FIRM Maps were off by as much as 15 feet in certain 
areas of Mississippi and Louisiana.
    In order for this program to regain its footing, I believe 
it is critical that the maps are updated to accurately reflect 
both flood elevation and flood depth. As it stands today, the 
Flood Insurance Program provides coverage for thousands of 
repetitive loss properties, vacation homes, and perhaps even a 
considerable number of structures that should never have been 
built. Its financial resources are insufficient to meet its 
financial responsibilities. It does not provide the taxpayer 
the benefit of prefunding losses that have become entirely 
routine. The fact is, the reality of the program and the 
expectations surrounding it are not in sync.
    Many of these issues were central to the consideration of 
the Flood Insurance Reform Act of 2004, passed by this 
Committee last Congress. I, again, want to recognize the 
leadership roles of Senator Bunning and Senator Sarbanes in 
obtaining many needed reforms. But despite their efforts, I 
believe that it is now clear that significant reforms remain 
necessary.
    This means that our Committee, and ultimately the entire 
Congress, must confront many tough policy questions. I 
certainly do not underestimate the difficult task that lies 
ahead. It is my intention to conduct a deliberative process so 
that whatever choices we may ultimately make, we shall make 
them with the full understanding of the true cost and the 
benefits associated with them.
    I would also like to note at the outset of our 
consideration of the clearly troubled Flood Insurance Program, 
that I see very close parallels between this matter and others, 
where it has been suggested that the Federal Government should 
take on the role of insurer of last resort. Frankly, we should 
recognize that the bankrupt Flood Insurance Program provides us 
a case study for any such deliberations.
    Furthermore, should we consider extending public 
liabilities in any such fashion, we will do it knowing full 
well the sum total of the additional responsibilities that we 
are placing on the taxpayers' shoulders.
    Today, we have a very distinguished panel of witnesses, and 
I would like to welcome them all to the Committee. Our panel 
this morning including Dr. David Maurstad, Acting Director, 
Mitigation Division, Federal Emergency Management Agency; Mr. 
David Walker, who is no stranger to our Committee, the 
Comptroller General of the United States; Mr. Donald Marron, 
Acting Director, Congressional Budget Office.
    Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman.
    I would like to take just a moment at the outset to welcome 
Senator Menendez to the Committee. We are very pleased to have 
him join this Committee. Senator Corzine was a very valued 
Member of the Committee, and we know that Senator Menendez, 
with his experience in the House and his concern on a range of 
issues, will be an equally important Member. So, I extend to 
him a very warm welcome.
    Chairman Shelby. If I could join with you on that. I 
welcomed him a few minutes ago privately. We are expecting a 
lot of work out of you on this Committee.
    [Laughter.]
    And you will be up to the test.
    Senator Sarbanes. Mr. Chairman, I want to commend you for 
holding this hearing today. It is an important and critically 
timely issue with respect to the National Flood Insurance 
Program. Last October, actually, we began a review of this 
program, which insures almost 5 million properties across the 
country. Of course, recent developments have demonstrated major 
difficulties and weaknesses in the program.
    To go back just a little bit, after Hurricane Isabel in 
September 2003, many of my constituents registered complaints 
about unfair treatment and inadequate settlements from FEMA 
under their flood insurance policies. We held hearings on 
that--Senator Bunning and his Subcommittee took the lead--and 
we passed some significant changes and reforms in the system 
including requiring FEMA to establish training guidelines for 
insurance agencies and an appeals process for policyholders 
with complaints.
    I remain upset that not all of my constituents have yet had 
a resolution of their situation. We still have people living in 
trailers. This hurricane was in September 2003. It is now 
January 2006, and I am sure some other colleagues of mine have 
similar difficult situations confronting their constituents. I 
have to say to FEMA that I think it reflects very poorly on the 
agency in that regard that these things have not been resolved.
    I look forward to hearing from Mr. Maurstad this morning, 
the Acting Federal Insurance Administrator, as to how they are 
proceeding in implementing the reforms that were passed in this 
Committee and in addressing these claims.
    Hurricane Isabel brought to light not only the 
administrative problems in the National Flood Insurance 
Program, Hurricane Isabel brought that to light. The recent 
devastation in the Gulf Coast has raised serious concerns about 
the fiscal posture of this program. Last November, we increased 
FEMA's borrowing authority to $18.5 billion. FEMA's most recent 
analysis shows that this funding, as I understand it, will pay 
flood claims through the middle of February, in other words, a 
few weeks to go. According to FEMA, there will be approximately 
$24 billion in legitimate, and I emphasize ``legitimate'' flood 
insurance claims, which, of course, means that the borrowing 
authority must be raised in order to allow the Federal 
Government to meet its contractual obligations to 
policyholders--let me repeat that--in order for the Federal 
Government to meet its contractual obligations to 
policyholders.
    Obviously, we must ensure that policyholders are able to 
receive their settlements as soon as possible. Any delay in 
payments means a delay in rebuilding their homes and rebuilding 
their lives.
    Clearly, we face major challenges in the Committee. 
Actually, the National Weather Service, Dr. Chris Landsea of 
the National Weather Service, who testified in October, said 
``Research suggests that many of the hurricane seasons in the 
next two to three decades may be more active than they were in 
the 1970's through the early 1990's.''
    Hurricane Katrina brought to our attention not only the 
great need for flood insurance, but also the extent to which 
people at risk do not have adequate flood coverage.
    In some of the hardest hit areas of the Gulf Coast, flood 
insurance coverage was relatively high, even reaching over 50 
percent in some areas. In other areas, however, only 5 to 10 
percent of housing units had flood insurance. There are a 
number of reasons for low participation which needs to be 
addressed, I think, first and foremost by the administrators of 
the program, but, obviously, in an oversight capacity by the 
Congress itself. People do not understand or fully appreciate 
the risks. The flood maps are not accurate. Many are not 
required to purchase flood insurance.
    We could not have avoided the hurricanes, but we can try to 
set up a system so there is adequate coverage for families, so 
people understand the risk, prepare to address those risks as 
best they can, and we have an obligation, I think, to ensure a 
financially sound flood insurance program, and one that 
prepares people for the natural disaster which may strike them.
    Mr. Chairman, Committee staff members have visited the 
hardest hit areas of the Gulf. Five months after, the storm's 
debris still fills the majority of yards and streets. Mold is 
rapidly growing, increasing the damage to homes. Electricity 
has not been restored in many areas. People are sleeping in 
trailers, tents, even the second stories of their partially 
gutted homes. Clearly, people are not going to be able to get 
back on their feet without significant assistance. Some have 
flood insurance, many others have nothing.
    We need to address this situation. It is a crisis within 
our own country, and I am increasingly becoming concerned that 
it is tending to slip from public view. It comes back into 
public view every so often, and then it fades away.
    I hope these hearings will focus attention on this 
situation, that in the course of them we can map out long-run 
changes that will strengthen the program, enhance the coverage.
    But I hope we do not lose sight of the short-run--well, for 
the people experience it is not short-run or long-run, it is 
all-run; that is what their life is all about right now--that 
we do not lose sight of the necessity of helping these people 
to get back on their feet and restoring some semblance of 
normality to their lives.
    I will look forward to hearing from the witnesses, and I am 
very pleased that Comptroller Walker and Mr. Marron are here 
with us, and, of course, Mr. Maurstad, you are the point person 
on this thing, and I am sure that will become clear as we move 
into the question period.
    Thank you very much, Mr. Chairman.
    Chairman Shelby. Thank you.
    Senator Bennett.

             STATEMENT OF SENATOR ROBERT F. BENNETT

    Senator Bennett. Thank you, Mr. Chairman. I think you and 
Senator Sarbanes have covered the issue well, so I shall not 
try to expand on that.
    I do want to extend a special welcome to Donald Marron, who 
used to be behind this, telling me what was going on to make me 
smart, and now he is in front of us.
    Chairman Shelby. He was telling us all.
    Senator Bennett. Telling me things I need to know to make 
me smart. I am very proud that I was the one that brought 
Donald up on the Hill as the Staff Director of the Joint 
Economic Committee, and I am glad to see how well he has 
prospered since he left us. So, welcome to him and to the other 
witnesses.
    Senator Sarbanes. We prospered while he was here too.
    Chairman Shelby. Our newest Senator, Senator Menendez, your 
first statement. You are recognized.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman. I want to thank 
you and Senator Sarbanes for the welcoming spirit that both you 
and the staff has extended to us, and I appreciate the 
opportunity to both learn and work with all the Members of the 
Committee in the days ahead on many of the critical issues that 
are within the jurisdiction of the Committee.
    As it relates to today's important and timely hearing, I 
think that if anything has been learned from the events of 
2005, it is that natural disasters, including flooding, can 
occur at any time and will continue to do so.
    And for New Jersey, this is an incredibly important issue. 
Data shows that New Jersey has over 195,000 families who have 
flood insurance, which places New Jersey in the top five for 
the entire Nation. And the Flood Insurance Program has been 
very important for the people of New Jersey, providing over 
$575 million over 25 years to help people rebound after these 
floods, and so that is why I am pleased that we are taking a 
good hard look at the program, the debt the program faces, and 
the possible challenges that could be made to fix the program.
    On the issues that we will be hearing about today, in 
addition to the issue of the borrowing authority and reaching 
the new borrowing limit as early as next month, that is 
something I look forward to hearing the testimony about. But 
another issue that is very important to New Jersey is the 
repetitive loss properties, and this is something that we are 
no stranger to. We have the third highest number of repetitive 
loss properties in the country, according to the Congressional 
Research Service. It is an issue I certainly want to look at 
carefully and thoughtfully, taking into account both the people 
who live in the houses that continuously get flooded, and those 
people who are subsidizing them through higher premiums.
    It is estimated that New Jersey policyholders could save 
$10 million a year if we take steps to address repetitive loss 
properties, and I have no doubt that these policyholders would 
like to have access to that money, if at all possible, but 
creating the right balance between these competing interests is 
critically important to both New Jersey and the Nation, and I 
look forward to working with Members of the Committee as this 
process moves forward.
    Thank you, Mr. Chairman, for the opportunity. I look 
forward to working with you and Senator Sarbanes and the rest 
of the Committee Members.
    Chairman Shelby. Thank you.
    Senator Bunning.

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. Thank you, Mr. Chairman. Thank you for 
holding the hearing. I think this series of hearings will lead 
to one of the most important legislative items we consider in 
this Committee this year. I think everyone in this room 
recognizes that there are serious problems with the National 
Flood Insurance Program.
    As Senator Sarbanes said, in 2004, with the Chairman and 
Senator Sarbanes' help, and others, we set out to make 
important changes to the program, and we did so. Unfortunately, 
some of the most important reforms have still not been 
implemented 19 months after the law was signed, and over a year 
since the date set by the law. That is totally unacceptable. I 
hope and expect to get answers about when those reforms will be 
implemented today.
    I hope this hearing will provide us with some ideas to make 
the Flood Insurance Program more solvent for the future. In 
2005, we saw flood damage unlike ever before, but that does not 
mean it will not happen again. We must find a way to prepare 
the program to cover such massive losses and better protect the 
taxpayer. But we must also make sure that people in danger of 
floods inside the country, such as along the rivers in 
Kentucky, are able to have their claims taken care of while we 
are recovering from the hurricanes.
    I know there are no easy solutions to the program's 
problems. We have some tough decisions to make, but they are 
necessary, and the price of doing nothing is too high.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Stabenow.

              STATEMENT OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman. Happy New Year 
to everyone on the panel. It is wonderful to be back in 
session. I appreciate the leadership on the Committee. Thank 
you for holding this meeting on a very important topic.
    I also want to welcome Senator Menendez. We served in the 
House together, where he was my senior Member, and it is now my 
great pleasure to be his senior Member, the one person I have 
seniority over on the Committee, and I want to maintain that 
position.
    [Laughter.]
    It is wonderful. I know you are going to add a tremendous 
amount of skill and knowledge to the process and the Committee.
    As we have said, it has been exactly 5 months since 
Hurricane Katrina devastated the Gulf Coast. and with a number 
of Members of leadership, I visited shortly after the 
hurricanes, and there is no question the devastation is 
unimaginable. I know it is unimaginable to everyone who has 
gone, even now, and to see the lack of progress. The progress 
at this point has not been happening because of many reasons.
    The National Flood Insurance Program, for 37 years, has 
been a critical part of helping these families and communities 
literally rebuild their lives, and it points up again the 
importance of that program to all of us in the States and 
communities we represent.
    In Michigan, we hold more than 25,000 policies, and 
Michiganians have put $14.3 million toward the Flood Insurance 
Program, and it plays an important role for us in Michigan, as 
it does for other States. Unfortunately, the devastating 2005 
year of storms led the program far beyond capacity, and that 
is, of course, why we are here today, faced with the challenge 
of exploring new options to cover the shortfall.
    It is clear to me, as it is to all of us, that something 
must be done. We must ensure that communities work with 
property owners to improve flood preparations. We must properly 
educate policyholders so that no family is surprised when 
something is not covered, and guarantee that families will 
receive the coverage that they have in a timely manner. We must 
also find new ways of mitigating future losses in disaster-
prone areas. Last, we must find a way to protect the program 
and strengthen it. It helps families and communities when they 
need it most.
    I also hope that in this exploration of solutions, we are 
aware of the potential impact various ideas could have on the 
Nation and on our States, and I would just point up one area of 
concern that my State has voiced. There are a number of homes, 
in fact, 63,000 Michiganians that could face higher cost to 
owning their current home, depending on what is done, and I 
worry that policies expanding the geographical areas and 
increasing the rules for mandatory flood insurance could hurt 
Michigan families, especially those who are already faced with 
mortgage payments and increasing interest rates, and this is an 
area that I will be watching closely. So, I urge that, as we 
consider this very important topic.
    Mr. Chairman, thank you very much for bringing this up 
early in the session. I hope that we will be able, as we have 
done in so many issues, to come together in a balanced way for 
the people that we represent.
    Thank you.
    Chairman Shelby. Senator Crapo.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. I do not have an opening statement at this 
time. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Thank you, Mr. Chairman.
    To our witnesses, welcome. Thank you for joining us today.
    In 1989, as Hurricane Hugo was bearing down on the East 
Coast, I was part of an effort over in the House of 
Representatives to reform the National Flood Insurance Program. 
Senator Bunning and I served at one time together, I believe on 
the House Banking Committee, and it was an issue of some 
concern to us at the time, an issue that he has continued to 
address here in the U.S. Senate.
    At the time we were concerned about low participation rate. 
And I am not sure, Mr. Chairman, if you were in the Senate then 
or in the House.
    Chairman Shelby. In the Senate.
    Senator Carper. You were in the Senate, a refugee from the 
House.
    Chairman Shelby. I was a refugee.
    Senator Carper. At the time we were concerned about the low 
participation rates in the Flood Insurance Program. I drafted a 
proposal to increase participation by requiring mortgage 
lenders to escrow flood insurance payments, just like many do 
for homeowners insurance. We were also concerned about the fact 
that a small percentage of properties have been responsible for 
more than a third of all claims, costing about $200 million 
annually.
    My proposal included a call for flood-proofing or--I think 
Doug Bereuter from Nebraska was my cosponsor, as I recall. But 
our proposal included a call for flood-proofing or removing 
those properties, and reserved a small amount of funds 
collected from flood insurance premiums to pay for this. We 
also sought to limit new construction in coastal areas that 
were quickly eroding. And our proposal sought higher, more 
appropriate premiums for those who lived in those vulnerable 
locations.
    In 1989, 16 years ago, a bill to reform the Flood Insurance 
Program was passed, one not as far reaching as our proposal, 
but a step in the right direction. It was passed by both the 
House and Senate before running into trouble in conference, 
where, unfortunately, it died.
    Today, in the wake of Hurricane Katrina, a couple of 
particularly destructive hurricane seasons, we find ourselves 
again looking at the National Flood Insurance Program, barely a 
year after taking up legislation authored by Senator Bunning. 
Our main concerns now, low subscription rate, the repetitive 
loss properties, the low premiums that do not reflect the 
vulnerability of the property being insured.
    This time the tragedy of Katrina will stay with us for a 
long time because the rebuilding will take many years, causing 
us in Congress and the Administration to continue writing 
checks for many years. While this is not something any of us 
want, perhaps it will keep the pressure on us long enough to 
pass a bill that truly improves the Flood Insurance Program 
this time, one that will require us to better consider where we 
build and rebuild, how we build, and how we allocate risk.
    I look forward to working with all of our colleagues, and 
certainly with Senator Bunning, who has had a longstanding 
interest in this issue.
    In closing, I just want to join Senator Stabenow and others 
in welcoming Congressman Menendez. I left the House at the end 
of 1992, and I think you were coming maybe about the time that 
I left, but I am delighted that you are here and look forward 
to working with you on this Committee and in the Senate. 
Welcome.
    Chairman Shelby. Senator Dole.

              STATEMENT OF SENATOR ELIZABETH DOLE

    Senator Dole. Thank you, Mr. Chairman. Thank you for 
holding this hearing this morning on the proposed reforms to 
National Flood Insurance, a program which covers approximately 
147,00 homes in North Carolina, many of which have felt the 
impact of flooding in the wake of hurricanes like Isabel, 
Frances, Ivan, and most recently last summer Ophelia.
    We in North Carolina recognize our vulnerability to 
flooding, and we are taking productive and proactive steps by 
undertaking one of the most advanced mapping programs in the 
Nation to better identify areas of risk. With FEMA's essential 
support, our maps provide community, State, and national 
leaders with clear delineations regarding the areas vulnerable 
to floods. This allows our communities to properly plan for 
current and future development.
    The availability of flood insurance also provides needed 
security for these communities. No one could have foreseen the 
strains that Hurricanes Katrina and Rita would place on this 
critical program. In December, Congress raised the program's 
borrowing authority, as the Chairman has said, to $18.5 
billion. Still, FEMA anticipates as much as $23.5 billion in 
claims, more than the program has paid out in total over its 
more than 30-year history.
    FEMA informs us that its current borrowing authority will 
only provide enough funds to last through mid-February, again, 
as the Chairman has indicated. Clearly, Congress will soon need 
to raise further the borrowing authority for the program, and 
we again should not hesitate to do so.
    In addition, I strongly support efforts to make responsible 
reforms to strengthen and improve the program. However, we must 
fully understand the impact of any change before its 
implementation.
    Three reform proposals are of particular concern to me, Mr. 
Chairman, because of their possible negative impacts on North 
Carolina: First, moving from the current 100-year floodplain 
insurance requirement to a 500-year requirement. Since North 
Carolina has advanced floodplain maps, it is clear where our 
500-year floodplains are located. However, flood maps in other 
States have, for the most part, only gotten older. In fact, 
according to FEMA, only 25 percent of 500-year floodplains have 
been mapped. We would need to know how and if other States with 
less sophisticated maps would be able to implement this policy.
    I also find it troubling that, according to the North 
Carolina Floodplain Managers Association, this policy change 
would require 15 to 20 percent more North Carolinians to 
purchase flood insurance. This would largely impact people in 
the poorer areas of eastern North Carolina. Such a change in 
policy should not disproportionately affect North Carolina, 
particularly those in poorer areas.
    If Congress were to approve a 500-year floodplain purchase 
requirement, I would certainly hope that families subject to 
this new law would pay premiums that reflect the lower risk of 
their area. We must have assurance of this before even 
considering any such proposal.
    Second, in 2004, this Committee approved and the President 
signed into law legislation reauthorizing the Flood Insurance 
Program. In the 2004 Act, we defined a repetitive loss as four 
events or more that have claims of more than $5,000. Given 
North Carolina's history of hurricanes, I believe that a 
proposal to remove families with four or more claims will make 
most of eastern North Carolina ineligible for the program. I 
would hope that the Committee would consider such a reform's 
impact on their State as well.
    Finally, I am concerned about a proposal to more than 
double the current 10-percent per year cap on flood insurance 
premium increases. While I understand the great need to bring 
additional funds into the program, a consistent 25-percent 
increase in flood insurance premiums for the next few years is 
excessive and, therefore, this also needs to be reconsidered.
    It is my hope, Mr. Chairman, that with a clearer 
understanding of the consequences of these reforms, we can 
quickly come to an agreement and move forward with a suitable 
proposal that will ensure that this important program 
continues. Families in North Carolina and throughout our Nation 
certainly deserve the security and peace of mind that the 
National Flood Insurance Program provides.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Martinez.

               STATEMENT OF SENATOR MEL MARTINEZ

    Senator Martinez. Thank you, Mr. Chairman, and thank you 
for holding this important hearing today. It is for me a great 
pleasure to also welcome Senator Menendez to the Committee and 
to the Senate. I am extremely proud of his ascension. And I 
also know many of my fellow Floridians share in the pride of 
your new status as one of our Senators, and we very much 
welcome you here. I look forward to working with you.
    Mr. Chairman, my State, like other coastal States, as 
Senator Dole just alluded to, is susceptible to flooding and is 
painfully aware of the devastation hurricanes can cause. The 
past two hurricane seasons have been horrendous for Florida.
    As I traveled throughout my State after Hurricanes Ivan, 
Charley, Jeanne, Frances, and Katrina, we saw the horrifying 
power and fury of natural disasters. I met with families 
burdened by extensive damage to their homes, worrying about how 
they would make their next mortgage payment, concerned about 
increasing insurance deductibles, multiple insurance 
deductibles, and facing the decision of rebuilding or 
relocating. And with the consideration of relocation came the 
concerns of finding new work and new housing that is 
affordable.
    I also became aware how incredibly important National Flood 
Insurance Program was to Florida families trying to rebuild 
their lives after hurricanes and flooding damaged their homes 
and communities.
    As the 2005 hurricane season came to a close, there were 
nearly 2 million NFIP policies on homes in Florida, 41 percent 
of the entire program, representing 42 percent of the program's 
total assets. After four hurricanes devastated my State over 
the 6-week period in 2004, FEMA called upon Congress to 
increase the National Flood Insurance Program's borrowing 
authority and allowed it to borrow $300 million to pay roughly 
$1.8 billion in claims.
    Since Hurricane Katrina's unprecedented impact on the Gulf 
Coast, Congress has authorized increased borrowing authority 
for the NFIP several times, totaling more than $18 billion. It 
is the NFIP's legal responsibility to pay claims of flood 
insurance policyholders, and that is why we must quickly 
approve the additional borrowing authority needed to pay 
outstanding claims from last season's terrific hurricane 
losses.
    The strengthened viability of the National Flood Insurance 
Program is more important to my State than to any other. 
Serious reforms need to be made to the program to ensure that 
those who rely on flood insurance continue to live and work in 
their communities and that they will have the security that 
they so desperately need and must rely upon.
    I am looking forward to today's panel. I want to thank our 
witnesses for being here. I have reviewed several of the reform 
proposals that are being discussed within the Committee, and I 
am very concerned about the impact that they would have on my 
constituents.
    As was just pointed out by Senator Dole, I share many of 
her concerns. Many hard-working families are greatly in need of 
this program in Florida. As I visited the community of St. 
Marks, a poor fishing, working-family place in north Florida, I 
was taken with the fact that the impact of this program is not 
just on the affluent but is really on poor working families.
    Mr. Chairman, I appreciate your attention to this issue, 
and I am ready to work with you to develop a reform plan that 
takes into consideration all possible implications of the 
proposals that we will hear about today.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you.
    Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Thank you, Mr. Chairman, and, again, I want 
to thank you for holding this hearing on proposals to reform 
the National Flood Insurance Program.
    Flood insurance is an important program for my constituents 
in Colorado as well as for citizens of coastal areas. While our 
risks may be different--dams instead of oceans or spring snow 
melt runoff instead of hurricanes--they are just as real. 
Geography can also present a significant danger in Colorado. As 
rain is funneled into mountain valleys, it can produce 
catastrophic results such as happened in the Big Thompson flash 
flood in my hometown area where many people lost their lives.
    In such instances, the Flood Insurance Program can be an 
important Government tool to help prevent or minimize flood 
damage and facilitate recovery efforts when damage does occur. 
Under the leadership of Senator Shelby, Senator Sarbanes, and 
Senator Bunning in 2004, the Committee produced a series of 
important reforms designed to make the National Flood Insurance 
Program more effective, and I was pleased to support the 
legislation. While that legislation was a great step, the 
National Flood Insurance Program is now faced with new 
challenges that will require further legislation.
    As the National Flood Insurance Program begins processing 
the thousands of claims resulting from the 2005 hurricane 
season, it will face stresses unlike any previous year. In 
fact, estimates indicate that the flood insurance claim payouts 
for 2005 could be more than the total of all payouts over the 
entire life of the program. Without significant reform, the 
program faces insolvency.
    We must prevent that from happening. Not only do we have a 
legal obligation to pay the claims of those who purchase flood 
insurance policies, but we also have an ethical obligation to 
the people who are responsible enough to buy appropriate 
insurance. We must ensure flood insurance continues to be 
available for those who need it as well as doing everything we 
can to protect taxpayer dollars. On this point, I remain deeply 
concerned over the effect of the ongoing subsidies for certain 
properties. We must move more strongly toward an actuarially 
sound flood insurance program.
    I am also concerned about the state of the floodplain 
mapping. An effective Flood Insurance Program is predicated 
upon accurate, current floodplain maps. Local community 
mitigation and prevention efforts are only as good as the maps 
on which they rely. I am interested in finding ways to utilize 
technologies such as satellites and aerial mapping capabilities 
to improve and speed up the current mapping system. In 
Colorado--and I do not believe we are unique in this regard--
many of our floodplain maps are outdated by a large number of 
years, in fact, decades. I think those maps need to be updated, 
and I do not think our situation is unique. I think that 
perhaps North Carolina might be unique in the fact that they 
have taken the initiative on updating their maps.
    Millions of people have taken steps to protect their homes 
and families by purchasing a flood insurance policy. We must be 
careful that as part of our reform efforts or more general 
disaster assistance not to create a moral hazard. In fact, we 
need to find ways to improve the flood insurance participation 
rates.
    I look forward to working with my colleagues to find the 
necessary reforms to ensure the long-term solvency of the 
National Flood Insurance Program, and thank you to the 
witnesses for being here today to share your perspectives with 
us.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you, Senator Allard.
    Mr. Walker, we will start with you. All of your written 
testimony--a lot of us have reviewed it--will be made part of 
the hearing record in its entirety. You may proceed as you 
wish, Mr. Walker. Welcome back to the Committee.

                  STATEMENT OF DAVID M. WALKER

            COMPTROLLER GENERAL OF THE UNITED STATES

    Mr. Walker. Thank you, Mr. Chairman. It is a pleasure to be 
back before the Senate Banking Committee.
    I appreciate the opportunity to participate in today's 
hearing on the National Flood Insurance Program. I, like many 
of the Members of the Committee, have had the opportunity to 
visit New Orleans and the Gulf Coast in light of the 
devastation caused by Hurricanes Katrina and Rita, which is one 
of the reasons that we are here today, but not the only reason. 
Clearly, Hurricanes Katrina and Rita represent a tragedy for 
hundreds of thousands of our fellow Americans. Their lives have 
been turned upside down, and many who would have benefited did 
not have flood insurance.
    At the same time, I think we need to recognize that out of 
this human tragedy comes an opportunity and, in fact, a need 
for the Congress to fundamentally rethink the Flood Insurance 
Program. How can it best be structured to provide financial 
protection from flooding for those who need it and would 
benefit from it, while at the same point in time, helping to 
assure that this program is solvent and sustainable over the 
longer-term.
    I hate to say it, Mr. Chairman, but this is a subset of a 
much broader challenge that we face because this is not the 
only Federal insurance program in trouble, but we will focus on 
this one today.
    The program was established in 1968 to provide 
policyholders with some insurance coverage for flood damage, as 
an alternative to disaster assistance, and to try to reduce the 
escalating costs of repairing flood damage.
    Flood maps identify the boundaries of the areas at greatest 
risk of flooding; however, as Senator Dole mentioned and 
Senator Allard just followed up on, some maps for various 
States are more up-to-date and more comprehensive than others 
are.
    From its inception in 1968 until August 2005, the program 
paid out about $14.6 billion in insurance claims. However, FEMA 
now estimates that Hurricanes Katrina, Rita, and Wilma are 
likely to generate claims and associated payments of about $23 
billion--far exceeding total payments over the previous roughly 
30-year life of the program.
    Given prior experience, the design of the program, as well 
as recent claims, the National Flood Insurance Program is not 
only not actuarially sound, but also it will not be able to 
absorb the total costs associated with these new claims. On 
November 21 of last year, FEMA's authority to borrow from the 
Treasury was increased from $1.5 billion to $18.5 billion 
through fiscal year 2008. But as you mentioned, Mr. Chairman, 
that is expected to run out mid-February. By the way, the 
overall debt limit is expected to run out in mid-February as 
well. I just came from a meeting with the Secretary of the 
Treasury.
    Chairman Shelby. How much more money are they going to 
need, in your judgment?
    Mr. Walker. I am looking forward to hearing from the FEMA 
Director on that. Several billion is my understanding. But I 
look forward to hearing from him on that, Mr. Chairman.
    A key characteristic of the Federal Flood Insurance Program 
is the extent to which FEMA must rely on others to achieve the 
program's goals, and in this regard, based upon GAO's past 
work, we have identified several major challenges facing this 
program: First, the need to reduce losses to the program 
resulting from policy subsidies and repetitive loss properties; 
second, the need to increase property owner participation in 
the program; third, the need to develop up-to-date and accurate 
digital flood maps, especially in light of recent tragic 
events; and last but not least, the need to provide efficient 
service and effective oversight of flood insurance operations.
    As of January 2006, FEMA had not yet fully implemented the 
provisions of the Flood Insurance Reform Act of 2004, which has 
been mentioned and referred to by several of the Senators. The 
6-month statutory deadline for implementing these changes was 
December 30, 2004. I think it is important to note that in 
September 2005, FEMA did post a Flood Insurance Claims Handbook 
on its website.
    With respect to the appeals process, FEMA has not yet 
stated how long it thinks its rulemaking is going to take to 
make this requirement a reality. And with respect to the 
training and education requirements for insurance agents, FEMA 
published a proposed notice on September 1, 2005, which 
included some online training materials. We have recommended 
that FEMA develop documented plans with key milestones for 
meeting this requirement. To my knowledge, they have yet to do 
that.
    In summary, the most immediate challenge for the Federal 
Flood Insurance Program is processing the flood insurance 
claims resulting from Hurricanes Katrina and Rita as well as, 
obviously, outstanding issues from prior tragedies.
    Progress is being made with regard to Katrina and Rita. In 
December 2005, FEMA estimated that it had paid about 70 percent 
of Hurricane Katrina claims totaling about $11 billion, some of 
them using expedited procedures to assist policyholders who 
were displaced from their homes. In the longer-term, Congress 
and the Insurance Program face a complex challenge in assessing 
potential changes to the program that would improve its 
financial stability, increase participation in the program by 
property owners in areas of risk of flooding, reduce the number 
of repetitive loss properties, and maintain current and 
accurate floodplain maps. These issues are complex, 
interrelated, and are likely to involve trade-offs and a 
balancing of interests.
    There is no silver bullet, but it is clear that in addition 
to additional borrowing authority, this program is in need of 
fundamental reform if we expect it to exist over the long-term. 
I wish it was the only one in this shape, but let's deal with 
one of them at a time.
    Thank you, Mr. Chairman. I am happy to answer your 
questions.
    Chairman Shelby. Thank you, Comptroller General Walker.
    Mr. Maurstad.

                 STATEMENT OF DAVID I. MAURSTAD

              ACTING DIRECTOR, MITIGATION DIVISION

              AND FEDERAL INSURANCE ADMINISTRATOR

              FEDERAL EMERGENCY MANAGEMENT AGENCY

              U.S. DEPARTMENT OF HOMELAND SECURITY

    Mr. Maurstad. Good morning, Chairman Shelby, Ranking Member 
Sarbanes, and Members of the Committee. I am David Maurstad, 
Acting Mitigation Division Director and Federal Insurance 
Administrator for FEMA within the Department of Homeland 
Security. I appreciate the opportunity to be here today to 
discuss the status of the National Flood Insurance Program, 
particularly after the devastating effects of last year's 
hurricane season.
    This morning, I would like to address three areas: First, 
FEMA's implementation of the 2004 Flood Insurance Reform Act; 
second, NFIP's financial status; and, third, strengthening the 
NFIP with meaningful structural reforms.
    Since the June 30, 2004 signing of the Flood Insurance 
Reform Act, the Nation has endured consecutive hurricane 
seasons of catastrophic proportions. Through the Reform Act, we 
initiated improvements in 2004 that enhanced our ability to 
serve policyholders in 2005. We now have the opportunity to 
press forward with further reforms and fundamentally change and 
strengthen the financial underpinnings of the program.
    The 2004 hurricane season resulted in over 75,000 claims 
totaling close to $2 billion. Our ability to quickly resolve 
these claims was due in large part to our ongoing public 
awareness activities as well as our work with the insurance 
industry to learn how the Reform Act could best be used to 
improve policyholder understanding of NFIP coverage.
    The 2004 hurricane season experience, combined with our 
effective FEMA-insurance industry partnership, resulted in two 
Reform Act-required documents: The NFIP Summary of Coverage and 
the Flood Insurance Claims Handbook.
    Immediately following Hurricane Katrina, we distributed 
these documents to policyholders to help them through the 
claims process. These materials have been made available in our 
Joint Field Offices, Disaster Recovery Centers, and Flood 
Response Centers, as well as in town meetings, since September 
1, 2005, and their effectiveness at clarifying the claims 
process for our Gulf Coast policyholders has played a big role 
in FEMA's ability to resolve over 70 percent of the 239,000 
claims policyholders have filed, more than triple the number of 
claims filed in all of 2004, and totaling over $3.5 billion in 
claims payments so far.
    The large number of claims and the severity of flood losses 
from the 2004 and 2005 hurricane seasons are unprecedented, yet 
the NFIP continues to effectively meet the needs of 
policyholders and communities as designed. We are obligated to 
ensure that our policyholders with covered claims are paid as 
quickly as possible, and it is imperative that the NFIP claims 
process continue uninterrupted.
    In October, I informed you that we expected the total NFIP 
payout for these events to be over $23 billion, $8 billion more 
than all of the claims paid in the entire history of the NFIP. 
The results of our ongoing assessments indicate that these 
estimates remain on target. As you will note in Exhibit 1, 
claim payments will exceed $22 billion for Hurricane Katrina 
alone.
    In November, Congress increased NFIP's borrowing authority 
to $18.5 billion, allowing the NFIP and the write-your-own 
companies to continue to effectively serve our policyholders. 
As indicated in Exhibit 2, we will approach that limit on or 
around February 10, 2006.
    The historic hurricane seasons of 2004 and 2005 have called 
our attention to the challenges facing the NFIP, as you have 
all indicated. Now is the time to complement our mitigation and 
insurance principles with meaningful structural reforms. To 
fundamentally change and strengthen the NFIP, we believe 
Congress should consider the adjustments recommended in my 
written testimony. Rather than speak to each one of these 
recommendations, I would like to use my time to highlight a 
handful of them.
    First, provide authority to eliminate over time subsidies 
for properties built before flood insurance rate maps were in 
place. When fully implemented and assuming no loss of 
policyholders, subsidy elimination would provide the NFIP $850 
million more a year to pay future flood insurance claims.
    Next, strengthen the mandatory purchase requirements by 
increasing penalties for noncompliance and requiring more 
frequent and thorough lender portfolio review.
    In addition, we ask that you direct FEMA to study the 
feasibility and implications of expanding the standard for 
mandatory purchase requirements to include the 0.2-percent 
chance per year floodplain--or the 500-year floodplain--and 
properties in areas of residual risk, those areas protected by 
levees, dams, and other manmade structures.
    Also, provide additional Increased Cost of Compliance 
coverage, and remove the $75 cap on ICC premiums so that a 
variety of ICC options can be offered to policyholders.
    And, last, provide FEMA and the NFIP with the resources and 
time needed to effectively implement programs and adjustments.
    NFIP changes, when integrated into a comprehensive 
mitigation strategy, will improve the program's economic and 
financial viability. However, I want to emphasize that there is 
no easy solution or single remedy that will enable the program 
to absorb catastrophic loss years as we have just experienced. 
Bold and meaningful reforms must be pursued that create safer 
communities, enable individuals to recover more rapidly from 
flood disasters, and lessen the financial impact of flooding on 
the Nation.
    To conclude, we expect to reach our borrowing limits by 
early to mid-February. In order to continue to meet existing 
claim obligations, the NFIP will need an additional $5.6 
billion in borrowing authority to cover claims and expenses 
through fiscal year 2006. Additionally, the limitation on 
interest payments to the Treasury needs to be waived or raised 
to at least $670 million for the program to meet its 
obligations to the Treasury.
    I look forward to continuing to work with the Committee, 
the NFIP write-your-own companies, agent groups, and other 
partners to fully implement the 2004 Flood Insurance Reform 
Act, to implement meaningful structural reforms to NFIP, and to 
continue helping Gulf Coast communities rebuild stronger and 
smarter so that they are less vulnerable to future flooding 
events.
    Chairman Shelby. Thank you.
    Mr. Marron, welcome back to the Committee.

                 STATEMENT OF DONALD B. MARRON

          ACTING DIRECTOR, CONGRESSIONAL BUDGET OFFICE

    Mr. Marron. Thank you, Chairman Shelby, Ranking Member 
Sarbanes, Members of the Committee. It is a pleasure to be here 
today to talk about flood insurance, and it is a pleasure to be 
here today on this side of the dais after having the experience 
of being on the other side. I have great respect for the staff 
of this Committee.
    The recent Gulf Coast destruction highlights obviously the 
value that flood insurance brings to the homeowners and 
property owners who have it. It is very important in reducing 
the risks they face. But it also brings home in a dramatic way 
the potential costs to American taxpayers.
    In preparing for this hearing, the Committee asked CBO to 
look at three specific issues: The first was to quantify the 
level of subsidies that exist in the program as it is today; 
the second was to look a little bit at what might happen if 
efforts were taken to reduce those subsidies, what the effects 
might be on the program and on our participation in the 
program; and then, third, to think a little bit about the 
current budgetary treatment of National Flood Insurance and 
about what alternative treatments might be. And so I will go 
through each of those really quickly.
    First, as many people have noted in their opening 
statements, the program as currently designed is designed to 
lose money. About a quarter of the properties in the program 
are explicitly subsidized. By our calculations, using some data 
we got from FEMA, the average subsidized property pays premiums 
now of about $700 per year, and if we charge them actuarially 
fair rates, that number would be closer to $1,800. The first 
thing to note about those numbers is that both of those numbers 
are actually pretty large relative to the incomes and means of 
many Americans, and those numbers are a signal of the great 
risk that many of these properties pose.
    So if you take those numbers, they imply about a $1,000 
subsidy, a little bit more, per property in the program. There 
are 1.2 million subsidized properties in the program. 
Multiplying that out you get a subsidy per year that is in the 
neighborhood of $1.3 billion--a significant chunk of change, 
serious money. One way to put that in orders of magnitude is to 
note that the program as a whole receives premiums of about $2 
billion, so it's about half again as much.
    Congress obviously has the opportunity now to consider 
whether steps should be taken to reduce the subsidies that are 
offered to these programs. Obviously eliminating them entirely 
would have the implication of raising premiums for these 
properties by about 150 percent on average, some more, some 
less. And if you think through qualitatively what the effects 
of that would be, it is pretty straightforward.
    There is some group of property owners who value the 
insurance greatly and who would be willing to pay those higher 
premiums and would provide greater resources to the fund. There 
are some policyholders who value insurance to a certain extent, 
but given the financial hit of paying the higher prices would 
ratchet back their coverage. And so instead of maybe having 
$200,000 of coverage, they might ratchet it back to $100,000 of 
coverage in order to reduce their overall expenses on the 
insurance. And there are obviously some policyholders who, when 
they saw the premium increase, would be motivated to try to 
drop the coverage.
    If you ask us to try to quantitatively estimate how all 
those different reactions net out and what would be the effect 
of eliminating the subsidies, it is hard to tell. There are not 
that many studies that have looked rigorously at the behavior 
of people and how they respond when you change their insurance 
rates. The studies that exist are relatively dated. They look 
at behavior from the 1980's and 1990's, a different period and 
also different kinds of price changes. This is talking about a 
very large change in the premiums that would be charged.
    But if you take those studies at face value, they would 
suggest that a significant number of people would ratchet back 
their coverage, some fraction would drop their coverage, and 
that the net effect on total dollars coming into the program 
may not be that large.
    Now, when you think about it purely from the program's 
point of view, the effects are more straightforward. As you 
move toward actuarial fairness, two things happen. Some 
participants in the program pay you more money. Some of them 
ratchet back their coverage. And on net, from the program's 
point of view, if you get to actuarial fairness, it will be on 
an actuarially sound basis. You know, you can get there either 
by raising more money or by driving risk out of the system. And 
a key policy concern would be that as you move in that 
direction, there is a concern about participation in the 
program, and obviously one side effect of raising premiums 
would be that fewer people had full coverage.
    A second effect to keep in mind is that, as people become 
less insured or have no insurance, there is a question about 
what kinds of payments they might receive after a disaster when 
people see that they weren't insured and through a political 
process or through charity or through other kinds of processes 
want to provide assistance to them. And so if you think about 
it from the overall Federal budget point of view, you would 
have to take those effects into account as well.
    Finally, turning quickly to the budgeting for the program, 
the National Flood Insurance Program, like many insurance 
programs, is currently budgeted on a cash basis. We had the 
phrase earlier, ``writing checks,'' and that is basically the 
way it shows up in the budget. It is a very convenient way to 
track the inflows and outflows to the program, but it does not 
specifically bring to the forefront the subsidy that is built 
into the program.
    Taking a step back, if you think about what the program is, 
we are really doing two things as a Nation through the Flood 
Insurance Program. One is we are providing these subsidies to 
certain property owners, and the other is that we are acting as 
an insurance company. It is difficult to design a budgetary 
treatment or a single budgetary measure that is going to 
reflect both of those activities, acting as an insurance 
company and providing subsidies. The current system is designed 
to focus on the cashflows.
    And so, for example, when you see CBO's projections of what 
the cost of the program will be in future years, you will 
basically see payments that are going out for Katrina-related 
losses, and because of the borrowing limit you will essentially 
see those stop at some point, because the borrowing limit, 
under CBO's rules as we project out the budget impact of the 
program, you basically just see that spending happens up to the 
borrowing limit and then stops. That is a treatment that is 
very good at highlighting the cash implications of the program, 
but doesn't necessarily highlight the subsidy aspect of it.
    A plausible alternative budgetary treatment would be to 
explicitly account for the subsidy and focus on that in the 
budgetary treatment. Under the Credit Reform Act, we do 
something similar to that for the treatment of student loans 
and guaranteed loans of various kinds where, when those 
activities take place, we reflect in the budget immediately an 
estimate of what the subsidy value is. That approach emphasizes 
what the subsidy is at the time that it is incurred, when the 
financial contract is entered into, but you should keep in mind 
that that involves judgment and estimates. It is hard to know 
in advance what the actual estimate will be, what the actual 
subsidy will be. You know, there is no particular reason from 
our point of view to doubt FEMA's estimates of what the 
actuarial rates should be and what the subsidy is. But, you 
know, it is only over time that we are going to learn what the 
true extent of the subsidies in the program are.
    And so a subsidy approach would be a plausible way of 
having budgeting that focuses on the subsidies that are built 
in, but it would not have the convenience of the cash focus 
that shows you really the cash inflows and outflows that the 
Government receives.
    And with that, I look forward to your questions.
    Chairman Shelby. The National Flood Insurance Program, it 
is my understanding, was originally created to reduce losses to 
the Federal Government, the taxpayer, and individual households 
from flood-related damages. It seems that flood costs have only 
continued to rise. This program obviously is broken. It has 
never been actuarially sound, to my knowledge. Mr. Marron and 
Mr. Walker, I will direct this question to you. To what extent 
do you believe the availability of flood insurance, 
particularly at subsidized rates, has only encouraged people to 
place themselves in harm's way and continue to rebuild in 
flood-prone areas?
    Mr. Walker.
    Mr. Walker. I think there is no question that, to the 
extent that you are providing insurance at subsidized rates, 
combined with the fact that if you were building in an area 
that is grandfathered from the building requirements, can 
create perverse incentives for people to build or rebuild in 
areas of high risk.
    Chairman Shelby. And they assume very little of the risk. 
Is that right?
    Mr. Walker. They do not assume appropriate risk. That is 
correct. I think one of the things that the Congress will need 
to do in relooking at this program is try to understand what 
are you trying to accomplish. There are differences between 
properties and individuals. Some properties are in flood-prone 
areas that are heavily populated and need to be heavily 
populated for various reasons. They may be populated by people 
of more modest means. Other flood-prone properties may be 
predominantly secondary homes or vacation homes, populated by 
individuals who are of significant means.
    And so there are various issues that should be looked in 
determining the best way forward, not only as to what should be 
insured, but at what levels and at what premium rate.
    Mr. Marron. Just to build on that, one of the key roles of 
insurance premium is to provide an incentive for property 
owners to take actions that would reduce that premium.
    Chairman Shelby. Assume some of the risk, in other words.
    Mr. Marron. Right, to assume the risk or to do things to 
make that risk go away. Obviously, what you can do depends a 
lot of your specific property, but clearly, various property 
owners have the ability to elevate, to move their property, to 
engage in other behavior that would reduce the potential 
exposure and the potential risk. And if you offer them 
subsidized insurance rates, some of that incentive goes away.
    Chairman Shelby. Mr. Walker, would you like to comment on 
the program's ability, the current program's ability to repay 
the borrowing that you referenced earlier from current 
premiums? I do not know how they could very repay the borrowing 
from----
    Mr. Walker. They are not going to be able to repay the 
$18.5 billion under the current structure. You are going to 
need to reform the program. Unfortunately, this scenario is 
very similar to another scenario, and that is the Pension 
Benefit Guaranty Corporation. They both have about $23 billion 
accumulated deficits. They have both gotten that way within the 
last 3 or 4 years. I think one of the things that you are going 
to have to do is not only reform the program, but also have a 
discussion about sunk or legacy costs versus going forward 
costs. I think you are going to have to have a discussion and 
debate about that for the NFIP as well as the PBGC.
    Chairman Shelby. Whatever we do, we better look at the 
actuarial soundness of the program, had we not?
    Mr. Walker. You should, yes. It should be designed to be 
solvent and sustainable over the long-term.
    Chairman Shelby. The National Hurricane Center, as you well 
know, is predicting in the next couple of decades that it will 
bring extremely active hurricanes. We hope not, but it probably 
will. What implication does the hurricane forecast have for the 
fiscal health of the Flood Insurance Program?
    Mr. Marron.
    Mr. Marron. I am obviously not a meteorologist, and we do 
not have many meteorologists on staff at CBO. But, if true, 
that would suggest that over time the actuarially fair rates 
would go up. And to the extent there was any impediments to 
charging those rates, the subsidies would build in the program.
    Chairman Shelby. So we better build in any program to 
consider that, had we not?
    Mr. Marron. Absolutely. The best insurance premiums are 
those that reflect the actual risks that people expect there to 
be in the future.
    Chairman Shelby. Do you agree with that, Mr. Maurstad?
    Mr. Maurstad. Yes, I do. I think that it is important we 
look at moving toward all of the policies in the program being 
risk-based in premium. I think it also illustrates that we need 
to continue to work very aggressively with the pre- and post-
disaster mitigation programs along with the flood mitigation 
assistance dollars, and hopefully by the end of this fiscal 
year, the Severe Repetitive Loss Pilot Program to mitigate and 
help policyholders mitigate against future losses.
    Chairman Shelby. Why do you believe that families choose 
not to buy flood insurance? Is it because they are not aware of 
the program or they do not want to assume the risk or what?
    Mr. Maurstad. I believe past studies and inquiries have 
indicated there are generally three reasons: One, a cultural 
difference in insuring for flood, which people believe will not 
happen to them, as opposed to fire, which is actually less 
likely to happen to them; the cost of the program; and in many 
cases, people indicating they were unaware. And so that is why 
we continue with our Flood Smart public awareness campaign, 
working with communities, working with agents, working with 
ASFPM and other partners on making sure that the individuals 
understand what their risk is so that shared responsibility can 
have better results.
    Chairman Shelby. Mr. Walker, do you have any comment?
    Mr. Walker. There are several reasons. Part of it might be 
awareness. Part of it might be the fact that, human nature 
being what it is, many people believe that it is not going to 
happen to them. By definition, when you say 100-year 
floodplain, a one percent chance each year, and with the amount 
of time that many people stay in a particular residence, they 
discount the likelihood it is going to happen to them. Some may 
have issues with regard to affordability.
    Think of young people. Why do young people not buy health 
insurance? They do not think they are going to get sick.
    Chairman Shelby. And a lot of them do not get sick.
    Mr. Walker. But some of them do.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    Mr. Maurstad, I want to address the housing situation of 
the Katrina evacuees first. I have been quite concerned about 
this. I am very disappointed with FEMA's insistence on making 
decisions about continued eligibility for housing assistance on 
a case-by-case basis instead of putting out clear and 
transparent guidance.
    Now, the Congress in the conference report on the defense 
appropriations bill put the following directive: ``The 
conferees are concerned with the lack of guidance on housing 
assistance. Within 2 weeks from the date of enactment of this 
Act, the Director of FEMA shall issue guidance used to 
determine continued eligibility for housing assistance under 
the Section 408 program. Consistent with current FEMA 
regulations, such guidance shall include the extension of 
assistance if the recipient is unable to afford local housing 
at the fair market rent level.''
    Now, that 2-week deadline ended on January 13. Has this 
critical guidance been issued?
    Mr. Maurstad. Senator, the housing area is outside my scope 
of responsibility in the NFIP and the mitigation program. I 
know our recovery people are actively working on that. I will 
carry your concern back to Acting Director Paulison, and we 
will get you a response for that. But I do not have that 
answer.
    Senator Sarbanes. When you say they are actively working on 
it, I take it that means that it has not been issued as yet.
    Mr. Maurstad. I do not know, sir.
    Senator Sarbanes. You do not know. Well, if you could get 
an answer, we would appreciate that.
    Mr. Maurstad. I will.
    Senator Sarbanes. We also understand that FEMA has 
indicated they will stop reimbursing localities for debris 
removal at the beginning of March. Now, Katrina was an 
unprecedented disaster that left an extraordinary amount of 
debris. Cleanup in some neighborhoods has not even begun. Can 
FEMA extend this deadline?
    Mr. Maurstad. Sir, I was down in the Gulfport area the week 
before last and evidenced what you have indicated there. Again, 
I apologize. It is a similar answer that I gave you before. It 
is under our Recovery Division, Recovery Director. I know from 
sitting in meetings that they are looking at all these issues. 
Specifically as to whether or not that deadline can be 
extended, I will, again, get you an answer from Acting Director 
Paulison or the Recovery Division Director for you.
    Senator Sarbanes. Were you struck by your visit down there 
of the need to extend the deadline with respect to debris 
removal just as an informed observer?
    Mr. Maurstad. Sure. The handful of visits that I have had 
down to the Gulfport area, the devastation, as you know, is 
widespread. It is over a larger area than we have ever 
experienced before. It is a monumental task and chore. So 
certainly the removal of debris continues to be one of the high 
priorities of the Department.
    Mr. Walker. Senator Sarbanes, may I add?
    Senator Sarbanes. Yes, certainly.
    Mr. Walker. I had the opportunity to tour New Orleans and 
southern Mississippi as well as southern Louisiana. Clearly, 
there is a tremendous amount of debris removal that still has 
to be done.
    It is my understanding, Senator, although I will double-
check this and provide it for the record, that the President 
has the authority to extend the timeframe to do debris removal 
and for the Federal Government to pick up the entire cost. I 
believe that is within his discretion. It is something I 
believe he has done at least once before and may need to 
considered again, given the status of recovery.
    I would also respectfully suggest that one of the problems 
that exists in the area is that the States and localities need 
to develop a plan regarding where debris removal should take 
place, where leveling should take place in order to prepare the 
way for reconstruction. The Federal Government may want to 
think about extending full Federal payment for debris removal 
if there is a plan that addresses what the States and 
localities plan to do on a going-forward basis with regard to 
reconstruction. There needs to be some linkage here because it 
is a shared responsibility between Federal, State, and local 
government. In some cases, there are problems in connection 
with various governmental levels in doing what they need to do 
in order to take care of the people in need.
    Senator Sarbanes. I understand in Pass Christian, 
Mississippi, the Army Corps of Engineers is contracted to 
remove the debris, yet very little of it has yet been removed.
    Mr. Walker. It is also my understanding that there is a bid 
protest that has been filed with the GAO with regard to one of 
these requests for proposal, We are moving expeditiously to try 
to deal with that. At the same time, it is also my 
understanding that the Army Corps of Engineers can, if there is 
a clear and compelling national interest to move forward.
    They did use that in the case of Iraq and theoretically 
they have the ability to it in the case of an unprecedented 
national disaster such as this--or natural disaster in the Gulf 
Coast such as this.
    Senator Sarbanes. Mr. Maurstad, when you appeared in 
October, we made it clear that we expected the 2004 Reform Act 
to be implemented, including the requirement to implement a 
formal appeals process which was supposed to have been 
implemented by the end of 2004. Has a formal appeals process 
now been put into place?
    Mr. Maurstad. Senator Sarbanes, we are absolutely committed 
to implementing all aspects of----
    Senator Sarbanes. Well, I heard that before.
    Mr. Maurstad. I understand that, but I want to reemphasize 
it. We are in the rulemaking process for the appeals rule. We 
are working with OMB on expediting the completion of that. And 
I hope to have that completed next month.
    Senator Sarbanes. All right. I know my time is up, but I 
want to get one factual thing straight. You collect about $2 
billion in premiums annually. Is that right?
    Mr. Maurstad. About $2.2 billion in premiums and fees.
    Senator Sarbanes. And as I understand it, before we deal 
with this extraordinary situation we are now confronted with, 
you pay out about $1.2 billion in claims during an average loss 
year. Is that right?
    Mr. Maurstad. It is probably closer to between $900 million 
and $1 billion, average, the last numbers that I got.
    Senator Sarbanes. Does that mean that you add $1 billion a 
year to a reserve in a normal year?
    Mr. Maurstad. No, sir. The balance goes for the 
reimbursement of the write-your-own companies, for their 
administering the program on behalf of the Federal Government. 
It goes to support the Federal Insurance Administration budget, 
operational budget. And it goes toward some grant programs such 
as the flood mitigation assistance grants, and there has 
historically been about $40 million that has gone toward the 
mapping efforts, which was woefully inadequate, and the reason 
why we recommended and Congress along with our mapping 
coalition partners proposed the flood map modernization effort 
a couple of years ago, the $1 billion, 5-year program.
    Senator Sarbanes. Leaving aside the flood mapping, which, 
as you said, was $40 million, are you laying out about $1 
billion a year in order to sustain a system that pays $1 
billion in claims? Is that right?
    Mr. Maurstad. Well, that would be the case.
    Senator Sarbanes. That is a pretty high ratio, is not it?
    Mr. Maurstad. Again, if you are looking at the average loss 
year, in those years where there----
    Senator Sarbanes. You take in $2 billion in premiums.
    Mr. Maurstad. Excuse me?
    Senator Sarbanes. You take in $2 billion in premiums.
    Mr. Walker. Yes, sir.
    Senator Sarbanes. You pay out $1 billion in claims, roughly 
speaking.
    Mr. Maurstad. Yes, sir.
    Senator Sarbanes. And, roughly speaking, you use up the 
other $1 billion to sustain the infrastructure to pay out the 
$1 billion in claims. Is that right?
    Mr. Maurstad. That would be an accurate assessment.
    Senator Sarbanes. What are we to think of that ratio? What 
does the Comptroller think of it?
    Mr. Walker. Senator Sarbanes, I think it would be a good 
idea for us to take a look at these ratios as compared to other 
insurance programs and report back to you on it.
    Senator Sarbanes. Yes, absolutely.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    I am just going to continue on Senator Sarbanes questions. 
It has been 19 months--19 months--since the President signed 
the 2004 Act and over a year since the law's deadline to 
implement the reforms that were in that Act. Three months ago, 
you did not have an answer to this question, so I ask it again. 
And you kind of answered Senator Sarbanes. Are you telling me 
for sure that this will be implemented within a month or two?
    Mr. Maurstad. It is my hope and I am making a commitment to 
you that we have this rule published hopefully sometime next 
month.
    Senator Bunning. I am sure glad that the rest of the 
Federal Government does not work that poorly because that is 
just not acceptable.
    How has the response to last year's hurricanes affected the 
program's ability to respond to other floods not in the 
hurricane area?
    Mr. Maurstad. We have been able to continue, maintain 
providing flood claims, the payment of flood claims throughout 
the country because we rely on the 96 write-your-own companies 
who administer this program on our behalf and use their 
structure by which to issue the policies, adjust the claims, 
and make the payments. There is no question that the back-to-
back catastrophic years have not only stressed the fund, but 
also our human capital resources also. But we continue to serve 
all 4.7 million policyholders because of the partnerships that 
we have developed with private industry.
    Senator Bunning. You said in October when you were here 
that you were providing advisory information to the Gulf region 
on how to rebuild and reduce future damage. Can you elaborate 
on that?
    Mr. Maurstad. We have worked with the mapping partners and 
the engineers in the Gulf Coast area and developed advisory 
base flood elevations for the three coastal counties in 
Mississippi and 11 of the 15 parishes on the coastal area in 
New Orleans--I mean in Louisiana, to assist decisionmakers in 
how best to rebuild. Those advisory base flood elevations, of 
course, have higher elevations than what----
    Senator Bunning. Are they paying any attention to your 
advice?
    Mr. Maurstad. Yes, I believe that they are. In fact, part 
of my visit to the Gulf Coast, the Mississippi Gulf Coast area 
the week before last was to meet with the area mayors, area 
county representatives, banking industry, insurance industry. 
This was the topic of discussion. They had a lot of very good 
questions on what these advisories and their adoption of them 
or not at this point would mean to their rebuilding efforts. 
So, I do believe they are paying attention to them. A handful 
of the communities have adopted them, maybe a third of them in 
the Mississippi area. Other communities and counties are 
actively having meetings on it, part of their council meetings.
    I would say they are paying attention to them. Have they 
all adopted them? No. Do we continue to encourage them to do 
so? Absolutely.
    Senator Bunning. One of the things that this Committee is 
going to have to decide is premium versus payout, and if we are 
paying out $1 billion to run a $2 billion program, we better 
look at the program.
    There should be built into the Flood Insurance Program some 
type of reserve, and that would obviously go with premium 
increases and better mapping on where repetitive losses 
continue to mount up, and we do not charge the proper premium, 
obviously, in those areas. That was what was in the 2004 bill, 
and if it would have been implemented, particularly those 
people who need an appeals process because we had a lot of 
complaints about not being able to appeal a decision FEMA made, 
and if that was implemented more quickly, it would have been 
able to have been done a lot easier and with a lot less pain.
    So, I suggest that when this Committee considers the new 
changes that we are going to have to make, Mr. Chairman, that 
we consider some type of reserve system.
    Chairman Shelby. Absolutely.
    Senator Bunning. And we are going to have to look at 
repetitive loss again.
    Thank you very much.
    Senator Sarbanes. Mr. Chairman, if Mr. Maurstad does not 
meet the target dates he gave us, maybe we should start 
thinking now of another hearing to give him the opportunity at 
that point, not too far in the future, to explain why those 
target dates were not met.
    Chairman Shelby. Senator Sarbanes, we are going to bring 
our panel back, I am sure, more than once, because this is a 
very important issue for this Committee, and we are going to be 
thorough about how we approach it, because it cannot be done in 
a slipshod way in any way.
    Senator Sarbanes. That is fine.
    Chairman Shelby. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Maurstad, just for my own edification, this 100-year 
floodplain is a bit of a misnomer, is it not? It is not that an 
occurrence will happen possibly once every 100 years, but that 
the likelihood of exceeding the 1 percent, meeting or exceeding 
1 percent of the elevation, is that not it?
    Mr. Maurstad. Actually, sir, it is an indication that a 
particular property has a 1 percent chance in any given year of 
having a flooding event.
    Senator Menendez. So it could happen multiple times?
    Mr. Maurstad. Certainly can and certainly does.
    Senator Menendez. Let me ask you, listening to my 
colleagues on the Committee ask you about the implementation of 
the 2004 Act, on the whole issue of the pilot program that was 
set under the Act on repetitive loss property, I think it was 
severe repetitive loss properties. Is that also not advanced?
    Mr. Maurstad. That is not completed. We have done some of 
the provisions. We had the consultation meeting that was 
required. We provided the report on the appeals process within 
the repetitive loss pilot program. We have provided that. We 
are in the process of developing the rules and the regulations 
associated with that. We now have, as a result of the last 
appropriations bill, the funding available to implement that 
program. So we are in the rulemaking process, developing that 
program and hope to have that ready to go by the end of this 
fiscal year.
    Senator Menendez. By the end of this fiscal year?
    Mr. Maurstad. Yes, sir.
    Senator Menendez. The rule that you are promoting is not 
promoted yet?
    Mr. Maurstad. Which? On the repetitive loss?
    Senator Menendez. Yes, on repetitive loss.
    Mr. Maurstad. No, that has not been published yet. We are 
still in the development process of that.
    Senator Menendez. What is your estimate of when it will be 
published?
    Mr. Maurstad. On the Severe Repetitive Pilot Program, that 
is the one that will be by the end of this fiscal year.
    Senator Menendez. By the end of the fiscal year. So that 
means that the program itself will not actually take place 
until the next fiscal year?
    Mr. Maurstad. Well, we hoped--again, there are some of 
these--the ability to give you a firm answer is in some cases 
outside my complete control. Our target is to get the program 
in a final rule by the end of this fiscal year. We want to do 
it as soon as possible. We want to get the program up and 
rolling and working with our States and community partners to 
get this program started as soon as possible now that we have 
the funding to do so.
    Senator Menendez. Do any of the panelists have any 
information on the proposal to extend to a 500-year plain, what 
that means? Is there any quantitative element of that? How many 
people would be captured by it? What would be the possible 
average cost?
    Mr. Walker. Part of the difficulty, Senator, is, as was 
mentioned by Senator Dole previously, not all of the States 
have up-to-date floodplain maps with regard to the 100-year 
requirement. By extending it to 500 years, you are going to 
need more information on in order to be able to make an 
informed judgment. I am not sure whether or not the Director 
may have some information that we may not be privy to but that 
he might be able to share with you.
    Mr. Maurstad. Sir, we have a targeted range, we do not have 
a specific number. Somewhere in the neighborhood of impacting 4 
to 6 million households.
    Senator Menendez. And do we have any sense of what the 
average cost would be for those individuals?
    Mr. Maurstad. They would be, as far as the premiums that 
would be paid by those individuals, would be the lower risk 
rates, so I would think that they would be more in the 
neighborhood of $150 to $200 range, would be an estimate off 
the top of my head.
    Senator Menendez. And based upon the control time, it 
would, the updating of the maps, be a necessary prerequisite to 
be able to do that?
    Mr. Maurstad. Our ongoing map modernization that I talked 
about earlier, where we have mapped about 42 percent of the 
population at this point into the third year of the program, 
and so there would certainly be additional resources to map a 
500-year, as opposed to the 1 percent annual chance. So there 
would need to be some considerations made on our mapping, 
digitizing all of the flood maps.
    Senator Menendez. Finally, Mr. Marron, let me just ask you. 
You talked about that there is two ways of making this 
actuarially sound, raising money or driving out risk in the 
process.
    Mr. Marron. Yes.
    Senator Menendez. When we drive out risk, that has other 
consequential factors to it, does it not, both, obviously, to 
the individual---they make that choice--but if they make the 
wrong choice at the end of the day, we are either facing, if 
they get hit with a flood, a very costly consequence. Either 
they have the resources to deal with the consequence or they 
could lose their property, and that also has a consequence to 
municipalities in terms of ratable basis, right?
    Mr. Marron. Oh, absolutely. If people do not have the 
insurance and a bad event hits, they are going to face exactly 
the losses you described, and then there will be carryover 
impacts on the communities in which they live, and just to be 
clear, there may be impacts on the Federal budget to the extent 
to which that creates a political demand for some assistance to 
them.
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Shelby. Thank you.
    Senator Allard.
    Senator Allard. It seems to me that an important part of 
our Flood Insurance Program is our mapping. I view it as a 
foundation, and if we do not get that foundation firmly I 
place, I think it is very difficult for us to make good 
decisions. For example, a question was just asked about the 
500-year floodplain, and how people are going to be impacted. I 
know we have the technology to do the mapping. The question I 
have is, what is the average age of the flood maps that are 
currently being used?
    Mr. Maurstad. I think prior to the map modernization effort 
that started a couple of years ago, the average map was 15-plus 
years old on average, some less, many more, depending upon how 
high risk of an area that we would be talking about. We have 
been focusing on the highest risk areas first as we started 
this 5-year program.
    Senator Allard. I have run into some areas in Colorado that 
have not been updated in 50 years, and the local governments 
cannot make decisions about floodplains because they are not 
updated. So the question comes up, how do you decide which 
areas you are going to update, and how do you establish 
priorities? I would like to have a response to that question.
    I have another question concerning your statement that maps 
for 42 percent of the population have been updated. What 
percent of the geographic area of the United States has been 
mapped? To me that is a more pertinent question than percentage 
of population.
    Mr. Maurstad. We can provide you with the mapping 
implementation plan that has been developed and updated, but 
structurally, as you recall, when I was Regional Director for 
Region VIII and worked with the State of Colorado, we worked 
very closely with each of the States. They develop mapping 
plans according to the resources that are available by region. 
They do that using the plans that are developed at the local 
level. We have developed this from the local level up through 
the States to an overall Federal approach. So, I can get you 
what the current implementation plan is, which States, which 
counties are getting what map mod funding now and the balance 
of the program, so that you will be able to see how Colorado 
stacks up.
    Senator Allard. Do these local governments have to provide 
money to get this going, or is it just providing information?
    Mr. Maurstad. Initially, we provided funding to the States 
to assist in the development of the planning documents to 
utilize and assist the local communities. Different States 
approached it differently. We heard of North Carolina earlier, 
an approach they have taken, very aggressive program. But right 
now, we are in the process of developing the maps, and that is 
being funded by the Federal Government.
    Senator Allard. And who does the mapping? Is it contracted 
out or is it done by the Agency?
    Mr. Maurstad. Again, it is done differently, depending upon 
what part of the country. In your area we have a very active, 
cooperative technical partner--that is what they are called--
who work with contractors, who work with the State and the 
communities to develop the approach and develop the tools.
    Senator Allard. I have taken a lot of interest in the 
mapping. There are companies, and some agencies of the Federal 
Government, that will take an overhead, aerial photo, taken 
about 34,000 feet, plus the GPS system, plus the old USGS maps, 
and they will merge those all together in a program and come up 
with extremely accurate maps. In fact, they find many errors in 
the old USGS maps. I would hope that we are utilizing that type 
of technology. Then the remapping, once you get everything in 
place, should move along fairly rapidly. What is it that we can 
do to get these maps more current in a speedy fashion so that 
the information that we are getting is also more accurate?
    Mr. Maurstad. Right now we are aggressively implementing 
the current authorization of the $200 million a year for 5 
years in developing new Digital Flood Insurance Rate Maps for 
the country based on the priorities that were developed in 
working with the States and the locals.
    Back to your question earlier, 75 percent of the maps are 
more than 10-years-old, and that is why Congress recognized 
that we needed to do this map modernization project. It is very 
important, one of the three legs of this NFIP stool. The plan 
is online, but would be more than happy to meet with you and 
visit with you on how the mapping is under way in the State of 
Colorado.
    Senator Allard. Thank you.
    Mr. Walker. Senator, may I intervene?
    Senator Allard. Go ahead.
    Mr. Walker. I think this is a critically important issue. 
We have obviously had a number of significant subsequent 
events. There is a real need to update these maps. In my 
lifetime, I have lived on one property that was on 100-year 
floodplain that did not flood, and another one that was not on 
a 100-year floodplain, and it did flood. So, I think it is very 
important that this be done. I guess the real question is, is 
this a money problem and/or a capacity problem? I do not know 
the answer to that, but it seems to me that the need is clear 
and compelling.
    Senator Allard. Mr. Chairman, just one additional question?
    Chairman Shelby. Go ahead.
    Senator Allard. Is the program that we have in place now 
with the $200 million, adequate to complete remapping within 
the 5-year plan that you mentioned?
    Mr. Maurstad. We have the $200 million, plus the NFIP 
continues to have $40 million, plus there are resources that 
are put in by those States or local communities that have 
information or data to share with the program. We are learning, 
as we get into the program, and we are working with the 
Department on determining whether or not additional resources 
will be needed beyond the current 5-year period to make sure 
that we adequately do what Congress is looking for in this 
program.
    Senator Allard. Thank you, Mr. Chairman.
    Chairman Shelby. Thank you.
    Mr. Marron, I will direct this question to you. If the 
Flood Insurance Program had started on a actuarially sound 
footing, do you have any sense of what the current reserves 
would have been pre-Katrina?
    Mr. Marron. I am sorry, no, we have not done that 
calculation, but we could and follow up.
    Chairman Shelby. Would you follow up with that for the 
record?
    Mr. Marron. Absolutely.
    CBO cannot determine with precision the additional money 
that would have been collected if all premiums for flood 
insurance had been actuarially based since the inception of the 
program, in large part because actuarial premiums would have 
significantly reduced participation in the program by 
individuals and communities. As noted in the testimony, the 
peer-reviewed study of demand for flood insurance estimated 
that the price elasticity for dollars of coverage is -1.0, 
which would imply that coverage falls enough in response to 
price increases to leave total premiums unchanged. In that 
case, the benefit to the program of higher premiums would have 
taken the form of reduced risk exposure and lower payouts, not 
higher premium income. Note, however, that the elasticity 
estimate was derived from data on the effects of relatively 
small price increases that did not lead whole communities to 
drop out of the program; had all premiums been actuarially 
sound from the outset, it is likely that fewer communities 
would have decided to participate, and hence that the program 
would have lost some of its unsubsidized policies as well.
    FEMA staff have given CBO a rough estimate that the 
subsidies provided in the NFIP over time have cumulated to 
between $15 billion and $18 billion, measured in today's 
dollars. FEMA's calculation reflects the simplifying assumption 
that the current premium shortfall on subsidized policies 
applied to policies sold in past years. The net impact of that 
assumption is unknown: Past policies carried smaller coverage 
limits, on average, but were more heavily subsidized in 
percentage terms. In any case, FEMA's calculation overstates 
the amount of additional revenues the NFIP could have taken in 
under full actuarial pricing, because it does not take into 
account the fact the volume of coverage sold would have been 
lower under such pricing. For the reasons noted above, the 
improvement in the program's actuarial balance from actuarial 
pricing would have been split between increases in premium 
income and reductions in payouts on flood losses.
    Chairman Shelby. I will direct this question to Mr. Walker 
at GAO. Could you explain to the Committee how the current 
mandatory coverage requirements applies to a particular home? 
Should we consider expanding the mandatory coverage to other 
homes within the 100-year floodplain, such as those with non-
Federal mortgages?
    Mr. Walker. Senator, my understanding is that individuals 
who have a mortgage from a Federal regulated lender, and who 
are within the 100-year floodplain, are required to buy flood 
insurance up to the extent of their mortgage, capped at 
$250,000.
    Chairman Shelby. How is that program implemented? How do we 
know they do it? It might be a requirement, but is it actually 
done?
    Mr. Walker. Obviously, the lender has a direct incentive to 
make sure that it is implemented, because it serves to protect 
them from loss. But one of the issues that was raised before by 
Senator Carper, was whether and to what extent that money is 
required to be escrowed to make sure that the premiums are paid 
and the coverage is in place.
    As you know, Senator, there are individuals who do not have 
a mortgage and who are in a 100-year floodplain. In fact, some 
very poor people who may have a home that has been in their 
family for generations, such as New Orleans, who do not have a 
mortgage, are not required to have flood insurance, and they 
may not purchase flood insurance. Furthermore, if an individual 
obtains a mortgage from a non-federally regulated lender, they 
are not required to have insurance.
    Chairman Shelby. It is my impression, Mr. Marron, to go 
back to you, it is my impression that many of the homes 
currently receiving explicit subsidies are second homes. Does 
the CBO, the Congressional Budget Office, have an estimate of 
how many second homes are currently receiving subsidies under 
the Flood Insurance Program, and would eliminating second-home 
subsidies, what would that bring to the program?
    Mr. Marron. Again, that is not an estimate that we have 
done.
    Chairman Shelby. Would you run some numbers on that?
    Mr. Marron. Be happy to see what kinds of--and I should 
actually have placed this as a caveat on my previous answer--we 
will see what numbers are available to give you responsive 
answers.
    Senator Sarbanes. Doesn't FEMA have those numbers, Mr. 
Maurstad?
    Mr. Maurstad. We have--yes, sir.
    Senator Sarbanes. On primary residences and nonprimary 
residences?
    Mr. Maurstad. The nonprimary-nonresidential subsidized 
properties would contribute about $50 million annually more, 
and the other than primary residences would be about $200 
million if they were actuarially risk-based rated.
    Mr. Walker. I think that is an important point.
    Senator Sarbanes. Yes. But I think the question was what 
percent of the flood insurance on homes that are primary 
residences----
    Chairman Shelby. Second homes.
    Senator Sarbanes. And second.
    Chairman Shelby. Do you have that number? I will ask the 
question again, just for the record. Does the Congressional 
Budget Office have an estimate of how many second homes are 
currently receiving subsidies under the Federal Flood Insurance 
Program? In other words, how many second homes? You say you do 
not have that.
    Mr. Marron. We do not have that at the moment.
    Chairman Shelby. But you will get that information.
    Mr. Marron. We will see what data is available, yes.
    According to data provided by FEMA, about 363,000 of the 
1.2 million subsidized policies as of December 31, 2005, or 30 
percent, are for properties identified as residences other than 
principal residences. Those subsidized non-principal residences 
include 180,000 (15 percent of all subsidized structures) for 
single families, 41,000 (3 percent) for two to four families, 
and 142,000 (12 percent) for more than four families. The 30 
percent share is consistent with the fact that non-principal 
residences account for 31 percent of all NFIP policies, 
subsidized and non-subsidized. The remaining subsidized 
structures include 765,000 (63 percent) principal residences, 
76,000 (6 percent) commercial structures, and 11,000 (1 
percent) residences that the data do not identify as principal 
or non-principal.
    Chairman Shelby. Mr. Walker, do you have that information 
at GAO.
    Mr. Walker. I do not, but I think it is very important. It 
comes back to what I said before.
    Chairman Shelby. Very relevant.
    Mr. Walker. Yes, I think it is very relevant. I mean, what 
is the purpose of this program? To the extent it is a primary 
residence is one thing. To the extent it is a secondary 
residence, it is another, and what are the financial means of 
the individuals involved?
    Chairman Shelby. Would you look into that too? I know you 
all will collaborate.
    Mr. Walker. We will collaborate.
    Chairman Shelby. Collaborate on that.
    Mr. Marron, going back to you, Congressional Budget Office. 
In numerous portions of your written testimony you state the 
importance of scoring the Flood Insurance Program on the 
budget. We know what you mean by scoring, and most people do, 
but maybe the American people do not. Could you elaborate on 
why it is so critical to score the Flood Insurance Program on 
the budget, and what do you mean by scoring?
    Mr. Marron. Sure. If I could just step back. In thinking 
about our budgetary institutions, there are two key issues. One 
is how we reflect programs like this on the reported budget so 
that we can see it in the historical data. And then there is 
the process that CBO is engaged in of forecasting or projecting 
what a baseline budget might look like in the future.
    And then scoring is the activity of evaluating proposed 
legislation against that baseline.
    Chairman Shelby. As to the cost, right?
    Mr. Marron. Yes, as to cost.
    Chairman Shelby. So future cost to the taxpayer?
    Mr. Marron. Exactly.
    Mr. Walker. Mr. Chairman, a key point is part of the 
problem is the way we keep score. In many cases, we are keeping 
score on a cashflow basis, based on 1-year, 5-year, or 10-year 
horizons, rather than on a discounted present value accrual 
basis. One example of that is it is not just with regard to 
insurance programs, but the Federal overall budget. The overall 
deficit last year on an accrual basis was several hundred 
billion dollars higher than was publicly reported because of 
how we keep score, and that is part of the problem.
    Chairman Shelby. So scoring is important, and how you keep 
that score is very important; is that correct, Mr. Walker?
    Mr. Walker. I agree.
    Chairman Shelby. Mr. Marron, do you agree with that?
    Mr. Marron. Absolutely.
    Chairman Shelby. Mr. Maurstad, I am not going to leave you 
out.
    Mr. Maurstad. Thank you, sir.
    Chairman Shelby. One of the primary purposes of the 
explicit subsidy of preflood insurance, homes, that is, houses 
built before the completion of the Flood Insurance maps was to 
minimize the financial burden on families that were then 
residing in flood-prone areas. Is there any change in the level 
of subsidized rates when one of these pre-FIRM property, pre-
Flood Insurance is sold? In other words, does it remain the 
same?
    Mr. Maurstad. It does remain the same.
    Chairman Shelby. Why is that? It looks like that could be 
another risk there.
    Mr. Maurstad. I believe that is the way that the current 
regulations are. I think it goes back to when the program was 
designed initially. There was a feeling that over time, maybe 
50 years, these pre-FIRM structures would move on, so to speak.
    Chairman Shelby. Disappear?
    Mr. Maurstad. Disappear. And that has not occurred at the 
rate that was anticipated back 37 years ago. Part of it is also 
when homes are substantially damaged, or are damaged, that 
there is a desire to try to keep the damage under our 50 
percent requirement of updating those homes so they can stay as 
they are. So there are a number of factors that involved as to 
why those structures are still with us.
    But if I could ask, sir, I have some numbers on our 
operating budget. If I could provide those to you?
    Chairman Shelby. Could you furnish that? I know Senator 
Sarbanes posed that question, but we are all interested in 
that.
    Mr. Maurstad. Okay. The $2.2 billion income is broken down 
in this fashion. About $1 billion is set aside for the average 
loss year claims; $650 million for the write your company 
expenses claims processing; $200 million for operations, the 
mapping that we talked about, the Flood Mitigation Assistance 
Grant Program; and then about $350 million for reserves to 
assist the program in those years where there is what I would 
guess you could define, given last year's event, as minimum 
fluctuations in the program and the ability to have a small 
amount of reserves set aside to help through those ups and 
downs in those years, along with the borrowing authority that 
allows us to go through those nonaverage claim years. So that 
is how that $2.2 billion is broken down.
    We will look at, working with you, in assessing whether 
that needs to be----
    Chairman Shelby. Would you furnish for the record the 
details of that?
    Mr. Maurstad. Yes, sir.
    Mr. Walker. Mr. Chairman, just based on the numbers, that 
is an over 40 percent administrative expense ratio.
    Chairman Shelby. That is high.
    Mr. Walker. Most of that is paid to the insurance 
companies, I might note.
    Chairman Shelby. We would like to know where that money 
goes, would you not, Senator Sarbanes?
    Mr. Walker. We will get that to you, sir.
    Chairman Shelby. One last question here. The Flood 
Insurance Reform Act of 2004 established a mechanism for 
addressing worse properties, so to speak, which have suffered 
repetitive flood losses. These repetitive loss properties 
represent, I believe, a significant drain on the Flood 
Insurance Program. Should the program, as we get into reforming 
it, continue to insure any eligible property regardless of how 
much we have paid on it? Mr. Walker? In other words, you have 
areas that you know are going to be at high risk over and over.
    Mr. Walker. Senator, it comes back to what I said before. I 
think you have to look at what is the nature of the area, what 
is the nature of the development and the population of the 
area, and what are the means of the individuals there.
    Chairman Shelby. We understand all that risk because a lot 
of us, including my State of Alabama, we have a lot of that 
risk there. We were very lucky. But look at all States with a 
big shoreline, subject to hurricanes and everything that goes 
with it. Go ahead.
    Mr. Walker. I think the program has to be targeted much 
more as to who is covered, to what level, and it also has to be 
risk related to a much greater extent with regard to the 
premium structure than it has been previously.
    Chairman Shelby. But if it is risk related, that would tend 
to make it more actuarially sound, would it not? There is a 
correlation there.
    Mr. Walker. It would. The NFIP still has a huge accumulated 
deficit that is going to have to be dealt with. The accumulated 
deficit right now is about $23 billion. The question is, can 
you make this program actually sound on a go-forward basis, and 
service the debt or not? There are a lot of issues here that 
have to be looked at. It is actuarially sound from here 
forward, but what about the $23 billion sunk cost and the 
related accumulated interest costs.
    Chairman Shelby. I would be curious when that is going to 
be paid off too and how.
    Senator Sarbanes, do you have any further questions?
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    I want to try to get this in some context and address some 
of these concepts. The hurricane that hit the Gulf Coast and 
New Orleans was of an order of magnitude that far exceeded 
anything we had ever experienced; is that correct? What is that 
order of magnitude? You are talking now about $24 billion, as I 
understand it. You have borrowing authority for $18\1/2\ 
billion. You want another $5\1/2\ billion, which you think will 
meet all legitimate claims. That is your estimate, although we 
will see what carries through, but that is your estimate. So 
you are shy $5\1/2\ billion borrowing, but that is a $24 
billion bill for this hurricane, or two hurricanes, whatever. 
Now, how does that compare with previous hurricanes?
    Mr. Maurstad. It far exceeds the magnitude of any 
individual event that has ever occurred.
    Senator Sarbanes. What is the largest previous event of a 
hurricane flooding?
    Mr. Maurstad. The largest season would have been 2004, the 
cumulation of the four hurricanes of 2004 which produced about 
$2 billion----
    Senator Sarbanes. Two billion?
    Mr. Maurstad. --$2.2 billion in losses.
    Senator Sarbanes. All four added together?
    Mr. Maurstad. Correct, during 2004. The magnitude of this 
storm----
    Senator Sarbanes. So that is one-tenth of this.
    Mr. Maurstad. That is correct.
    Senator Sarbanes. I just want to make this observation. I 
think there is a danger in addressing the basis program in the 
context of these kinds of figures because I do not see any 
rational program that you could put into place that would 
provide actuarial soundness against this amount of damage, as I 
understand it. Let me give you an example.
    As I understand it, if you get the borrowing authority and 
you go up to those figures, the interest cost on that borrowing 
authority is going to cost you close to another billion dollars 
a year, is that right?
    Mr. Maurstad. Yes, sir.
    Senator Sarbanes. You are getting $2 billion in revenue 
now, so that means just to cover the interest on the borrowing, 
you would have to increase your revenues from where they are 
now by another 50 percent. Is that correct?
    Mr. Maurstad. Yes, sir.
    Senator Sarbanes. And that does not make any provision for 
repaying the principal; is that correct?
    Mr. Maurstad. I believe that is why the Chairman indicated 
the program was bankrupt.
    [Laughter.]
    And why structural, meaningful reform is needed now.
    Senator Sarbanes. Yes, but the question is, are you going 
to set out on a challenge of reform that would encompass the 
capacity to handle a storm of this magnitude? And if you set 
out on that path, you would have to increase your revenues 10 
times over, so you are going to jump the insurance 10 times--
well, I mean these are rough calculations, but I am just trying 
to get this in some perspective.
    I think we have two problems. One is, how do we address 
this tremendous catastrophe, far exceeding anything we ever 
experienced, and we have a real problem there. And then the 
other is what do we do about--and it helps to highlight some of 
the problems, but it does not answer. The other is, what do we 
do to the system in order to strengthen it and to make it work 
better?
    Mr. Walker. Senator, I agree with you wholeheartedly. My 
point is you should look at the sunk or legacy cost, $23 
billion, most of which is directly attributable to the recent 
catastrophic events dealing with Katrina and Rita.
    Chairman Shelby. It could be more, could it not?
    Mr. Walker. It could be more. But you are starting off 
deeply in the hole. I think you have to do several things. One, 
you have to figure out what does it make sense to do with the 
Federal Flood Insurance Program from this point forward in 
order to provide reasonable but not absolute assurance that it 
can be actuarially sound with regard to activities from this 
point forward. That is a separate issue from what you should do 
about that $23 billion. You have to decide whether and to what 
extent you want to cover the cost of that $23 billion and/or 
the related debt service cost as part of your reform package 
through the insurance program, or whether or not you want to 
deal with that some other way.
    Senator Sarbanes. If you try to do it through the insurance 
program, you are imposing an incredibly heavy burden. I do not 
even think if you leave that out that through the insurance 
program you could make adequate provision going out into the 
future to handle a natural catastrophe of this magnitude. It 
just exceeds whatever is within the ball park as a reasonable 
way to try to deal with this.
    Mr. Walker. I would respectfully suggest that you are going 
to need to deal with the legacy cost separately. Then you are 
going to need to look and decide how best to proceed with this 
program going forward. You may not be able to adequately fund 
for an event like Katrina happening again, but clearly, we can 
do much better than we have.
    Senator Sarbanes. I think that is an appropriate 
observation. Let me ask you this question, because we are 
compounding the complexity of this by introducing this 500-year 
floodplain. I am not clear that we have fully explored the 
application of 100-year floodplain in terms of helping to 
strengthen the program.
    Let me ask just a couple of questions on that score. At the 
moment, if you have a mortgage from a federally regulated 
financial institution, you must have flood insurance if the 
home is located in 100-year floodplain, correct?
    Mr. Walker. Up to the value of the mortgage, capped at 
$250,000.
    Senator Sarbanes. Right, which is another limitation. What 
percent of the homes that are covered by that application have 
flood insurance?
    Mr. Maurstad. I believe there was a recent study--recent, 
within the last 5 years--that would indicate that in the 
neighborhood of 40 to 60 percent of the homes----
    [Pause.]
    Senator Sarbanes. Are you straightening something out 
down----
    Mr. Walker. I was trying to understand whether the 40 to 60 
percent was the percentage that were required to have it that 
had it.
    Senator Sarbanes. Yes, that is what I am asking.
    Mr. Maurstad. That gets at the heart of the effectiveness 
of the mandatory purchase by the lenders, and, again, all I can 
do is share from recollection--I will try to find the exact 
study for you--that in the neighborhood of 40 to 60 percent of 
those that should have it under the mandatory purchase do. But 
it has been an issue that has not been thoroughly studied and 
for which there are differing opinions.
    Senator Sarbanes. So about half of the ones that are now 
required to have it--and that is a limited universe of all of 
the houses in the 100-year floodplain. But about half of those 
have it. Is that correct?
    Mr. Maurstad. Again, my recollection, I think GAO has done 
some look at this in the past and maybe in their recent reports 
have indicated that they have not been able to develop a 
definitive answer to that, but I do not want to speak for GAO.
    Senator Sarbanes. Again, doing a rough calculation, because 
it is affected by the value of the house and so forth, but 
presumably if 100 percent had it instead of 50 percent, you 
would double the money coming in, roughly speaking. Is that 
correct?
    Mr. Maurstad. If those premises are accurate, yes.
    Senator Sarbanes. Yes, and this is required under existing 
law. So we are only getting 50 percent of the required money. 
Now, that does not address the question of being in a 100-year 
floodplain and having a mortgage from a non-federally regulated 
financial institution or having no mortgage at all.
    Now, just one final point, Mr. Chairman.
    Chairman Shelby. Go ahead.
    Senator Sarbanes. The subsidized payments, as I understand 
it, go to homes that were in the floodplain before 1974. Is 
that right?
    Mr. Marron. Before the community's flood rate now.
    Mr. Maurstad. Right, before the community adopted their 
existing flood insurance rate map.
    Senator Sarbanes. I see. So if those homes seek flood 
insurance, they get a subsidized rate. If you put a house into 
the floodplain after and you want flood insurance, you have to 
pay the actuarial rate. Is that correct?
    Mr. Maurstad. You cannot put a house into the floodplain 
after the flood insurance rate maps are adopted unless they are 
at the adopted base flood elevation by the community. And then 
they would not be in this pre-FIRM category.
    Senator Sarbanes. And do those homes pay an actuarial rate?
    Mr. Maurstad. Yes. On new construction, on construction of 
substantially damaged homes, and on construction of 
substantially improved homes that are built at the base flood 
elevation are higher, they pay actuarial rates and that is why 
the number of subsidized homes has been going down over the 
years. It has just not gone down at the rate at which it was 
initially intended.
    Senator Sarbanes. If I remodel a subsidized home, do I pay 
an actuarial rate or do I continue to get the subsidized rate?
    Mr. Maurstad. If the improvement is more than 50 percent of 
the market value of the property, then you would pay the 
subsidized rate.
    Senator Sarbanes. No, I would pay the actuarial rate.
    Mr. Maurstad. The actuarial rate. If it is more than 50 
percent--I am sorry if I have been unclear. If you are 
substantially improving the home, more than 50 percent of its 
market value, you would have to elevate the current base flood 
elevations, and then you would not pay the subsidized rate. You 
would pay the actuarial rate, which would be less.
    Senator Sarbanes. It would be what?
    Mr. Maurstad. It would be less.
    Senator Sarbanes. Less than what?
    Mr. Maurstad. Less than the subsidized rate. The subsidized 
rates are actually more expensive than the risk-based rates, 
because they are more at risk, they are below the base flood 
elevations.
    Mr. Walker. But the cost to raise the property up to the 
standards could be substantial. In other words, what could be 
going on here--and I would ask the Director. He has the data. 
But what could be going on here is when you have a cliff like 
that, people could be making adverse selection decisions to 
decide whether or not, and to what extent to improve, in order 
to maximize their personal benefit.
    Mr. Maurstad. As Mr. Marron indicated earlier, the average 
premium for subsidized is $700. The average rate for an 
actuarial rated property is $400. So even though that property 
is subsidized, they still pay a higher premium because they are 
the most at-risk properties. That is why they needed the 
subsidy.
    Senator Sarbanes. Are those the figures you use?
    Mr. Marron. Ours were slightly different but comparable 
with that, the average subsidized property at $710 and in our 
calculations the average unsubsidized property at $340, and for 
the reason that he mentions, that the subsidized properties are 
systematically more risky than the average.
    Senator Sarbanes. I see. Thank you, Mr. Chairman.
    Chairman Shelby. Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Thank you very much, Mr. Chairman. Thank you 
for holding this hearing. Like all of our colleagues, after 
Katrina and Rita I rushed up to Rhode Island, the Ocean State, 
and tried to make an assessment of what could happen if we 
received a hurricane of that magnitude. And what I discovered 
at one point was that the FEMA maps are out of date; 70 percent 
are over 10 years old. In my State of Rhode Island, they are 20 
years old out of date. They do not incorporate the Army Corps 
of Engineers inundation maps, which might give certainly a 
fuller appreciation of potential consequences of a flood. And I 
came back and have introduced legislation, the National Flood 
Mapping Act of 2005, which I hope in our deliberations we can 
consider. It would first require a more rapid updating of these 
maps so that we are dealing with the present situation.
    I do not think Rhode Island is alone, but in the last 20 
years, much has changed on our coastline. Thousands of homes 
have been built. People are flocking there, as they are up and 
down the east and west coasts, and yet these maps do not 
reflect that kind of human intrusion and habitation. And we 
should make these maps accessible by putting them on the 
Internet so that everyone can see quite quickly where the lines 
are with respect to inundation floods, and standards for 
establishing maps should be more uniform, and also directly 
identifying those areas that could be affected by hurricanes, 
and certainly asking the Comptroller General to make 
recommendations about our policy along these coastlines in 
terms of building and development. I think that is essential, 
and I hope as we go forward we can grapple with these concepts 
embedded in this bill.
    We know hurricanes are going to happen again in Rhode 
Island. Climatologists suggest that the lull in hurricanes that 
I have observed anecdotally since being a child in 1954 with 
Hurricane Carol is anticipated to pick up by many scientists, 
and we know it is coming. So, I think we have to make these 
improvements. I thank you again, Chairman, and the Members for 
their participation today.
    Let me ask just one question, because I know that you have 
been here for a while, and that is to the Comptroller General. 
I am concerned about whether enough attention, staff, and funds 
have been provided to natural disaster and predisaster 
mitigation since FEMA became part of Homeland Security. You 
know, has GAO looked at the resource allocation and its 
potential impacts on State and local governments with this 
transfer?
    Mr. Walker. My understanding, Senator Reed, is the answer 
to that is no.
    Senator Reed. Could you elaborate? You have not looked at 
it?
    Mr. Walker. We have not looked at that specific issue. We 
have looked at many issues and we are looking at many issues 
dealing with FEMA, Katrina, and Rita, but not that issue. We 
would be happy to talk to you and the Committee.
    Senator Reed. I think it is important since we have heard 
in other contexts where agencies--not just FEMA but other 
agencies moved into DHS have found difficulty establishing 
their home and their funding sources and fulfilling their 
mission. So, I would ask you to look at that, and I would be 
happy to talk with you.
    Mr. Chairman, let me stop at that point right now.
    Chairman Shelby. Thank you.
    Senator Carper.
    Senator Carper. Thanks, Mr. Chairman. We are really blessed 
with the witnesses that are before us today. This is a good 
panel, and I just regret that I could not be here for the whole 
thing. We have another concurrent hearing going on, on ethics 
and lobbying reform and stuff like that. So, I have been 
bouncing back and forth. You know how it works.
    Let me preface my larger questions by making a request of 
Mr. Maurstad, and that would be just to ask you to share for 
the record how many homes in Delaware would be included in the 
100-year and the 500-year floodplain. If you could do that for 
the record, I would appreciate it.
    I want to go back to something that Senator Sarbanes was, I 
think, speaking to, and I just heard part of what he was 
saying. I understand that one of the reasons why a lot of 
people elect not to have flood insurance even though they are 
in a risky area is because their homes are paid for and there 
is no real requirement for whoever has provided the mortgage to 
stipulate that flood insurance be required.
    But I think I heard Senator Sarbanes say something about in 
those places where coverage is required or mandated of 
homeowners, only about 50 percent of the homeowners actually 
have obtained the coverage. I think I heard him say that. If 
that is correct, why only 50 percent? Why aren't the other 
people getting the coverage as well?
    Mr. Maurstad. I believe Senator Sarbanes was taking the 
estimate that I provided off the top of my head of between 40 
and 60 percent. You know, why it is not more effective, again, 
anecdotally or what I have picked up when I have asked the same 
question is the amount is not escrowed and so the policy does 
not stay in force beyond the initial time that the mortgage was 
written. The mortgage may be sold to someone else, and during 
that period of time, the policy lapses. So there are a number 
of anecdotal--I also indicated that recollection tells me that 
there was some type of a study done on this within the last 5 
years. I would like to see if I can discover that and provide 
it to the Committee if so. But, again, I believe that there 
have been attempts by GAO also in the past to be able to 
measure this, and they have not been able to get their thumb on 
it, as I recall. But I do not want to speak for the 
Comptroller.
    Senator Carper. Okay. Thank you.
    Mr. Walker. Senator, my understanding is that there is a 
massive data reliability problem here. I think one of the 
things that the Senate may wish to consider is, to the extent 
that you are dealing with entities that are mortgages that are 
issued by a federally regulated entity, if the major problem is 
that people may end up paying it in year one but not in later 
years, then you might require that these amounts be escrowed in 
order to assure that the premiums get paid on a recurring 
basis.
    Senator Carper. Thank you.
    Mr. Maurstad. Sir, in addition, we work with our Federal 
partners in this area. The lenders, I believe, since they are 
not at the table, would indicate that they would believe that 
that percentage is higher than what I have characterized and 
believe that there is greater enforcement of that. It may be a 
good question. Maybe the lenders have done a study and they are 
aware of what these numbers are. But I do know--and it is what 
has been evidenced by this last storm, and it also came forward 
in the 2004 storms--that the unmet need of those that lacked 
insurance is greater than what people's expectations were. And 
many of those--although there has not been any number, many of 
those had to have mortgages. I know Congress is dealing with 
those unmet needs.
    Another issue in addition to the escrowing amount that I 
believe we need to look at is instead of requirement of just 
covering the amount of the loan, we should look at providing 
insurance to value during that period of time so that people 
that also are finding themselves having a flood policy but not 
having an adequate limit would have had that mandatory 
requirement to have a limit that would insure them better at 
the time of the loss.
    Senator Carper. All right. Thanks.
    Mr. Chairman, just one last question, if I could, and I 
would ask the panel if you would just be brief in responding to 
this. As I said earlier, we have very bright people before us 
on this panel, and I have not heard you testify. I have not 
heard everything. I heard part of your testimony, but not all 
the questions that followed it. Where do you agree? What are 
the basic areas you agree on in terms of the kinds of reforms 
that should be adopted? And what are the consequences if we do 
nothing more?
    Mr. Walker. I would respectfully suggest--and we will see 
if my colleagues agree with this--that the National Flood 
Insurance Program is $23 billion in the hole, primarily 
attributable to Katrina, Rita, and Wilma, because up until 
those events it was in reasonably good shape. Congress is going 
to have to decide how to deal with that $23 billion, which is a 
sunk cost. In addition to that, because of all that we have 
learned over the years, including Katrina, Rita, and Wilma, the 
program is going to need to be reformed in order to determine 
who should be covered, to what limits based at what rates, and 
whether or not escrow is appropriate, et cetera.
    So, I think we are all saying there needs to be substantive 
and comprehensive reform going forward of the program, not just 
to allow them to borrow more money, but also how you are going 
to deal with that $23 billion negative number to start off 
with.
    Mr. Marron. If I could just build on that?
    Senator Carper. Sure, Mr. Marron.
    Mr. Marron. As David Walker said, a clear issue is the 
program appears to be--``bankrupt'' is the word that has been 
used, and just as a matter of the physics and actualities of 
how you run the program, that will have to be addressed in some 
way, and obviously it is something that Congress will have to 
address.
    If there are no significant changes to the program because 
of the subsidies that are built in, the program will continue 
to build up a fiscal hole. And that may or may not be apparent 
in coming years, depending on what storms hit us and what 
claims result. But over time we are building up that risk.
    And then the third point I would just make is that because 
the Government has chosen to be in the insurance business, even 
if we moved to actuarially fair rates and so that on average we 
expect to break even, there is still a risk out there that we 
might get unlucky. And so that if all we do is move to 
actuarial fairness, there is still the possibility that things 
could turn out very poorly.
    Senator Sarbanes. Yes, but let's face facts. Is anyone 
positing that you can structure the Flood Insurance Program in 
a way that would enable you to cover, in some actuarially sound 
way, the costs of a catastrophe of the magnitude of Katrina?
    Mr. Walker. Not with a 100-percent probability, no. There 
are two issues. One, what do you do with the cost of Katrina? 
And, second, going forward, which you are raising, Senator, how 
do you recognize the fact that you can do a better job, but you 
will never with 100-percent certainty be able to cover those 
types of costs?
    Senator Sarbanes. Yes, I think you have to segment this 
out. First of all, the Flood Insurance Program is not working. 
Even if you left Katrina out, it was not working well. We 
addressed those questions to Mr. Maurstad, all the trouble 
people have, the appeals process and all the rest of it.
    Second, going a step beyond that, it could do a better job 
of bringing in resources and building up its strength than it 
is doing now. We do not have 100-percent enforcement on the 
covered properties. Others should be covered. The flood maps 
have not been updated. On and on and on. You have to address 
the subsidized rate and so forth. So you could strengthen the 
program and its ability to handle hurricanes.
    But the biggest previous hurricane was $2.2 billion. The 
four hurricanes added up together in 1 year. This is $24 
billion. Now, you are not going to get the program up to the 
capacity of being able to handle $24 billion. You can do better 
so it can handle, you know, 3 or 4, whatever. I mean whatever 
is within reason. But beyond that, we are going to constantly 
face the problem of how do we address this kind of catastrophe 
when it happens. And then if you really address it, then you 
have an equity situation between people who did not get flood 
insurance and yet they get covered because you have this 
pressing human disaster, as opposed to the people who are 
paying out and getting flood insurance who can then say to you, 
well, I did not have to get this flood insurance, they would 
have taken care of me with this huge catastrophe that happened.
    I have one final question. Mr. Maurstad, is the 
Administration going to submit to the Congress a statutory 
proposal for the reform of the Flood Insurance Program?
    Mr. Maurstad. At this point in time, I believe that my 
testimony serves as the purpose for the----
    Senator Sarbanes. It is not a statute. Why don't you all--
you are the experts, supposedly. I say that advisedly. You are 
the experts on the Flood Insurance Program. Why shouldn't it be 
part of your responsibilities here to send up to the Congress a 
proposed statute to reform the Flood Insurance Program? We may 
or may not agree with all of it, but it would give us a working 
basis.
    Chairman Shelby. It would be a proposal, anyway.
    Senator Sarbanes. Yes, it would be a proposal.
    Senator Carper. Mr. Chairman.
    Chairman Shelby. Senator Carper.
    Senator Carper. The witnesses never had a chance to really 
answer the second half of my question. I would ask you just 
very briefly, if you would, what are the consequences of our 
doing nothing further on this score?
    Mr. Maurstad. I think that you certainly have the basis for 
what has occurred in the last 2 years repeating itself. We need 
to take this opportunity, as has been the case after other 
major events in the 37-year history of this program, for 
substantive, meaningful reform to occur post this type of an 
environment. There is not one thing that will solve the 
problem. It is going to take a number of initiatives to make 
the program stronger. We are going to need to look at is there 
a mechanism by which to structure the premium rates to have a 
component for reserve for catastrophe years such as this.
    Another alternative may be like the private insurance 
market--
    Senator Carper. What I was asking, what are the 
consequences of our doing nothing? I was not asking you for a 
prescription of things we should do, but what are the 
consequences of our doing nothing? I am sorry.
    Mr. Maurstad. Well, simply we would find ourselves in the 
same circumstance that we find ourselves now.
    Senator Carper. All right. Thanks.
    Mr. Walker. As Yogi Berra would say, ``Deja-vu all over 
again,'' and continuing some of the perverse problems that 
exist with the current program; and, third, further mortgaging 
the future of our kids and our grandkids.
    Senator Carper. All right. Thank you.
    Mr. Marron.
    Mr. Marron. Exactly what the gentlemen said. We continue 
digging the hole, as I said earlier.
    Senator Carper. All right. Thanks. Thanks to each of you.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thanks for your question, but I do not 
think we have the luxury of doing nothing. This is public 
policy. This is very important.
    I am just thinking out loud here. What have we learned here 
today, among other things? We have learned that the program is 
broken. It was never actuarially sound. We have real structural 
problems with the program. The flood mapping is grossly 
inadequate, the data reliability that goes into this. Should 
we, I believe one of you mentioned, insure value rather than 
just the mortgage? Because ultimately that is what people are 
interested in. And should we as public policymakers look at the 
people who are least likely and able to buy something because 
of their economic situation? As opposed to some of the very 
wealthy that have second, some third homes, and they are 
getting a ride, so to speak.
    I think we have to make this as actuarially sound as we 
can. We have to look to the future. Senator Sarbanes asked a 
question earlier, and you all talked about sunk costs. I am 
afraid that cost might be sunk already, sunk with the taxpayer 
eating it. But we will have to see, but we are going to be 
comprehensive in these hearings, and we will hear from you 
again. And we hope that a lot of you are going to furnish 
information regarding the questions that we asked previously.
    We appreciate your appearance, and you will be back, I 
hope. Thank you a lot. The hearing is adjourned.
    [Whereupon, at 12:22 p.m., the hearing was adjourned.]
    [Prepared statements and response to written questions 
supplied for the record follow:]

               PREPARED STATEMENT OF SENATOR CHUCK HAGEL

    Thank you Mr. Chairman for holding this hearing today on flood 
insurance.
    In 2004, Congress passed legislation to reauthorize and reform our 
National Flood Insurance Program (NFIP). The goal of this legislation 
was to assist communities in preparing for floods and also make 
policyholders' premiums more equitable. I was an original cosponsor of 
this legislation in the Senate. Former Nebraskan Congressman Doug 
Bereuter introduced this legislation in the House. The President signed 
the bill into law on June 30, 2004.
    The NFIP provides important protection for flood-prone communities 
across America. Given the impact of Hurricanes Katrina, Rita, and Wilma 
on the NFIP, Congress needs to examine the current fiscal state of the 
program and ask what can be done to improve it. We must look at ways to 
help flood prone communities better prepare for future floods and 
ensure that the program does not unfairly overburden the communities at 
low-risk for flooding.
    Updating the flood insurance maps is important to helping achieve 
this and I am pleased by the Federal Emergency Management Agency's 
(FEMA) recent approval of the Letter of Map Revision (LOMR) for North 
Platte, Nebraska. This is not only good for the people in North Platte, 
but also good for fostering an equitable and strong flood insurance 
program.
    Mr. Chairman, I welcome a very distinguished Nebraskan to today's 
panel. Dave Maurstad is FEMA' s Acting Director of the Mitigation 
Division. Dave also served Nebraska as a distinguished State Senator, 
mayor of one Nebraska's largest cities and as our Lieutenant Governor. 
I look forward to his testimony and the testimony of the other 
panelists. Today's hearing will help this Committee better understand 
the issues facing the NFIP and explore what can be done to improve the 
fairness and stability of the program.



                PREPARED STATEMENT OF DAVID I. MAURSTAD
    Acting Director and Federal Insurance Administrator, Mitigation 
                                Division
                  Federal Emergency Management Agency
            Emergency Preparedness and Response Directorate
                  U.S. Department of Homeland Security
                            January 25, 2006

    Good morning Chairman Shelby, Ranking Member Sarbanes, and Members 
of the Committee. I am David Maurstad, Acting Mitigation Division 
Director and Federal Insurance Administrator for the Federal Emergency 
Management Agency (FEMA) within the U.S. Department of Homeland 
Security. I appreciate the opportunity to appear today before the 
Committee to discuss the status of the National Flood Insurance Program 
(NFIP), particularly after the devastating effects of last year's 
hurricane season.
    As I did during my October testimony before this Committee, I would 
like to provide a context for what the NFIP is facing as a result of 
Hurricanes Katrina, Rita, and Wilma. As you know the NFIP was 
established in 1968 to make affordable flood insurance available in 
communities that would adopt and enforce measures to make future 
construction safer from flooding. Since the NFIP's inception in 1968 
through 2004, a total of $15 billion has been paid out to cover more 
than 1.3 million losses. Simultaneously, the NFIP's floodplain 
management efforts are now reducing the potential losses from floods by 
an average of $1.1 billion a year.
    Since the June 30, 2004 signing of the Flood Insurance Reform Act 
(FIRA04), this country has experienced back-to-back catastrophic 
hurricane seasons. The 2004 hurricane season resulted in over 75,000 
claims totaling close to $2 billion dollars paid out in NFIP coverage. 
The 2005 hurricane season has resulted in payments totaling over $13.5 
billion to date--nearly matching the total amount paid out over the 
NFIP's 37-year existence.
    From 1986 until the 2005 hurricane season, the NFIP has been self-
supporting. During periods of high losses, consistent with the law, the 
NFIP has borrowed from the U.S. Treasury Department. Our authority to 
borrow from the Treasury is an essential part of the NFIP's financing 
design for heavy loss years. This authority enables the program to 
borrow limited amounts from the Treasury on occasions when income is 
not sufficient to cover losses and related costs. These loans have been 
repaid, with interest, from policyholder premiums and related fees, and 
at no cost to the Nation's taxpayers. Thus, the program has 
successfully provided economic resources to help individuals and 
businesses recover from flood disasters. Without this program, the 
demand on the Disaster Relief Fund and other Federal relief programs 
would be extreme.
    The large number of claims and severity of flood losses from the 
2004 and 2005 hurricane seasons are unprecedented in the history of the 
NFIP. The challenges these storms have presented to the Mitigation 
Division, particularly the 2005 hurricane season, in terms of flood 
insurance claims handling, floodplain management, flood hazard mapping, 
and mitigation planning and grants management--have never been 
encountered, on this scale, before.
    Yet, the NFIP continues to effectively operate as intended. In the 
nearly 5 months since Hurricanes Katrina, Rita, and Wilma struck the 
Gulf Coast, the NFIP has resolved over 70 percent of the 239,000 claims 
filed from these events. This volume far exceeds the highest number of 
claims filed from any single event in the NFIP's history, and is more 
than triple the total number of claims filed in 2004. Our industry 
partners, the Write-Your-Own (WYO) insurance companies, claims 
adjusters, and agents, have more than fulfilled their responsibility to 
help policyholders begin to rebuild their lives.
    We are fulfilling the promises we made to our policyholders and 
NFIP communities, and the NFIP is effectively serving our policyholders 
in the wake of the worst natural disaster this Nation has ever 
experienced. FEMA is proud of the NFIP's ability to provide good 
customer service to our flood insurance policyholders--people who had 
the foresight to do the right thing and protect their homes and 
businesses from the perils of flooding.
    In October, I informed you that we expect the total NFIP payout 
(claims and associated expenses) for these events to be over $23 
billion--more than all of the claims paid in the entire history of the 
NFIP. We have reexamined these projections based on claims to date, and 
we still believe that these estimates are valid. As you will note in 
Exhibit 1, claims payments will exceed $22 billion for Hurricane 
Katrina alone.
    Today, my testimony will focus on the NFIP's financial and program 
status and options for strengthening the program.
NFIP Financial and Program Status
    The NFIP currently insures in excess of $800 billion in assets. 
This covers more than 4.8 million policies for homes, businesses, and 
other nonresidential property owners. Each year the NFIP collects 
approximately $2 billion in premiums and fees. As previously stated, 
$15 billion has been paid out since the NFIP's inception through 2004 
to cover more than 1.3 million losses. Many of these claims occurred as 
a result of smaller flood events that did not rise to the level of a 
Presidential disaster declaration and for which Federal disaster 
assistance was unavailable. Yet these property owners endured as much 
of an individual loss as those in larger events. In this regard, 
studies have indicated that insurance is the most efficient and 
equitable method of providing disaster assistance.\1\
---------------------------------------------------------------------------
    \1\ See GAO Report, PAD-80-39.
---------------------------------------------------------------------------
    The NFIP provides insurance at actuarial (risk-based) rates for 
newer construction, with approximately 76 percent of policyholders 
paying actuarial rates. For structures built prior to the mapping and 
implementation of NFIP floodplain management requirements 
(approximately 24 percent of the policies), heavily subsidized rates 
are charged on the first $35,000 of insured value because flood risks 
were not fully known to the property owner when these structures were 
built. For these structures full risk-based rates are charged for 
limits beyond the first $35,000 of coverage. On average, these 
policyholders are paying only 40 percent of a full risk-based premium.
    As mentioned earlier, we anticipate that total borrowing for the 
2005 hurricanes will exceed $23 billion. Annual interest on such 
borrowing will exceed $1 billion.
    Congress increased the NFIP's borrowing authority to $18.5 billion 
in November due to Hurricanes Katrina, Rita, and Wilma. This additional 
borrowing authority has been a critical element of the NFIP's ability 
to effectively serve our policyholders, allowing FEMA to resolve three-
quarters of the Katrina, Rita, and Wilma claims received to date.
    Most importantly, as shown in Exhibit 2, NFIP projections indicate 
that flood insurance claims payments will reach the new $18.5 billion 
borrowing limit by early to mid-February 2006. The program will require 
an additional $5.6 billion in borrowing authority to cover claims and 
expenses through fiscal year 2006. Additionally, language in the 2006 
DHS Appropriations Act limits interest payments to Treasury to $30 
million, which is not sufficient for the program to fulfill its 
interest obligations. In order for the program to meet its obligations 
to the Treasury, the interest cap needs to be waived or raised to at 
least $670 million.
    The 2004 Flood Insurance Reform Act was a catalyst for improvements 
to the NFIP. We began implementing these changes during the 2004 
hurricane season and improved our delivery of them during the 2005 
hurricane season. Our approach included expanded communication to 
increase awareness and effective processing of claims.
    Increasing risk awareness among homeowners and consumers with 
improved, succinct information is one of the NFIP's basic principles, 
and is an important element of the 2004 Flood Insurance Reform Act. 
FEMA, through an aggressive education and outreach campaign, is 
continuously designing and upgrading informational material to increase 
the public's awareness of flood risks and to effectively keep our 
policyholders informed.
    For instance, immediately following Hurricane Katrina, we 
distributed two documents to policyholders to help them through the 
claims process: The NFIP Summary of Coverage and the Flood Insurance 
Claims Handbook. These easy to understand materials are being 
distributed to all policyholders at the time of initial purchase, 
policy renewal, and at the time a claim is filed. In addition, these 
materials have been distributed in our Joint Field Offices, Disaster 
Recovery Centers, and Flood Response Centers--as well as in Town 
Meetings--since September 1, 2005. I have personally handed these 
materials to State Insurance Commissioners in Alabama, Mississippi, and 
Louisiana, and we have distributed an informational CD containing these 
documents and other ready-to-print materials to field offices, State 
and local government offices, and the media.
    Also, recognizing that a significant number of policyholders were 
displaced, FEMA has implemented several systems to reach policyholders 
early in the claims process. These systems have been particularly 
useful to those who are cut off from their usual sources of information 
and communication. For example, in the days immediately following 
Katrina, we cross-referenced a National Processing Service Center 
report of all callers who applied for disaster assistance and indicated 
they had flood insurance. We matched the addresses of damaged 
properties to NFIP policy addresses and connected insurance companies 
to their flood insurance policyholders. It has enabled the WYO 
companies to reach out to their NFIP policyholders and help them 
immediately when they needed it most. This system will now become 
standard operating procedure in future flooding events.
    We have also aggressively worked with the insurance industry to 
implement the minimum training requirements for all flood insurance 
agents who sell flood insurance. I have met with and given 
presentations to the National Association of Insurance Commissioners 
and the National Conference of Insurance Legislators on 
several occasions. We have also conducted three webcasts covering the 
NFIP and program improvements for State insurance commissioners and 
their staff. The training requirements were published in the September 
1, 2005 Federal Register, and we are working with the States as well as 
the insurance industry and related associations to inform insurance 
companies and agents of these requirements.
    These innovative materials, systems, and training initiatives carry 
out the provisions and intent of FIRA04, and the desire of the NFIP to 
reach out--with easy-to-understand information--to policyholders as 
early in the claims process as 
possible, recognizing that the sooner claims are settled, the sooner 
people can start rebuilding their lives and communities.
    Given the unprecedented number of claims, widespread destruction, 
and the 
difficulties encountered by adjusters accessing the devastated areas, 
FEMA is especially appreciative of our insurance industry partners as 
we developed and implemented streamlined adjustment and claims 
processes designed to effectively serve policyholders.
    Utilizing state-of-the-art aerial imagery, up-to-date water-depth 
data, and information from extensive underwriting files, the Write-
Your-Own (WYO) insurance companies have been able to rapidly identify 
insured properties that have been washed off their foundations, have 
had standing water in them for an extended period, or have only pilings 
or concrete slabs remaining. In addition, FEMA waived proof of loss 
requirements and has fast-tracked claims up to the maximum insured 
value.
    These streamlining methods have substantially reduced our normal 
adjustment times from what one would normally see under such extreme 
circumstances. Further, this process provided a mechanism for rapidly 
resolving claims within 60 days of the event. By November 1, over 
30,000 claims had been handled through our expedited claims process, 
and over $1.8 billion were made available to policyholders. From the 
beginning, FEMA general adjusters and claims staff have been in the 
field reinspecting sample sets of claims in order to ensure the 
integrity of the process.
    FEMA is strongly encouraging Gulf Coast communities to assess and 
utilize all relevant, current technical resources and information 
available, including updated flood hazard information, in all planning, 
mitigation, and rebuilding efforts. Hurricanes Katrina and Rita had 
significant impacts on flood hazards in coastal Mississippi and 
Louisiana. Citizens are anxious to begin recovering, and updated flood 
hazard information is being provided to help guide reconstruction. At 
the request of Mississippi officials, FEMA provided the State with 
Advisory Base Flood Elevations to help rebuilding efforts for the 
State's three most heavily affected counties. In Louisiana, Advisory 
Base Flood Elevations were provided for 11 of the 15 
parishes affected. As more information becomes available, FEMA will 
release it to communities. This phased data development effort will 
ultimately result in revised Digital Flood Insurance Rate Maps.
    FEMA anticipates that preliminary Digital Flood Insurance Rate Maps 
(DFIRM's) will be issued for Mississippi by August 2006. Preliminary 
DFIRM's will be provided to the parishes and communities in Louisiana 
beginning in the fall of 2006. By early 2007 all impacted Louisiana 
parishes are scheduled to receive preliminary DFIRM's.
Strengthening the Program
    Significant flood events have played a major role in the NFIP's 
evolution. The program was created when Hurricane Betsy carved a swath 
of destruction through the Gulf Coast in 1965. Tropical Storm Agnes in 
1972 provided the impetus for the mandatory purchase requirements to 
increase participation in the program. The Midwest Flood of 1993 
strengthened lender compliance requirements by introducing penalties 
for noncompliance with mandatory purchase provisions of the statute 
with the National Flood Insurance Reform Act of 1994. It is entirely 
appropriate, because of the 2004 and 2005 hurricane seasons, to once 
again examine ways to strengthen the NFIP.
    In my October testimony before this Committee, I outlined the 
following mitigation and insurance principles:

 Protect the NFIP's integrity by covering existing commitments 
    and liabilities;
 Phase out subsidized premiums in order to charge policyholders 
    fair and actuarially sound premiums;
 Increase NFIP participation incentives and improve enforcement 
    of mandatory participation in the program;
 Increase risk-awareness among homeowners and consumers by 
    improving information quality; and
 Reduce risk through combinations of proven mitigation 
    practices and explore opportunities to reduce risks through 
    enhanced protective measures.

    Now is the time to complement our mitigation and insurance 
principles with several NFIP enhancements. To strengthen the NFIP, and 
to foster our commitment to reduce the Nation's flood risks, we believe 
Congress should consider the following NFIP adjustments:

 Provide authority to eliminate subsidies over time for 
    properties built before flood insurance rate maps were in place, 
    particularly for other than primary residences.
 Strengthen the mandatory insurance purchase requirement for 
    federally regulated lending institutions to require insurance to 
    value as opposed to the outstanding balance of the loan, and for 
    the life of the loan, and to require more 
    frequent and thorough portfolio reviews by lending regulators.
 Increase the penalties for Federally regulated lending 
    institutions that do not comply with their mandatory purchase 
    responsibilities.
 Reduce the period of time a new policyholder must wait before 
    an NFIP policy takes effect from 30 days to 15 days.
 Direct FEMA to study the feasibility and implications of 
    expanding the standard for mandatory purchase requirement to 
    include properties in the 0.2 percent chance per year floodplain 
    (500-year flood plain) and properties in areas of residual risk 
    (structures protected by levees, dams, and other manmade 
    structures).
 Provide for additional Increased Cost of Compliance (ICC) 
    coverage--money for NFIP policyholders to bring their structures up 
    to existing flood-related building codes--that is in addition to 
    available building limits. Remove the $75 cap on ICC premiums so 
    that a variety of ICC options can be offered to the policyholder.
 Direct FEMA to study the feasibility and implications of 
    offering Additional Living Expense coverage and Business 
    Interruption coverage.

    A strengthened NFIP, combined with the implementation of a sound 
mitigation strategy, will provide even more support to NFIP 
policyholders and will continue to help communities reduce their 
vulnerability to flooding events in a cost-effective manner. According 
to a Congressionally mandated study recently released by the National 
Institute of Building Sciences, each dollar spent on disaster 
mitigation saves an average of $4. Mitigation, combined with a 
strengthened NFIP, results in significant benefits to society as a 
whole--to individuals, States, and communities. These benefits 
represent reduced economic losses, and significant savings to the 
Federal treasury.
Conclusion
    The 2005 hurricane season has presented the NFIP with numerous 
challenges on a variety of fronts. However, it is important to remember 
that these challenges are not the result of a broken program; rather, 
they are the result of the most catastrophic back-to-back hurricane 
seasons this Nation has ever experienced. The 
program has, for more than 37 years, through sound floodplain 
management, mitigation, and insurance, helped people recover from the 
devastation of floods while saving the Nation more than $1 billion 
annually.
    The proposed changes to the NFIP, when integrated into a 
comprehensive mitigation strategy, will improve the program's economic 
and financial viability. However, I want to emphasize that there is no 
quick solution that will enable the program to absorb catastrophic loss 
years as we have just experienced.
    In order to continue to meet existing claims, the program will need 
an additional $5.6 billion in borrowing authority to cover claims and 
expenses through fiscal year 2006. Additionally, the limitation on 
interest payments to the Treasury needs to be waived or raised to at 
least $670 million for the program to meet its obligations to the 
Treasury.
    I look forward to continuing to work with the Committee, our NFIP 
WYO companies, agent groups, and other partners to not only complete 
implementation of the FIRA04, but also implement future changes to the 
NFIP.
    I would be pleased to answer any questions Committee Members may 
have.



                 PREPARED STATEMENT OF DONALD B. MARRON
              Acting Director, Congressional Budget Office
                            January 25, 2006

    Chairman Shelby, Ranking Member Sarbanes, and Members of the 
Committee, thank you for offering the Congressional Budget Office (CBO) 
the opportunity to discuss issues related to the National Flood 
Insurance Program (NFIP), administered by the Federal Emergency 
Management Agency (FEMA). Established in 1968, the NFIP now includes 
over 20,000 communities that adhere to certain minimum standards for 
floodplain management. Within those participating communities, nearly 
4.7 million policyholders pay more than $2.0 billion in premiums each 
year to receive over $800 billion in coverage.
    By law, some policyholders--primarily those whose properties were 
built before their local community joined the program--receive coverage 
at rates that are explicitly subsidized. Lawmakers built those 
subsidies into the program partly on the grounds that actuarial (full-
risk) premiums for many existing structures would be unattractively 
high. The subsidies have both benefits and costs. The immediate 
benefits to current property owners encourage communities to 
participate in the program, thereby reducing future flood losses 
through improved floodplain management and tighter building standards. 
Moreover, charging flood insurance premiums, even if they are 
subsidized, may encourage policyholders to take at least some notice of 
the risks to their properties. However, subsidized premiums provide 
less incentive than full-risk premiums would for policyholders to 
reduce their flood risks--and, of course, they impose costs on 
taxpayers.
    In light of the devastation caused by last fall's hurricanes in the 
Gulf Coast, resulting in claims for flood damage estimated to exceed 
$20 billion, you asked CBO to address the size of the program's 
actuarial imbalance, the likely effects of reducing or eliminating the 
subsidies, and Congressional options for reforming the program's 
treatment in the budget. My testimony will make the following points:

 Almost 1.2 million policyholders, roughly one-quarter of the 
    total, pay subsidized premiums. As a result, the program as a whole 
    is not actuarially sound under current law. Historically, it has 
    collected enough in premiums to pay for the losses experienced in a 
    ``usual'' or ``typical'' year, which is why the actuarial imbalance 
    was not more apparent prior to 2005, but it has not built up 
    sufficient reserves to pay (or repay the borrowing) for the losses 
    in a catastrophic year. On the basis of information from FEMA, CBO 
    estimates that the program collects about 60 percent of the 
    premiums needed for actuarial balance, leaving a cost to taxpayers 
    estimated at about $1.3 billion per year.
 According to the available evidence, eliminating the subsidies 
    would lead relatively few policyholders affected by the increases 
    to drop all coverage but would induce many to cut it enough to keep 
    their premiums roughly unchanged. The total premiums collected 
    would also remain roughly constant. Those findings should be 
    interpreted cautiously, though, because the available evidence is 
    limited and some of the premiums that would be charged under 
    actuarially fair rates would be well outside the range of past 
    experience.
 Regardless of the responses of policyholders, ending the 
    subsidies entirely would eliminate the NFIP's actuarial imbalance, 
    so the expected annual savings to the program would be $1.3 
    billion. Smaller reductions in the subsidies would yield smaller 
    savings. The net savings to the Federal Government would be smaller 
    if, in response to future floods, expenditures for disaster 
    assistance to uninsured property owners and renters increased.
 Annual spending for the NFIP is inherently unpredictable, so 
    even if the Congress amended the program to charge actuarially 
    sound rates on all of its policies, the program would still require 
    a backup source of funding, such as its borrowing authority. The 
    difference would be that substantial reserves would build up in 
    noncatastrophic years.
 The budget presents the NFIP's financial results and those of 
    most other budget accounts on a cash basis. Adopting an approach 
    similar to that used for loans and loan guarantees, which 
    recognizes the long-run costs of the program by recording an 
    actuarial estimate of the annual Federal liability, would better 
    identify the Government's exposure to flood risk but would obscure 
    estimates of the cash deficit. The choice of one budgetary 
    treatment over another should be based on which presentation will 
    better inform the policy choices faced by the Congress.
Background
    Under the National Flood Insurance Program, currently authorized to 
sell annual policies through 2008, property owners can obtain coverage 
for damages to structures and contents of up to $350,000 for 
residential properties and $1 million for commercial properties. Many 
NFIP policies are purchased under a Federal statutory requirement that 
property owners maintain insurance up to the outstanding balance of 
their mortgage (or the applicable coverage limit, whichever is less) if 
their mortgage is federally insured or from a federally regulated 
lender and the property is located within a 100-year floodplain (an 
area that has at least a 1 percent chance of flooding in any given 
year). However, how well that requirement is enforced is uncertain. 
Most policies are sold and serviced on behalf of FEMA by private 
insurance companies, which retain a portion of the annual premiums to 
compensate them for those activities.
    The NFIP reviews its insurance rates annually and has the authority 
to raise them by an average of not more than 10 percent a year for each 
risk category of property. Since 2001, the program has increased rates 
between 2 percent to 3 percent annually, on average.
    The NFIP has the authority to charge premiums (within parameters 
set by its authorizing statute) and to spend income from those premiums 
to cover claims and 
underwriting expenses. Thus, flood insurance is classified in the 
budget as a mandatory, or direct spending, program. As a mandatory 
program, the NFIP does not 
receive regular appropriations for its activities from the general 
fund. However, annual appropriation acts for the Department of Homeland 
Security generally authorize spending for salaries and expenses related 
to flood insurance operations and flood mitigation, to be financed by a 
per-policy fee that depends on the type of insured property and that is 
considered separate from the premiums.
    FEMA also has the authority to borrow additional amounts from the 
U.S. Treasury if the income from premiums falls short of expenses. The 
program is required to repay borrowed funds, with interest, from 
surplus premiums collected in years when claims for damages caused by 
floods are small. Before 2005, FEMA used its borrowing authority 
primarily as a means of financing claims within a fiscal year, and the 
agency generally managed to repay borrowed funds within a relatively 
short time. FEMA's borrowing authority was limited to $1.5 billion 
before Hurricane Katrina, but the Congress subsequently raised that 
limit twice last fall, bringing it to $18.5 billion. It is highly 
unlikely that the program will be able to repay that amount of 
borrowing out of its income from premiums and fees.
    In some years, NFIP premiums and fees have exceeded payments for 
claims and administrative expenses (resulting in net negative outlays); 
in other years, total payments have exceeded total collections 
(resulting in net positive outlays). Over the past 20 years (through 
fiscal year 2005), the program had net negative outlays in 11 years and 
net positive outlays in 9 (see Figure 1). Over that 20-year period, 
cumulative net outlays of the program, measured in nominal (current) 
dollars, totaled only about $300 million. In sharp contrast, net 
outlays for fiscal year 2006 are likely to top $20 billion--if 
additional borrowing authority is enacted to allow the program to spend 
more than its current limit of $18.5 billion.
The Actuarial Imbalance in the NFIP
    The available estimates of the current subsidies in the flood 
insurance program are based on FEMA's estimates of actuarially sound 
premiums. Those estimates could be too low--if, for example, the 
probabilities of very rare, catastrophic floods or levee failure are 
greater than FEMA assumes--or too high. CBO has no basis for concluding 
that the actuarial rates err in either direction, and the analysis 
underlying this testimony assumes that FEMA's estimates are correct.




    Roughly 1.2 million flood insurance policyholders, about one-
quarter of the total, pay rates that are explicitly subsidized--that 
is, below the level that FEMA estimates would be required for the 
program to break even in the long-run. Those subsidies are built into 
the program by statute--or, in the case of one small group of 
properties, by an agreement 20 years ago with the Congressional 
oversight committees.\1\
---------------------------------------------------------------------------
    \1\ Information on the subsidies is drawn largely from Thomas L. 
Hayes and Shama S. Sabade, Actuarial Rate Review (Federal Emergency 
Management Agency, November 30, 2004).
---------------------------------------------------------------------------
    By far, the largest group of explicitly subsidized policies is 
those covering ``pre-FIRM'' structures--meaning structures built before 
a community's flood insurance rate map (FIRM) was completed (or before 
1975, whichever is later). FEMA estimates that pre-FIRM properties 
accounted for about 24 percent of all policies in 2005. The basic 
rationale for those subsidies is twofold: That the detailed information 
about risks that the flood maps provide was not available when those 
structures were built and that premiums incorporating their full risks 
would not encourage the desired levels of participation by individuals 
and communities. FEMA also charges subsidized rates on three smaller 
groups of properties, together representing about 2 percent of the 
policies in 2005.\2\
---------------------------------------------------------------------------
    \2\ Those three smaller groups include properties that will be 
protected against a 100-year flood (more precisely, against a flood 
whose probability of occurring in a given year is at least 1 percent, 
or 1 in 100) upon completion of a structural project that is already 
half finished; properties in areas served by structural measures that 
have been decertified as no longer protecting against such a flood if a 
schedule meeting certain criteria exists for restoring that level of 
protection; and properties subject to coastal flooding that were built 
between 1975 and 1981, the year when FEMA incorporated new information 
about wave heights and strengthened the building standards for new 
construction in such areas.
---------------------------------------------------------------------------
    The explicit subsidies received by those policyholders apply only 
to a first tier of coverage. For example, subsidies apply to the first 
$35,000 of coverage for a one-to four-family dwelling and the first 
$100,000 for nonresidential and larger residential properties. 
Additional coverage above those limits is purchased at FEMA's 
estimated actuarial rates. Since 1988, FEMA has set the subsidized 
rates with an eye to collecting premiums at least sufficient to cover 
payouts in the ``historical average loss year''--that is, average 
losses observed since 1978. Since the program had never suffered a 
truly catastrophic loss until last year, that target was clearly below 
the level required to achieve actuarial balance.
    FEMA estimates that the average premium paid on a pre-FIRM 
structure--taking into account coverage purchased in both the 
subsidized and actuarial tiers--is about 40 percent of the actuarial, 
or full-risk, rate. Nonetheless, the subsidized premiums are higher 
than the unsubsidized premiums, on average, reflecting the fact that 
properties built before communities joined the NFIP and implemented 
tighter land-use policies and building standards are typically at much 
higher risk of flooding. 
According to FEMA's estimates, the annual premium on the average 
unsubsidized policy was $340 in 2005, while the average subsidized 
policy cost $710. The corresponding full-risk premium for that 
subsidized policy would be roughly two and a half times that amount, or 
almost $1,800 (see Table 1). The greater risk associated with 
subsidized properties is illustrated by partial data on properties 
damaged by Hurricane Katrina: Roughly 122,000 of the 200,000 damage 
claims reported to FEMA by November 30, 2005, or 61 percent, were for 
subsidized properties.\3\
---------------------------------------------------------------------------
    \3\ Those data indicate that subsidized policyholders filing claims 
after Katrina represent at least 10 percent of all subsidized 
policyholders nationwide.
---------------------------------------------------------------------------
    Those premium rates and percentage subsidies are averages; the 
full-risk premium for any individual structure depends on the local 
flood risk, the structure's elevation, and its insured value. In fact, 
many pre-FIRM properties are on high enough ground that the actuarial 
premiums would be lower than the pre-FIRM rates, which do not take the 
elevation of individual properties into account--in other words, the 
``subsidies'' are negative. In those cases, the property owners can 
lower their premiums, as many have done, by certifying their elevation 
and choosing to be rated on the post-FIRM schedule.\4\ Conversely, 
full-risk rates for those structures at the lowest elevation relative 
to the local floodplain would be as much as 10 times higher than the 
subsidized rates.\5\
---------------------------------------------------------------------------
    \4\ A study using data from 1998 estimated that, out of a total of 
4.4 million insured and uninsured pre-FIRM structures nationwide, 1.9 
million (44 percent) would cost less to insure under post-FIRM rates; 
see PriceWaterhouse Coopers, Study of the Economic Effects of Charging 
Actuarially Based Premium Rates for Pre-FIRM Structures (prepared for 
the Federal Emergency Management Agency, May 14, 1999), p. 5-4. That 
share may have fallen since then, if more policyholders in that 
situation have switched to the post-FIRM rate schedule.
    \5\ Ibid., p. 5-5.

    
    

    Using FEMA's 2005 figures on the average subsidy and the relative 
shares of subsidized and actuarially based policies, CBO estimates that 
the NFIP collects only 61 percent of the premiums required for long-run 
actuarial balance. Based on the $2.0 billion in premiums from 2004, the 
percentage implies an aggregate subsidy of $1.3 billion.\6\ That 
estimate assumes that FEMA's actuarial tables are correct, and thus it 
does not include any hidden subsidy on (or surplus from) the post-FIRM 
properties. Nor does it reflect the cost to taxpayers of bearing the 
risk of the insurance contracts. Ideally, one would estimate the 
economic subsidy, which includes not only the actuarial subsidy but 
also the amount required to compensate taxpayers for their risk 
exposure. CBO has done such estimates in other contexts, in analyzing a 
loan guarantee to America West Airlines, for example.\7\ Estimating the 
cost of risk is difficult, however, and in the case of the NFIP, 
further analysis would be required before CBO could say whether the 
risk premium is small or large relative to the estimated actuarial 
imbalance of $1.3 billion per year.\8\
---------------------------------------------------------------------------
    \6\ The Center on Federal Financial Institutions made the same 
calculation last fall; see Federal Flood Insurance After Katrina, p. 8, 
available at www.coffi.org.
    \7\ Congressional Budget Office, Estimating the Value of Subsidies 
for Federal Loans and Loan Guarantees (August 2004).
    \8\ On the one hand, the fact that reinsurers include substantial 
``risk loads'' in the premiums they charge for policies covering 
natural disasters suggests that the risk cost of the NFIP is high. On 
the other hand, the fact that the risk of catastrophic flooding in the 
United States has little correlation with the performance of the 
national or global economy (unlike, say, the risk of widespread bank 
failures), and hence is relatively diversifiable, suggests that the 
program's risk cost is low.
---------------------------------------------------------------------------
The Effects of Reducing or Eliminating the Subsidies
    The Congress could choose to modify the NFIP's rate structure to 
reduce or eliminate the current explicit subsidies. The qualitative 
responses of policyholders to changes in those subsidies are clear: 
Some policyholders would reduce their amount of coverage, and others 
would drop their flood insurance entirely--in either case leaving 
themselves more exposed to future flood risks. Reducing or eliminating 
coverage would probably be more common among voluntary purchasers, but 
compliance by people whose mortgage requires them to maintain full 
coverage might decrease.
    Quantifying those responses by policyholders is difficult, 
however.\9\ CBO has identified three studies that analyze the 
sensitivity of demand for flood insurance, one of which has been 
published in a peer-reviewed journal.\10\ That study, which examined 
aggregate State-level data for 1984 through 1993, looked separately at 
the numbers of flood insurance policies and the dollars of coverage in 
force. The study estimated that the price elasticity of demand for 
policies was -0.11 and the elasticity for dollars of coverage was -1.0, 
implying that a 10 percent increase in price would lead to about a 1 
percent decrease in the number of policies and a 10 percent decrease in 
coverage.
---------------------------------------------------------------------------
    \9\ The PriceWaterhouse Coopers study in 1999, cited earlier, 
addressed just that question; but notwithstanding the extensive effort 
by the study team to identify sample communities and collect data on 
the age, elevation, presence of basements, and other characteristics of 
thousands of structures, the study's results rested on very slight 
evidence about policyholders' response to price changes. In particular, 
the study relied on a single estimate of price sensitivity from a 1983 
analysis by the General Accounting Office (now the Government 
Accountability Office).
    \10\ Mark J. Browne and Robert E. Hoyt, ``The Demand for Flood 
Insurance: Empirical Evidence,'' Journal of Risk and Uncertainty, vol. 
20, no. 3 (2000), pp. 291-306; Warren Kriesel and Craig Landry, 
``Modeling the Decision to Buy Flood Insurance: Results from 62 Coastal 
Communities,'' available at www.agecon.uga.edu/faculty/wkriesel/
PDFfiles/section3.pdf; and General Accounting Office, The Effect of 
Premium Increases on Achieving the National Flood Insurance Program's 
Objectives, GAO/RCED-83-107 (February 1983).
---------------------------------------------------------------------------
    The applicability of those estimates to the questions of interest 
here is uncertain, however. Major reductions in the existing subsidies 
would translate into large increases in premiums--and in many cases, 
those premiums would be well outside the range of the study's pre-1994 
data. So the study's results may greatly understate the extent to which 
policyholders would drop their coverage. Conversely, two factors 
suggest that the results may overstate the sensitivity of demand to 
changes in the subsidies. First, the requirement making the purchase of 
flood insurance mandatory for some property owners has been expanded 
and become better enforced since the period covered by the study. 
Second, the changes in premiums would apply only to the first tier of 
coverage, so policyholders with coverage extending into the 
unsubsidized tier would see no increase in prices, and hence no 
increased incentive to reduce their coverage, within that second tier.
    With those qualifications, CBO has assessed the implications of the 
study's estimates: If premiums on all subsidized policies were raised 
150 percent, which is the average amount needed to eliminate the 
subsidies entirely, about 10 percent of the previously subsidized 
policyholders would drop out of the program, total coverage in force 
would fall by about 60 percent, and total revenues from premiums would 
remain essentially unchanged.\11\ But those projections should be 
interpreted with caution, in light of the questions about the 
applicability of the study's analysis.
---------------------------------------------------------------------------
    \11\ For there to be a 60 percent reduction in the amount of 
coverage in force with only a 10 percent decline in the number of 
policies, the average coverage among those who maintain their policies 
must fall by about 56 percent.
---------------------------------------------------------------------------
    The impacts on the NFIP's soundness and the Federal budget are 
somewhat easier to predict. If the subsidies were eliminated, estimates 
of what would happen to the number of policies or the coverage in 
force, or even to total premiums, would not be necessary because each 
remaining policy would be pulling its own weight, actuarially. Thus, 
eliminating the subsidies would eliminate the actuarial imbalance in 
the flood insurance program, which, as mentioned, is estimated to be 
about $1.3 billion per year. Estimating the annual savings from a 
smaller reduction in subsidies would be more complicated, involving 
questions about which groups of policyholders would drop or reduce 
their coverage, but the result would be less than $1.3 billion. Net 
savings to the Government would be smaller than those to the NFIP, to 
the extent that future floods would lead the Congress to appropriate a 
greater amount of Federal disaster assistance in response to a greater 
number of uninsured flood victims. Historically, the levels of 
assistance provided to disaster victims have not been so large that 
they would entirely offset the savings to the NFIP.
Budgeting and Policy Choices for the NFIP
    The Congress faces important policy choices about flood insurance 
that can be informed by the budgetary treatment of the NFIP. For 
example, as the Congress considers the program in light of the 
catastrophic hurricanes of 2005, it faces choices about whether to 
continue to provide subsidies to NFIP policyholders or to charge 
actuarially fair rates. Other policy choices include whether to try to 
recover the funds borrowed to pay for the claims from last fall's 
hurricanes, whether to expand the reach of the requirement to purchase 
flood insurance, and whether more should be done to reduce the Nation's 
exposure to flood risks. Arguments can be made on either side of those 
issues, but they are ultimately policy decisions for the Congress.
    To make informed decisions about the NFIP and the benefits that it 
provides, the Congress needs good information about the program's 
costs. FEMA's actuarial analysis, Federal budget data, and CBO's 
baseline projections and cost estimates for legislation are various 
means of communicating such cost information. Currently, the Federal 
budget displays the NFIP's financial results on a year-by-year cash 
basis, and CBO prepares baseline projections for the NFIP on that same 
basis, estimating the program's annual flows of funds. But because the 
NFIP is an insurance program, that budget presentation does not 
necessarily convey the Government's exposure to risk over the long-
term.
    Estimates of both the cashflows and long-term subsidies provide 
valuable perspectives on the NFIP, and, ultimately, the Congress needs 
both kinds of information. The relevant question about budgetary 
treatment--a question that can be asked not only about the flood 
insurance program but also about other Federal insurance programs--is 
which of the two types of information is most useful to include in the 
budget. But the budgetary treatment can only inform the policy 
decisions; regardless of the presentation used, central questions such 
as whether, and to what extent, the Government should subsidize flood 
insurance will remain.
Budgeting for Insurance Under Current Law
    The Federal budget records the transactions of the flood insurance 
program on a cash basis. Specifically, income from premiums and fees 
for policies in force is recorded as offsetting collections (negative 
outlays), and payments for flood insurance claims and administrative 
costs are recorded as outlays. Actual results for each year and the 
Administration's budget for the coming year appear in the budget on a 
cash basis. CBO's baseline projections currently reflect the agency's 
best estimate of net spending for the program--taking into account 
claims, other expenses, and collections of premiums--on a cash basis. 
In the short-run, particularly for the current year, estimates reflect 
anticipated costs that are heavily influenced by events that have 
already occurred. As such, CBO's January 2006 baseline projects 
unprecedented levels of net spending in 2006 as claims from last fall's 
devastating hurricanes are settled.
    Because CBO cannot estimate the timing or magnitude of future 
floods, projections for years beyond 2007 represent estimates of net 
spending based on past experience. Historically, the fund has ended 
most years with either a modest surplus (that is, net receipts) or 
modest net spending. On the basis of those results and the inherent 
unpredictability of major floods, CBO's estimate of the most likely 
amount of net spending for any particular future year, on a cash basis, 
is zero.
    Zero is not the best estimate of the long-term costs of the 
program, however, because the program does not collect sufficient 
premiums to cover actuarially expected losses. As I noted earlier, on 
the basis of FEMA's data, CBO estimates that the subsidy built into the 
program totals $1.3 billion annually. However, FEMA does not have 
sufficient borrowing authority to support net spending of $1.3 billion 
in every year. So in the context of a cash budget, baseline projections 
must be consistent with that borrowing constraint, and, therefore, they 
cannot show the full estimated subsidy in all years.\12\
---------------------------------------------------------------------------
    \12\ The existence of the borrowing limit also may influence the 
budgetary impact of proposals to change the NFIP. The program is 
currently estimated to owe about $5 billion more in claims than it has 
the legal authority to pay (by borrowing from the Treasury)--implying 
that new collections of premiums or fees might have to be used to pay 
some of the outstanding claims, not to reduce the deficit.
---------------------------------------------------------------------------
    In short, cash-basis accounting for flood insurance has the 
advantage of being simple and of accurately recording past receipts and 
payments from the fund. But cash-based estimating does not provide an 
accurate picture of expected long-term costs for this program.
An Alternative Approach: Budgeting Subsidy Costs
    To obtain better information about the cost of providing subsidized 
insurance, the Congress could specify changes to budget process law 
that would require CBO and the Administration to record spending and 
prepare projections for flood insurance on a noncash basis.\13\ The 
Federal Credit Reform Act specifies particular accounting treatments 
for Federal credit programs that could serve as a model for an 
alternative approach for insurance programs. The analogy between the 
flood insurance program, which provides year-to-year policies, and 
credit programs that offer long-term loans or loan guarantees is not 
perfect; but the credit reform approach of trying to capture expected 
costs may be a useful model to consider for the budgetary treatment of 
the NFIP. The approach would require that the cost of subsidizing flood 
insurance be recorded each year. Under that approach, CBO and the 
Administration would estimate the projected premiums and costs, and the 
expected net losses (or gains) would appear as outlays (or collections) 
in the budget and would be reflected in projections of the budget 
deficit.
---------------------------------------------------------------------------
    \13\ Most procedures that specify how to construct baseline and 
legislative estimates are contained in the Balanced Budget and 
Emergency Deficit Control Act and the Congressional Budget and 
Impoundment Control Act.
---------------------------------------------------------------------------
    Specifically, the budget would record historical results and 
estimates of actuarial imbalances when coverage was sold.\14\ Under 
that type of treatment, baseline projections for the program would show 
net spending equal to an estimate of the 
subsidy--currently $1.3 billion--in every year that the program was 
assumed to operate. That estimate would generally not be updated at the 
end of the fiscal year to reflect actual net spending. A reestimate 
would be made only if the year's experience provided evidence that the 
distribution of possible flood events was different from what was 
previously thought. In such cases, the budget would record reestimates 
of the subsidy that reflected changes in estimates of actuarial costs. 
In years without such reestimates, the budget would record net spending 
equal to the estimated subsidy. The actual cashflows would be tracked 
separately in a nonbudgetary account.
---------------------------------------------------------------------------
    \14\ Incorporating estimates of the actuarial subsidy in budget 
presentations would not in itself account for the cost of risk to 
taxpayers. Even under actuarially fair rates, the NFIP would transfer 
risk from policyholders to the Federal Government and ultimately to 
taxpayers. The cost of that risk can be interpreted as the amount that 
private reinsurers in a competitive market would charge to assume it.
---------------------------------------------------------------------------
    Adopting a subsidy-cost basis for presenting the NFIP in the budget 
offers the 
primary advantage of providing a clear display of the average expected 
cost of the program. It also offers the prospect of more explicit 
Congressional control of the program's cost.
    Such an approach has some disadvantages, however. Perhaps most 
important is the intrinsic difficulty in projecting future insured 
losses from catastrophic floods. Correspondingly, a subsidy-cost 
treatment of the NFIP does not reflect the fact that borrowing 
authority would still be needed to pay losses during some catastrophic 
years even if subsidies were eliminated. In addition, a subsidy-cost 
approach could result in reestimates if significant new information 
about flood risks was acquired. Finally, the analytical complexities of 
subsidy-cost accounting for flood insurance would create new demands on 
the budget process.
        RESPONSE TO A WRITTEN QUESTION OF SENATOR DOLE 
                      FROM DAVID M. WALKER

Q.1. The National Flood Insurance Program was created in 1968 
to help families afford flood insurance because it was too 
expensive. Is flood insurance now affordable in the private 
market? Do private insurance companies offer flood insurance 
for families that live in a 100-year-floodplain?

A.1. Flood insurance is not considered profitable within the 
private-sector insurance industry, and no major markets other 
than the NFIP exist through which flood insurance can be 
purchased. A June 2005 report by the Congressional Research 
Service found that flood insurance was once sold in private 
markets in the United States, but has not been available for 
many years. During the late 1920's several dozen fire insurers 
sold flood insurance, but after river flood disasters in 1927 
and 1928, they withdrew from the market. By the late 1950's, 
flood insurance was virtually unavailable from the private 
insurance markets because insurers could not profitably sell 
coverage at an affordable price due to the catastrophic nature 
of flooding and insurers' inability to develop actuarial rates 
that reflected the flood hazard risk. Currently, according to a 
FEMA Mitigation official, Lloyds of London offers flood 
insurance in excess of NFIP policy limits primarily to 
businesses. In addition, this official was aware of one U.S. 
insurance company that sold flood insurance policies, but among 
other restrictions, no policies are sold for properties located 
in the 100-year-floodplain.

         RESPONSE TO WRITTEN QUESTION OF SENATOR REED 
                      FROM DAVID M. WALKER

Q.1. There are a number of reasons so few homeowners buy flood 
insurance, including lack of knowledge and misunderstanding of 
the National Flood Insurance Program (NFIP). Does GAO have any 
suggestions on how to improve participation in the NFIP?

A.1. We have also been told by FEMA officials and insurance 
practitioners that a reason homeowners do not buy flood 
insurance unless they are required to do so is because they do 
not believe their properties will be flooded. These homeowners 
choose not to spend money on flood insurance premiums or do not 
have the income to pay the premiums. The very term ``100-year-
floodplain'' may lead homeowners to minimize their risk of 
flooding. Homeowners who live in a 100-year floodplain 
statistically have one chance in a hundred of being flooded in 
any given year; however, there is a 30 percent chance of being 
flooded over the life of a 30-year mortgage. Premium amounts 
for NFIP policies vary according to the amount of coverage 
purchased and the locations and characteristics of the property 
to be insured. In June 2005, the average yearly premium for a 
1-year policy was $446. FEMA officials reported to us that they 
have observed a yearly cycle in the purchase of NFIP policies 
in which the policies in force increase slightly during each 
hurricane season when reports of flood damage are in the news. 
At the end of the hurricane season, policies begin to level off 
or decline until the start of the next hurricane season.
    In our testimony, we noted that FEMA and its private-sector 
partners have a marketing campaign called ``Flood Smart'' 
underway to attract new NFIP policyholders and improve rates of 
renewal. Marketing elements being used include direct mail, 
national television commercials, print advertising, and 
websites designed for customers and insurance agents.
    According to FEMA officials, in a little more than 2 years 
since the contract began, net policy growth improved a little 
more than 7 percent and policy retention improved from 88 
percent to 91 percent. However, we also note there have been 
incremental increases in policies in force during most years 
throughout the history of the NFIP.
    In our ongoing work, we plan to obtain additional 
information on the costs and benefits of the Flood Smart 
campaign and other actions, if any, that should be considered 
to increase the number of NFIP policies in force. In addition, 
we will look at data on policies in force to assess whether 
more purchases and renewals are made as a result of the 
devastating hurricane seasons over the last 2 years.

Q.2. GAO reported, in June 2002, that the extent to which 
lenders were enforcing the NFIP's mandatory purchase 
requirement was unknown since Federal bank regulators believed 
lenders were generally complying, while FEMA officials believed 
that many lenders were not complying with the requirements. 
Since the rate of compliance is an important component in the 
discussion to further expand mandatory purchase requirements, 
how do you propose we accurately measure compliance with this 
existing requirement?

A.2. As part of our ongoing work, we are analyzing what changes 
could be made to the NFIP to increase revenues, reduce costs, 
or otherwise make the program more financially sound. Certainly 
one part of this analysis will be to revisit the compliance 
issue and its potential to increase the amount of premiums paid 
into the NFIP. A starting point for us will be to review the 
results of two recent reports. FEMA contracted with the 
American Institutes for Research (AIR) to do a comprehensive 
evaluation of the NFIP, which is expected to be fully completed 
in December 2006. In March 2005, AIR released its study of the 
NFIP's mandatory purchase requirements entitled, ``The National 
Flood Insurance Program's Mandatory Purchase Requirement: 
Policies, Processes, and Stakeholders.'' Among the 
recommendations made by the study was that NFIP develop a 
system that permits a comprehensive and ongoing assessment of 
the level of lenders' and borrowers' compliance with the 
mandatory purchase requirement.
    In December 2005, the RAND Corporation released a report on 
``market penetration'' by the NFIP entitled, ``The National 
Flood Insurance Program's Market Penetration Rate: Estimates 
and Policy Implications.'' The report focused on flood 
insurance coverage for single family homes. The report 
estimated that nationally about 49 percent of single family 
homes in special flood hazard areas--the 100-year-floodplain--
had NFIP policies. The report also estimated that although 
about one-third of NFIP policies were for properties outside 
special flood hazard areas, these policies represented about 1 
percent of properties outside the boundaries of the special 
flood hazard areas. The report also estimated that about 60 
percent of single family homes in special flood hazard areas 
are in the South. While estimating that the compliance rate 
with the mandatory purchase requirement was highest in the 
South and West (80 percent or more), the report noted that data 
limitations precluded developing precise estimates about 
compliance with the mandatory purchase requirement. The report 
concluded that many complex considerations needed to be 
addressed in setting goals for policy growth and market 
penetration rates, and that financial regulators and NFIP 
managers should evaluate whether and how to improve compliance 
with the mandatory purchase requirement in various submarkets 
and areas of the Nation.

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR DOLE 
                     FROM DAVID I. MAURSTAD

Q.1. As I mentioned at the hearing, North Carolina has 
excellent flood maps due to our advanced flood mapping program. 
How many other States have maps that detail their 500-year 
floodplain? What percentage of flood maps detail the 500-year 
floodplain?

A.1. FEMA commonly assesses its mapping activities regarding 
the 500-year floodplain by considering the total number of 
steam miles for which 500-year floodplains have been mapped.
    The following table shows the top 12 States and 
Territories, along with the District of Columbia, ranked by the 
percentage of stream miles having a mapped 500-year floodplain.


------------------------------------------------------------------------
                                           Percent of Stream Miles  with
      Ranking               State               500-Year Floodplain
------------------------------------------------------------------------
                1   District of Columbia                             90
------------------------------------------------------------------------
                2   New Jersey                                       45
------------------------------------------------------------------------
                3   Delaware                                         42
------------------------------------------------------------------------
                4   Rhode Island                                     39
------------------------------------------------------------------------
                5   Massachusetts                                    39
------------------------------------------------------------------------
                6   Maryland                                         35
------------------------------------------------------------------------
                7   Louisiana                                        33
------------------------------------------------------------------------
                8   Connecticut                                      33
------------------------------------------------------------------------
                9   Florida                                          26
------------------------------------------------------------------------
               10   North Carolina                                   21
------------------------------------------------------------------------
               11   Puerto Rico                                      21
------------------------------------------------------------------------
               12   South Carolina                                   17
------------------------------------------------------------------------


    It should be noted that some portion of the total 500-year 
floodplain has been identified in each State. North Carolina 
has approximately 65,000 miles of stream. Of that total, 
approximately 13,600 miles have a mapped 500-year floodplain, 
which translates into approximately 21 percent of North 
Carolina streams mapped.

Q.2. Of that percentage of maps that detail a 500-year 
floodplain, how much is in North Carolina?

A.2. Approximately 4.2 million miles of streams exist in the 
United States. FEMA has mapped a 500-year boundary for 
approximately 230,000 stream miles. Many of the Nation's stream 
miles are located in large Federal holdings that may never need 
to be studied. North Carolina currently has approximately 
13,600 miles of stream with mapped 500-year floodplain 
boundaries. Of FEMA's total inventory of the Nation's mapped 
500-year boundaries, 5.9 percent are located in North Carolina.

Q.3. Can FEMA implement a 500-year floodplain policy 
requirement in States with maps that do not detail these areas?

A.3. All States have areas where the 500-year floodplain has 
not been mapped. FEMA could not implement a mandatory flood 
insurance purchase requirement in these areas until they were 
studied and flood maps were prepared. Additionally, all 
existing 500-year floodplain mapping should be reviewed and its 
accuracy confirmed before it is used as the basis for the 
mandatory purchase of flood insurance.

Q.4. Do you believe that implementation of a 500-year 
floodplain purchase requirement reform would disproportionately 
affect North Carolina?

A.4. The implementation of the 500-year floodplain purchase 
requirement would be beneficial to the Nation's population at 
flood risk, including those in the State of North Carolina, 
because they would be protected against flood losses to their 
homes and businesses. FEMA is prioritizing the national mapping 
effort to focus on areas at flood risk including the State of 
North Carolina.
    By the end of Flood Map Modernization, it is estimated that 
90 percent of the Nation's flood risk will have been mapped 
based on factors such as population, flood history, growth 
potential, and other similar characteristics. Specifically, it 
is now estimated that at the end of Map Modernization:

 Digital flood map products will be available for 92 
    percent of the Nation's population.
 Thirty percent of the stream miles mapped will be 
    based on new, updated, or validated engineering analyses, 
    affecting 40 percent of the Nation's population.
 Eighty percent of Nation's population will have maps 
    that encompass stream miles that meet the 2005 Floodplain 
    Boundary Standard. The 2005 Floodplain Boundary Standard 
    sets forth a refined mapping standard for depicting the 
    floodplain boundary to match the best available topographic 
    data.

    Because the application of the 2005 Floodplain Boundary 
Standard is aligned to flood risk, areas of moderate to high 
population density and anticipated growth within the floodplain 
will have the 500-year floodplain boundary identified.
    Currently, the State of North Carolina, which is nearing 
completion of its Map Modernization efforts, has 5.9 percent of 
the Nation's total inventory of mapped 500-year floodplain 
boundaries. If the 500-year floodplain mandatory purchase 
requirement were implemented at this stage of the total 
nationwide Map Modernization effort, North Carolina could 
appear to be disproportionately impacted. This is because the 
State has been proactive in contributing to and delivering 
updated digital flood hazard maps sooner than other areas of 
the Nation. However, as FEMA continues its Map Modernization 
efforts, the amount of the Nation's mapped 500-year floodplain 
boundary inventory in other States will increase. By the end of 
Map Modernization, we do not anticipate that the State of North 
Carolina will have been disproportionately affected by the 500-
year floodplain mandatory purchase requirement.
    Property owners in the State of North Carolina will benefit 
from the availability of updated flood hazard information, 
including the 500-year floodplain boundary, which reflect their 
flood risk and enable proper flood insurance rating. Property 
owners in the 500-year floodplain would purchase flood 
insurance at rates lower than those located in the 100-year 
floodplain. Since floods also occur in lower risk areas, and 
can have devastating effects on individuals and communities, 
these property owners will have the benefit of the protection 
that the National Flood Insurance Program provides.

Q.5. If we raise the premium rate increase cap to 25 percent in 
the year following the increase how much will the average 
premium rise for families living in a 100-year floodplain? In 
addition, how much of an increase would you expect in the 
second and third years?

A.5. For rating purposes, the National Flood Insurance 
Program's (NFIP) primary differentiation for structures in the 
100-year floodplain is between structures built before a 
community joined the NFIP (known as pre-FIRM structures), and 
structures built after a community joined the NFIP (known as 
post-FIRM structures). Post-FIRM structures are charged full-
risk premiums. As such, these structures will continue to see 
modest increases in order to keep their premiums current with 
inflation.
    Rate increases for pre-FIRM structures would be determined 
in consultation with FEMA's Congressional authorizing 
Committees. If it is the intent of Congress that FEMA quickly 
and significantly reduce the amount of subsidy, then FEMA would 
implement a series of 25 percent increases for these 
structures. On average, owners of pre-FIRM structures currently 
pay approximately $800 annually for their flood insurance 
policies. Such a series of increases could result in the 
average premium increasing to $1,000 the first year, $1,250 the 
second year, and $1,550 the third year. However, as these 
premium increases are implemented, no pre-FIRM structure would 
be required to pay more than their full-risk premium.

Q.6. With a 25 percent rate increase cap how many 25 percent 
rate increases will it take to get to a nonsubsidized rate?

A.6. The full-risk premium for pre-FIRM structures varies 
depending on how far below the Base Flood Elevation (also known 
as the 100-year flood level) the structure is located. Some 
pre-FIRM structures will be at full-risk premiums after the 
first rate increase. Other structures are at much greater risk 
of flooding and will require a series of increases to reach the 
full-risk premiums. FEMA estimates that by the fifth increase, 
more than 90 percent of the current pre-FIRM structures will be 
at full-risk premiums.

Q.7. Does FEMA believe that raising the rate increase cap 
indicates that Congress wants to end the practice of providing 
lower flood insurance rates to families living in a floodplain?

A.7. FEMA will consult with its authorizing Committees in order 
to determine the intent of Congress on this issue. Without 
explicit direction to discontinue the subsidy, it appears that 
Congress' intent is a major reduction in the amount of subsidy 
provided, not a complete elimination of that subsidy. If that 
is the direction FEMA receives from the oversight Committees, 
the agency will work with those Committees in determining the 
proper level of the future subsidy.

Q.8. Is flood insurance currently available at market rates 
from private companies for families living in a 100-year 
floodplain? If so what companies offer it and what is the 
average yearly premium they would charge?

A.8. Non-NFIP flood insurance may be available from various 
insurance companies for families that live in certain special 
flood hazard areas (SFHA's), as well as in nonparticipating 
communities and Coastal Barrier Resource Areas. FEMA does not 
maintain detailed information on all such companies, nor the 
premiums that they charge. However, it is FEMA's understanding 
that the main provider is Lloyds of London. AIG and Chubb also 
offer primary flood insurance, but they may limit sales to 
certain non-SFHA's.

Q.9. Last year, we doubled the funding for mitigation grants in 
the reauthorization bill. With 200,000 claims expected from 
2005 will FEMA also require additional funds to expand these 
mitigation efforts in the Gulf Region?

A.9. At this time, FEMA is providing technical assistance to 
the Gulf Coast communities with preparation of their Mitigation 
Plans to ensure that mitigation grants are effectively targeted 
and consistent with State and local priorities. Local 
mitigations plans, in conjunction with State-established 
mitigation priorities, will help direct necessary grant funds 
to the most cost effective projects. States set mitigation 
priorities and select project applications that are developed 
and submitted by local jurisdictions. Funds will be obligated 
though FEMA's portfolio of hazard mitigation assistance 
programs which include the Flood Mitigation Assistance (FMA), 
Pre-Disaster Mitigation (PDM), Hazard Mitigation Grant Program 
(HMGP), Severe Repetitive Loss (SRL), and the Repetitive Flood 
Claims (RFC) Programs. Since many projects are still in the 
planning or development phase, FEMA does not yet know what the 
total financial requirements are, or the States' ability to 
provide the required match, and will continue to monitor 
community needs as recovery moves ahead.

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 
                     FROM DAVID I. MAURSTAD

Q.1. I am very concerned that FEMA's maps do not accurately 
reflect flood hazards in communities, especially by failing to 
include storm surge and coastal inundation information from the 
Army Corps of Engineers and the National Oceanic and 
Atmospheric Administration. In my State, the FIRM's are 20-
years-old so they also do not reflect the effects that new 
development and erosion may have on flooding. What steps are 
FEMA taking to improve the FIRM's, including putting the maps 
on the web in a user-friendly manner?

A.1. FEMA's Flood Map Modernization effort will transform the 
Nation's flood maps into more reliable, easier-to-use, and 
readily available maps. The mapping effort uses state-of-the-
art technology and advanced engineering to streamline studies 
and improve results, and improve data quality and 
accessibility, including production of flood maps in Geographic 
Information System (GIS) format.
    Map Modernization will allow community planners and local 
officials to gain a greater understanding of the flood hazards 
and risks that affect their community, and provide builders and 
developers with detailed information for making decisions on 
where to build and how construction can affect flood zones. In 
addition, home and business owners will be able to make more 
informed decisions about their flood risks.
    FEMA regularly incorporates storm surge and coastal 
inundation information into map updates, including data from 
sources such as the U.S. Army Corps of Engineers (USACE) and 
the U.S. Department of Commerce's National Oceanic and 
Atmospheric Agency (NOAA). FEMA-funded storm surge studies are 
currently in production for the entire Texas, Louisiana, and 
Mississippi coasts using the most up-to-date models and data 
available. The USACE is performing two of the three studies, 
and a private-sector engineering firm is performing the third. 
Coordination with NOAA is an important and ongoing component of 
all three studies. In addition, FEMA is developing a National 
Coastal Strategy to help prioritize study of the entire U.S. 
coastline as part of planning for future coastal flood hazard 
updates. High-risk areas with outdated flood hazard maps will 
be prioritized for updates.
    As part of Map Modernization, countywide Flood Insurance 
Rate Map (FIRM) updates are in progress for all five counties 
in the State of Rhode Island. The results of these efforts will 
also include consideration of storm surge data and coastal 
flood hazard data, including the flood hazard information 
collected as part of the wave height/runup study performed for 
the Narragansett Bay in Bristol County in 1992.
    Please note that any interested party may request that 
their community officials submit a map revision request to FEMA 
in accordance with Part 65 of the National Flood Insurance 
Program (NFIP) regulations. To assist communities in compiling 
all the data required to support map revision requests, FEMA 
has developed easy-to-use, step-by-step instructions and forms. 
These instructions and forms are contained in the MT-2 
application forms package, available on FEMA's website at 
www.fema.gov/pdf/fhm/mt-2.pdf. Upon receipt of the community's 
map revision request, FEMA will review the completed forms and 
the required data and, if appropriate, revise the FIRM, either 
by physically revising and reissuing the FIRM, or by issuing a 
Letter of Map Revision (LOMR). The LOMR, which would become 
effective on the date it is issued by FEMA, has the effect of 
revising the FIRM without physically revising and reissuing the 
affected FIRM panel(s).
    Additionally, the online FEMA Flood Map Store is available 
at http://store.msc.fema.gov. Users may research, view, and 
purchase the available inventory of effective NFIP products, 
including Flood Insurance Study reports, FIRM's, and other 
mapping products. A user can also create a customized 
FIRMette--a paper copy of a user-defined portion of an 
effective FIRM, produced on the user's computer. After 
selecting the State, county, and community name, the user 
chooses the panel to be viewed, selects standard paper size, 
defines the area to be printed, and selects whether the 
FIRMette will be created as an Adobe PDF or TIFF image. The 
user then can save the FIRMette to his or her own computer, 
open it from the viewer, and print the image. The FIRMette is 
true to scale and includes title block, scale, and north arrow. 
It can be used to help determine the location of a property or 
structure relative to Special Flood Hazard Area (SFHA's), which 
are land areas at high risk for flooding.

Q.2. According to the study recently released by the National 
Institute of Building Sciences, each dollar spent on disaster 
mitigation saves an average of $4. What further mitigation 
strategies does FEMA intend to implement?

A.2. In addition to FEMA's portfolio of hazard mitigation 
assistance programs which include the Flood Mitigation 
Assistance (FMA), Pre-Disaster Mitigation (PDM), Hazard 
Mitigation Grant Program (HMGP), Severe Repetitive Loss (SRL), 
and the Repetitive Flood Claims (RFC) Programs, the Mitigation 
Division administers and oversees the Nation's floodplain 
management program for over 20,000 communities. The National 
Flood Insurance Program (NFIP) has played a critical role in 
encouraging communities to adopt and enforce floodplain 
management regulations, implement broader floodplain management 
programs, and foster adoption of strong building codes. These 
floodplain management requirements are the most cost effective 
way to reduce the flood risk to new buildings and 
infrastructure. Structures built to NFIP requirements 
experience 80 percent less damage than structures that are not 
built to these standards, which nationally results in $1.2 
billion per year in reduced flood losses.
    FEMA's Mitigation Division is working closely with States 
and local communities to implement effective mitigation 
practices and to promote sound planning and recovery decisions, 
especially in those areas most vulnerable to future hazard 
events. For example, in response to requests for updated 
rebuilding guidance from State and local officials in 
Mississippi and Louisiana following hurricanes Katrina and 
Rita, FEMA took the unprecedented step of immediately assessing 
existing flood risk data and issuing updated and more accurate 
advisory guidance to help speed the recovery.
    The flood recovery guidance documents released to impacted 
counties and parishes in Mississippi and Louisiana as of April 
2006 provide Advisory Base Flood Elevations (ABFE's), which are 
an interim product to provide communities with the best 
available data to assist with their rebuilding efforts while 
new preliminary Flood Insurance Rate Maps (FIRM's) are being 
completed. FEMA is working to expedite the production of the 
preliminary FIRM's. The agency continues to work closely with 
its mapping partners on the development of new storm surge 
modeling that will serve as the foundation for the updated 
flood maps. FEMA is on schedule to deliver preliminary FIRM's 
to Louisiana and Mississippi communities for comment by the end 
of this calendar year. These preliminary FIRM's will begin the 
formal process that will eventually result in final, updated 
Flood Insurance Rate Maps.
    FEMA requires States and communities to use the ABFE's for 
federally funded mitigation and recovery projects, and strongly 
encourages States and local communities to use the ABFE's in 
making reconstruction and elevation decisions. Through the 
adoption of stricter requirements and by building higher and 
stronger, communities will be able to ensure a greater level of 
protection to homes and businesses during future storm events. 
These mitigation strategies will be evaluated for use on a 
nationwide basis.
    Mitigation planning is critical to the future viability of 
vulnerable communities. FEMA continues to coordinate the 
mitigation planning process with long-term community recovery 
planning that is already underway. For example, FEMA is asking 
communities to meet or exceed the local mitigation planning 
requirements identified in FEMA regulations [44 CFR 201.6]. 
FEMA will continue to assist local jurisdictions in 
implementing the planning process to update existing risk 
assessments and to make use of the latest available hazard 
information in developing mitigation plans.
    Finally, mitigation assessment teams have worked closely 
with State and local officials to evaluate and recommend 
improved building design and construction techniques, advocate 
new building codes and enforcement measures, and suggest 
mitigation activities that will improve community-wide disaster 
resistance during future events.

Q.3. What steps is FEMA taking to help communities prepare for 
next year's hurricane season? Has education of homeowners been 
increased? Have mandatory purchase requirements been enforced?

A.3. Property owners across the United States learned from the 
hurricane seasons of 2004 and 2005 that the consequences of 
flooding can be devastating, and that too many Americans lack 
adequate protection from flood damage to their homes and 
businesses. Two years ago, in an effort to increase awareness 
and educate homeowners about their flood risk and the 
importance of flood protection, FEMA's National Flood Insurance 
Program (NFIP) launched an integrated marketing effort that 
includes public relations (PR), direct response advertising, 
website development (www.floodsmart.gov), and an online 
marketing campaign known as FloodSmart. As the 2006 hurricane 
season approaches, the primary goal of FloodSmart is to 
continue and increase efforts to inform residents about their 
flood risk and available options for flood insurance 
protection.
    The NFIP's message this hurricane season is simple and 
direct: Homeowners and business owners in the country's highest 
risk areas, designated special flood hazard areas (SFHA's), 
should be protected with a flood insurance policy. In addition, 
the NFIP continues to reach out to residents who, although they 
live outside of the highest risk areas, are still at risk for 
flooding. Floods can happen anywhere, at anytime, and the 
FloodSmart campaign is working to spread this message by 
encouraging all Americans to learn their risk and protect their 
families and homes from flood damage.
    NFIP's targeted effort to communicate the importance of 
flood insurance protection to residents in hurricane-prone 
areas will begin on May 1, 2006. There is a 30-day waiting 
period for new policies to take effect. Launching these efforts 
on May 1, 2006, will underscore the need to purchase flood 
insurance in advance of hurricane season, which begins on June 
1, 2006.
    Ongoing campaign efforts include direct-to-consumer 
outreach through a direct mail campaign to property owners in 
high, moderate, and low flood risk areas, advertisements in 
national publications, television commercials, information 
posted on the FloodSmart website, and online advertisements. 
The campaign also continues to aggressively reach out to the 
media with important tips and information about the NFIP, 
including targeted messages and what property owners can do 
before, during, and after a flood to reduce or eliminate their 
risk.
    The NFIP is working closely with the insurance industry, 
community leaders, and industry stakeholders to educate 
Americans about the effects of hurricanes and the risk of 
floods beginning in May 2006, and continuing throughout 
hurricane season. Toolkits of flood insurance outreach 
materials, industry-related conference outreach, and consistent 
communications efforts have helped the NFIP develop and expand 
critical partnerships with State associations, insurance 
agents, and other key stakeholders and influencers. In turn, 
these partners have become engaged in the FloodSmart program 
and consistently communicate the importance of flood insurance 
investment in their local communities.
    The NFIP has taken steps to support flood insurance 
education and hurricane preparedness in the Gulf Coast region 
and other areas greatly affected by the 2005 storms. The NFIP 
supports FEMA's Joint Field Offices and Departments of 
Insurance in Mississippi and Louisiana with messaging to 
educate local residents about flood risk and protection. The 
program also provides counseling and outreach support for the 
``Stay Alert, Stay Alive'' campaign, an 8-week awareness effort 
initiated by Mississippi's State and local governments.
    A cornerstone of the FloodSmart campaign during the past 2 
years has been its focus on building and enhancing programs to 
support insurance agents with informational tools to help them 
communicate with their clients about the importance of flood 
insurance coverage. In addition to www.floodsmart.gov, which 
has become a key destination for flood and flood insurance 
information by media and consumers, the campaign has recently 
developed an agents-only section filled with audience-focused 
materials and resources at agents.floodsmart.gov.
    The increased education and awareness through FEMA's 
FloodSmart campaign, in preparation for the upcoming hurricane 
season and continuing throughout the year, is critical to 
lessening the impact flood disasters have on peoples' lives 
across the Nation.
    Last, regarding the enforcement of the mandatory purchase 
of flood insurance requirement, the Flood Insurance Reform Act 
of 2004 did not have a lender compliance component. Oversight 
for lender compliance with the laws applicable to the NFIP is 
placed on the Federal regulatory authorities responsible for 
the federally regulated lending institutions.


        PROPOSALS TO REFORM THE NATIONAL FLOOD INSURANCE PROGRAM

                              ----------                              


                       THURSDAY, FEBRUARY 2, 2006

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

    The Committee met, pursuant to notice, at 10:03 a.m., in 
room SD-538, Dirksen Senate Office Building, Senator Richard 
Shelby (Chairman of the Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order.
    This morning, the Committee meets to hold its third hearing 
on the future of the National Flood Insurance Program. I 
believe it is important to briefly recapitulate some of the key 
issues from last week. The National Flood Insurance Program is 
currently bankrupt. Congress has increased the borrowing 
authority for the program to $18.5 billion and will need to 
increase that borrowing authority by several billion dollars 
more before the end of this month.
    Under its current structure, the National Flood Insurance 
Program has no ability to pay even the interest on its current 
debt, let alone the principal. According to the Congressional 
Budget Office, 25 percent of the homes and businesses within 
this program, the very properties most susceptible to 
repetitive flooding, receive an explicit subsidy.
    In testimony, the CBO valued the subsidy for this program 
at $1.3 billion per year. CBO also stated that since this 
program is not scored on the annual budget, no accounting is 
made for the subsidy that this program provides. Many of the 
preflood insurance program homes with the explicit subsidies 
have been bought and sold numerous times to individuals who 
knew full well that these properties were located in high risk 
flood areas.
    We also learned that beyond the actuarial imbalances, the 
maps used to administer this program are grossly inadequate. As 
Senator Allard and others mentioned during the hearing last 
week, many of the flood maps used for this program are in 
excess of 20 years old. These maps are critically important, 
because they are used to determine the proper flood elevation 
for accurate height measurements for new construction and 
because they are used to determine the rate structure for the 
program. Without updating the flood insurance rate maps, I 
think it will be impossible to create an actuarially sound 
program.
    It appears that the program has encouraged development in 
many low-lying areas where flooding is prevalent. Because of 
this, it appears that the program has initiated a vicious 
financial cycle for the taxpayer. The program fosters 
development in risky places; development leads to higher 
property values; higher property values lead to greater 
liability and bigger losses under the program. However, it does 
not stop after one round of losses; rather, the whole cycle 
begins anew after each payout. This may be good for business 
developers, but it is extremely costly for the taxpayers.
    In our last hearing, we also learned that we need to have a 
better accounting of the use of premium dollars. Mr. Maurstad, 
who is the Acting Director of the Mitigation Division at FEMA, 
noted that of the $2 billion collected in premium income, 
roughly half is spent on administrative fees and expenses, 
which seems rather high.
    Unfortunately, many of these issues are not novel concepts. 
In 1994, the GAO conducted a study on the National Flood 
Insurance Program and found the program was incapable of 
meeting its financial obligations in even minor catastrophic 
years. The current status of the flood insurance program only 
illuminates how accurate the GAO assessment was in evaluating 
the National Flood Insurance Program.
    The events of 2004 and 2005 hurricane season and the 
forecast from the National Hurricane Center at our first 
hearing on this subject in October only reinforced how dire the 
need is to overhaul this program.
    As I mentioned in last week's hearing, we do not have the 
luxury of doing nothing. We have today a very distinguished 
panel of witnesses, and I would like to welcome all of them to 
the Committee. Our panel this morning includes Mr. David 
Conrad, Senior Water Resources Specialist at the National 
Wildlife Federation; Ms. Regina Lowrie, Chairman, Mortgage 
Bankers Association; J. Robert Hunter, Director of Insurance, 
Consumer Federation of America; Mr. David Pressly, National 
Association of Homebuilders; Mr. Paul Gessing, Director of 
Government Affairs, National Taxpayers Union; Mr. David John, 
Research Fellow at the Heritage Foundation; and Ms. Pam Pogue, 
Chair, Association of State Flood Plain Managers.
    Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman.
    I want to join you in welcoming the witnesses before the 
Committee this morning. This is a further step in the series of 
hearings we have been holding on the flood insurance program 
which very clearly has some systemic problems. Actually, they 
became evident to me at least a few years ago when Hurricane 
Isabel struck the East Coast and revealed major administrative 
problems in the program. My constituents reported receiving 
unfair treatment and inadequate settlements from FEMA. FEMA was 
overwhelmed then, let alone the circumstance in which it now 
finds itself after one of the greatest natural disasters in our 
history.
    Katrina drove over a million families from their homes, 
flooding hundreds of thousands of residences, and leaving tens 
of billions of dollars of destruction in its wake. The hearing 
we held last week, I thought, helped to put things in some 
perspective. The acting Federal Insurance Administrator, David 
Maurstad, testified that prior to 2005, the largest loss year 
was 2004, and the flood insurance program paid out $2.2 billion 
in claims that year.
    The average loss year, according to Maurstad, ran at about 
$1.2 billion a year. It is now estimated that Katrina and the 
other hurricanes in 2005 will result in almost $24 billion in 
flood insurance claims being paid. We need to raise the 
borrowing authority if they are to do that. I feel strongly 
that should be done. The people who took out these policies and 
made these payments and everything have a contractual right, 
actually, to be paid.
    But this loss is 10 times the second highest loss year. It 
is 20 times the average loss year. And I put that out there 
because I think we need to keep it in mind, because I think 
there are two separate problems here, and I thought Comptroller 
General David Walker made that distinction at last week's 
hearing. One is how do we pay the $24 billion in claims from 
the 2005 storms, this unprecedented figure, 20 times the 
average loss year, 10 times the highest previous loss year? And 
the other issue is how to strengthen the program moving 
forward.
    And we are going to talk a lot about actuarial rates and so 
forth and so on. I want to hear from the witnesses whether when 
they do that they are encompassing within the construct of an 
actuarial rate handling a $24 billion loss year; in other 
words, a storm of such magnitude that it far eclipses anything 
that has ever previously been recorded.
    We have not settled yet how FEMA will pay for Katrina 
claims, although we have now raised the figure to $18 billion, 
and I think they estimate they will need roughly another $6 
billion in order for the Federal Government to meet its 
contractual obligations to policy holders. As we explore this 
more and more, it is apparent it is quite a complex issue, and 
there are many things that need to be done to strengthen the 
flood insurance program.
    Some of these witnesses have even raised the possibility of 
eliminating the flood insurance program. Mr. Hunter, who helped 
to put it into place and develop it, is now--it is either one 
way or the other as I understand his testimony, and I would be 
interested to draw him out on that as we proceed. But FEMA 
collects about $2 billion a year in premium income, so the 
order of magnitudes here are quite large when you get hit with 
something like Katrina.
    I mean, it is beyond my understanding how you could 
encompass that within the premium structure, and I would be 
interested to hear from the witnesses on that particular point 
as well as many others.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Thank you, very much, Mr. Chairman and 
Senator Sarbanes for holding this hearing on Reforming the 
National Flood Insurance Program, and I want to particularly 
welcome Pam Pogue from Rhode Island. Pam is our State's 
floodplain manager. She does a superb job for us, and we have 
been working with her on some of the legislation we have 
proposed.
    And I also want to thank the Association of State 
Floodplain Managers and the National Wildlife Federation for 
endorsing my bill to modernize the FEMA flood mapping program. 
Thank you.
    Mr. Chairman, I have a longer statement I would like to put 
in the record, but let me make a few points, if I may. Before 
1989, no single coastal storm had caused insured losses greater 
than $1 billion in real terms, and since that time, Andrew, 
Wilma, Katrina, Rita, and others have caused damage in excess 
of $1 billion. This is no longer a minor event when one of 
these storms hits, and the reason, obviously, is that people 
are flocking to the coastlines.
    Rhode Island is a great example of that. Twenty years ago, 
30 years ago, summertime, you had beach houses along the coast. 
Now, there are multimillion dollar houses. They are demolishing 
the old houses to build the multimillion dollar ones. It is 
happening on the Maryland shore; it is happening on the Gulf 
shore. We have to be responsive to that.
    We do have to have to modify the program. I believe the 
reforms must balance making the programs actuarially sound with 
insuring that American families living in these areas have 
access to affordable flood insurance. We also have to work 
closely, and FEMA has to take the lead, with respect to hazard 
mitigation programs. We understand these storms will come 
again, and we have to take steps now to minimize these billion 
dollar or more storm effects.
    And I think finally, as has been said by the Chairman and 
others, we have to modernize the FEMA maps. The Corps of 
Engineers have inundation maps that are much different. They 
should be reconciled, and we should give information to local 
community zoning authorities, to local builders, and to 
individuals about exactly what the risks are, and these maps 
are important with respect to the overall program.
    I hope the witnesses will discuss today whether the Federal 
Government programs such as Federal flood insurance, these 
programs are unintentionally giving the wrong incentives rather 
than the right incentives in terms of development along 
coastlines. But we all recognize the appeal of the oceans and 
the bays of this country are overwhelming, and as long as they 
are there, people will like to live close to them. I know I do; 
and we have to have a program that reflects that behavior and 
does so in a sound and prudent way, and I thank the witnesses 
for being here, particularly Pam.
    Thank you.
    Chairman Shelby. Your written statement will be made part 
of the record without objection, Senator Reed.
    Senator Reed. Thank you, Mr. Chairman.
    Chairman Shelby. Mr. Conrad, we will start with you. All of 
your written testimony, which is voluminous, will be made part 
of the record, and it is not only voluminous; it is very good, 
all of it.
    Thank you, Mr. Conrad.

                  STATEMENT OF DAVID R. CONRAD

               SENIOR WATER RESOURCES SPECIALIST,

                  NATIONAL WILDLIFE FEDERATION

    Mr. Conrad. Thank you, Mr. Chairman.
    Good morning, Mr. Chairman, Ranking Member Sarbanes, and 
Senator Reed. My name is David Conrad, and I serve as Senior 
Water Resources Specialist for the National Wildlife 
Federation. We very much appreciate the opportunity to testify 
on this most important subject.
    Mr. Chairman, the National Flood Insurance Program is 
indeed currently facing the most serious crisis in its 38-year 
history, we believe. The four major hurricanes which struck 
Florida put a major strain on the NFIP's solvency. Hurricanes 
Katrina, Rita, and Wilma have now demonstrated what has long 
been predicted, that the program's lack of an actuarially based 
financial structure leaves it vulnerable to major catastrophic 
losses, which can now only be repaid with enormous bailouts 
from the American taxpayers.
    We do not believe that these should be viewed as isolated 
events that will not happen again. With a lack of accumulated 
catastrophic reserves, only $2 billion in annual revenues, the 
need to borrow in excess of $24 billion from the Treasury to 
pay claims and interest payments that will approach $1 billion 
from borrowing, it is clear that without a bailout, the NFIP 
would soon collapse.
    We assume that some level of bailout will be provided but 
we strongly hope that Congress will take significant action 
concurrently to put the program on a much sounder footing. 
Improvements must be made financially in how, where, and at 
what price we provide insurance, and through a concerted effort 
to better manage risk. This requires a commitment to apply the 
best scientific methods of determining risk and best policy 
setting regarding where and under what circumstances we allow 
building in the vicinity of flood prone areas.
    Mr. Chairman, in 1998, the National Wildlife Federation 
published a 3-year study that we conducted on the NFIP that 
showed that a relatively small group of properties, the 
repetitive loss properties, most of which received highly 
subsidized pre-FIRM rates, had up to that point experienced 25 
percent of the losses and received 40 percent of total NFIP 
claims.
    The enormous costs of these buildings, combined with 
continuing to insure them at highly subsidized rates and the 
fact that seldom was anything done to remove them from harm's 
way, meant that the NFIP continued to be far from actuarially 
sound and could never develop the needed reserves for 
catastrophic losses. As we heard last week from FEMA and GAO, 
these properties are continuing to be a large and chronic drain 
on the National Flood Insurance Fund.
    We believe that a number of changes must be made to put the 
program on a sound footing: Reduction and elimination of 
subsidies, especially for pre-FIRM structures and repetitive 
losses is a long overdue reform that should be an urgent goal 
today. The belief when the program was first developed was that 
the high risk pre-FIRM properties would eventually be flooded 
and removed from floodplains, being replaced with structures 
outside the floodplain. This has proceeded far more slowly than 
anticipated, with the subsidies in fact working adversely to 
encourage a continual cycle of flooding and paying for flood 
damages.
    It has been suggested that an initial step could be to 
eliminate subsidies for vacation homes, nonprimary residences, 
and commercial properties. We would strongly agree with this, 
because it is essential to begin to place the responsibility on 
those who own these properties.
    The ultimate goal would be to phase out all subsidies and 
to rate all properties based on their true risks. An equally 
important alternative that must be pursued to help those for 
whom actuarial rates would be a significant hardship, is to 
provide substantial and sustained support through hazard 
mitigation grants to reduce their costs and costs of insurance. 
We also believe that hazard mitigation and strengthening of 
NFIP standards should be cornerstones of restoring financial 
integrity.
    Overall, funding for hazard mitigation has dropped in 
recent years and needs to be increased. The grants formula for 
the Hazard Mitigation Grants Program should be restored to the 
15 percent level that it was at prior to 2003, and it should be 
applied immediately to help Gulf Coast communities.
    We have suggested in our written testimony a number of 
improvements in NFIP standards that would help ensure that we 
are not just building up more risk over time that is vulnerable 
to major storms. We would urge that FEMA be charged with 
identifying the places where it is simply too risky or unwise 
to continue to make flood insurance available.
    It has also been suggested that the mandatory purchase 
requirement be extended to areas behind levees and below dams 
to insure for the associated residual risk in the event of 
structural failures. We would strongly support this change in 
light of numerous recent examples where many flooded residents 
found themselves with major losses and without insurance.
    The accurate mapping of flood hazards is fundamental to the 
NFIP and for basic community planning. We greatly appreciate 
the continued support of the Administration and Congress for 
the map modernization program, but additional steps are needed. 
We strongly urge the Committee's supervisor for S. 2005, 
recently introduced by Senator Reed, that would expand mapping 
to the 500-year floodplain and for related flood hazards as 
well as provide funding that will be absolutely necessary to 
have the quality mapping that is needed in the future.
    Again, Mr. Chairman and Members of the Committee, we 
applaud your work to reform the NFIP. The program has fallen 
short of its initial promises and currently finds itself in 
extremely serious financial trouble. The program has been 
successful in many ways to reduce the adverse impacts of 
flooding on many of the Nation's communities, yet it has 
overall failed to put insurance on an actuarial footing, to 
accurately assess flood risks, to adequately communicate those 
risks to the public, and failed to adequately discourage 
building and rebuilding in high and substantial risk areas.
    For 38 years, it has continued to highly subsidize many of 
the policies it sells, thus skewing market signals as to the 
risks involved with certain floodplains locations and in some 
cases serving as an inducement to developing high risk areas 
rather than the opposite. Perversely, this has also had a 
substantial adverse effect on many sensitive and critical 
ecosystems that support a large portion of the Nation's 
wildlife, with the result sometimes being intensive 
urbanization and fill immediately along the Nation's rivers, 
streams, coastlines, estuaries, and barrier islands with 
heightened flood risks.
    We are ready to work with the Committee to make needed 
improvements. Thank you for asking me to provide the views of 
the Federation. I would be happy to respond to any questions 
you have.
    Chairman Shelby. Thank you.
    I am going to recognize Senator Santorum for any comments 
he wants to make on Ms. Lowrie.

               STATEMENT OF SENATOR RICK SANTORUM

    Senator Santorum. Thank you. I appreciate the indulgence of 
the Chairman. I just got back from the National Prayer 
Breakfast, and I guess Bono decided he was going to speak a 
little longer than everybody anticipated.
    Let me thank you, Mr. Chairman, and I just wanted to come 
by and thank you for holding this hearing. This is a very 
important topic, one that we have experienced in Pennsylvania 
the inadequacies of this program and the problems with it. So, 
I am very pleased that you are doing so. I wanted to come by 
and welcome to the Committee Regina Lowrie, and I thank her for 
the terrific work that she has done in Pennsylvania and 
nationally now with the Mortgage Bankers Association. She has 
been a great leader in making homeownership more affordable due 
to the tremendous work of the mortgage bankers, and I welcome 
her here and thank her for her testimony.
    Ms. Lowrie. Thank you, Senator.
    Chairman Shelby. Ms. Lowrie, you proceed.

                 STATEMENT OF REGINA M. LOWRIE

             CHAIRMAN, MORTGAGE BANKERS ASSOCIATION

    Ms. Lowrie. Thank you.
    Good morning, Chairman Shelby, Ranking Member Sarbanes, and 
Members of the Committee. Thank you for inviting the Mortgage 
Bankers Association to testify here today. My name is Regina 
Lowrie, and I am President and founder of Gateway Funding 
Diversified Mortgage Services, located in Horsham, 
Pennsylvania, and I am the 2006 Chairman of the Mortgage 
Bankers Association.
    The hurricanes of 2005, Hurricanes Katrina, Rita, and 
Wilma, resulted in unprecedented damage and destruction to 
homes and businesses. The flood insurance program has been an 
important part of the recovery throughout the entire Gulf Coast 
region. NFIP testified last week that 75,000 claims had been 
paid. Yet, NFIP also testified that they will need an 
additional $5.6 billion in borrowing authority to continue 
paying flood insurance claims from these storms.
    First and foremost today, MBA believes it is crucial that 
Congress move quickly to increase the borrowing authority in 
order for the program to continue to meet its obligations to 
the current policy holders and claimants in the affected Gulf 
region.
    The cost of the flood insurance program to the Treasury in 
the wake of these disasters has raised some important issues 
about the long-term viability of the program. MBA believes the 
program is vital to homeowners to help maintain value in their 
property and facilitate affordability.
    The Committee asked MBA to discuss some of the ideas that 
have recently been raised to maintain the solvency of the 
National Flood Insurance Program. As background, even before 
the statutory mandatory requirement, lenders often required 
flood insurance to protect their collateral interests. With the 
passage of the Flood Disaster Protection Act of 1973, however, 
it became unlawful to make, increase, extend, or renew a loan 
secured by a structure in a special flood hazard area without 
flood insurance coverage for the life of that loan.
    Without a reliable and uninterrupted source of flood 
insurance, we believe that mortgage credit would at best be 
more expensive or at worst unavailable in many markets. 
Although there are private providers of flood insurance, MBA 
estimates that 90 percent of all flood policies are written 
through NFIP. The mortgage industry wants to ensure the 
continued viability of the National Flood Insurance Program.
    One of the ideas to increase participation in the flood 
insurance program is to expand the definition of a special 
flood hazard area to the 500-year floodplain map. At this time, 
without further study, MBA cannot support this expansion of 
coverage.
    The burden of enforcing compliance with flood insurance 
requirements falls squarely on the mortgage industry. The 1973 
Act, for the first time, restricted federally insured 
depository institutions from making loans in a special flood 
hazard area without flood insurance. The National Flood 
Insurance Reform Act of 1994 expanded that mandatory purchase 
requirement to loans purchased by Fannie Mae and Freddie Mac. 
The Act also reaffirmed the lenders' obligation to keep the 
policy that was obtained at origination in full force for the 
life of the loan through the use of lender-placed insurance if 
it was necessary.
    We were very concerned, however, with remarks made by the 
NFIP last week before this very Committee. In response to 
questioning, the Acting Director said he believed the level of 
noncompliance with the mandatory purchase requirement was 
between 40 and 60 percent. Since he did not state or did not 
recall where he had seen that data, I would like to take this 
opportunity to comment on lender compliance.
    As an industry, mortgage companies execute the flood 
insurance obligations consistently, in good faith, and with few 
errors. In fact, a March 2005 study produced for FEMA by the 
American Institutes for Research shows significant compliance 
with the law. The bank regulators had similar findings.
    The flood insurance statute is a complicated law with a 
magnitude of requirements. Our written testimony goes into 
detail regarding the significant procedures to ensure 
compliance with these and other statutory obligations that our 
members have instituted.
    Mr. Chairman, MBA appreciates the opportunity to testify 
before you today. We stand ready to work with you and the rest 
of your Committee to find ways to make the program work better 
for policy holders, stakeholders, and the Federal Government. 
Thank you.
    Chairman Shelby. Mr. Hunter.
    Senator Sarbanes. Mr. Chairman.
    Chairman Shelby. Yes, Senator Sarbanes.
    Senator Sarbanes. Before, can I just ask for a quick 
definition?
    Chairman Shelby. Sure.
    Senator Sarbanes. What is your definition of significant 
compliance? What percentage figure would you use?
    Ms. Lowrie. In a recent interview with a Fannie Mae 
representative who had done an audit of their seller servicers 
and the compliance, out of an entire portfolio of seller 
servicers' loans, there were six loans of noncompliance. 
Overall for the industry, we think that number is close to 95 
percent, Senator.
    Senator Sarbanes. So you use a 95 percent figure rather 
than a 40 to 60 percent figure.
    Ms. Lowrie. No, 95 percent compliant.
    Senator Sarbanes. The agency, in effect, would have 
somewhere between 40 and 60 percent compliant. They said 40 to 
60 percent noncompliant, but, I mean, you just turn that 
around; is that right?
    Ms. Lowrie. Yes; they said 40 to 60 percent, right.
    Chairman Shelby. Mr. Hunter.

                 STATEMENT OF J. ROBERT HUNTER

                     DIRECTOR OF INSURANCE,

                 CONSUMER FEDERATION OF AMERICA

    Mr. Hunter. Good morning, Mr. Chairman, Members of the 
Committee.
    I love the National Flood Insurance Program. As Senator 
Sarbanes indicated, I poured a lot of my own life into it in 
the first 10 years, first as Chief Actuary, so I can answer 
some of your actuarial questions, hopefully, and as the 
Administrator.
    If it worked as Congress intended, it would have blessed 
the Nation by now, and we would be seeing a lot less flooding, 
not more. It would have made sure that new building was wise in 
the flood hazard areas. It would have eliminated building in 
very high flood hazard areas, and it would have covered all 
those by now exposed to flood hazard.
    I say this because I have to sadly raise the question today 
whether this program should be continued. If it is not fixed, I 
do not think it should. If the program encourages unwise 
construction in floodplains, it is a danger to the Nation 
rather than a blessing. If the program lures people 
unexpectedly into floodplains, if it subsidizes construction in 
unsafe places, if it cannot deal with communities flaunting the 
program's requirements, if it falsely assures people that they 
are in low risk areas when they are not, it must be reformed, 
or it must end, because it will encourage, as you say, people 
to come in to high risk areas and build.
    I also love New Orleans. That is where I was born, and I 
have been a very strong advocate over the years for the poor, 
as you probably know. However, you cannot change the flood 
program to allow unwise reconstruction or new construction in 
New Orleans. We hear that the city, from several sources, is 
allowing people with an excess of 50 percent damage to rebuild 
without elevating their homes under a program that has allowed 
90 percent of the appeals to be reversed, even though the 
damage is a lot more than 50 percent, according to people I 
have talked to.
    It is not doing the poor a favor to let them build back the 
same way their house was before Katrina. It is just setting 
them up for the next flood, for another bout with grief and 
destruction. FEMA cannot allow sympathy to stop it from doing 
what is required by Congress and by their regulations.
    I support helping residents with direct aid in some 
fashion, whether it is the Baker approach or whatever. I think 
that is needed. And that needs to be done particularly for 
those who do not have flood insurance, but we cannot afford to 
allow rebuilding in high risk areas without proper elevations. 
If you do not force the elevations to be done properly, how do 
you, in the next flood, force them to do it if a flood in Ohio 
happens or Rhode Island, God forbid, or something? So FEMA 
should be moving firmly to assure that this is stopped.
    You should also terminate the program if the maps are not 
made current. This is really a disgrace. When I was 
administrator of the program, we had the goal of updating the 
maps every 3 to 5 years, and even then, we were worried about 
should we add a freeboard, because we know that development 
pushes the elevations up.
    Consider Hancock County, Mississippi. There are 76 
different maps covering most of that county on FEMA's web page. 
Those maps, called Hurricane Katrina surge, inundation, and 
advisory base elevation maps are really a smoking gun on how 
FEMA's inaction has contributed to the devastation people felt 
from Katrina. The maps show that the antiquated 100-year flood 
levels are out of date, and on average, 12 feet too low. The 
maps that are currently in force in that county on average are 
12 feet below what they now say the 100-year risk is.
    So somebody who built according to the FEMA requirements 
and thought they were safe were way, way underwater when that 
happened, plus a lot of people who were outside the flood zone, 
because let us say in one place I was looking at, the current 
map is 9 feet, and the new map would be somewhere between 20 
and 30, the size of the flood zone would be much larger, so a 
lot of these people who do not have flood insurance would have 
had flood insurance had the map been properly drawn, because 
when they got their mortgages, they would have been required to 
get it.
    These are not unique to Mississippi. These old maps exist 
everywhere; I mean, not every map is 20 years old like that, 
but the maps are old, and that is bad. As a result, people are 
building what they think are safe homes, and to varying 
degrees, they are not.
    Actuarial rates are predicated on these maps, so if the map 
elevations are too low, the rates are too low. I am getting a 
very cheap rate if I build at 9 feet when I should have built 
at 20. In effect, it is a hidden taxpayer subsidy of unwise 
construction.
    Further, large areas outside the area, as I said, were 
actually in the high risk area, and people did not have 
insurance and thought they were safe, and many of them have 
called us and said we talked to our agents; they said you are 
outside the area, and do not worry about it. So they really 
were in the area, and FEMA is in large measure at fault for 
that, for them not having insurance. If the maps are not 
quickly brought up-to-date and kept up-to-date, the program 
should be terminated to end the taxpayer subsidy.
    Actuarially, the NFIP collects too little money to cover 
losses over the long haul. When I talk about actuarial 
soundness, Senator Sarbanes, actuarial soundness typically 
means prospective. Rates should be accurate for covering the 
future risk. You do not go back and recoup, at least 
actuarially, so this loss that you have currently is beyond 
actuarial soundness if you are going to try to recoup it. 
Actuarial soundness is a prospective thing. The current 
estimates are that there is a $1.3 billion shortfall 
actuarially on a $2 billion premium base, so that is about a 65 
percent shortfall, but that would not recoup what you are about 
to pay out and have already authorized a lot of.
    Katrina is only one example of the kind of shortfall, 
though, because the NFIP now only covers enough to pay for the 
relatively normal flooding of a year. Katrina obviously is a 
lot bigger than that, and now, you are learning it. But even 
bigger floods than Katrina are possible and in the long-term 
certain: A Category 5 storm at Miami Beach or Long Island are 
just examples where you could have a lot bigger claims than 
that.
    Let me just say simply, for the program to be actuarially 
sound, you have to charge actuarial rates, and that has to be 
done over the long haul. There are other steps, though, that 
can save money, like eliminating the excessive write-your-own 
expenses, the $1 billion of the $2 billion problem, and also 
making sure mitigation is enforced. And these are necessary 
steps toward bringing it toward soundness, but they are not 
sufficient. You have to make the rates actuarially sound 
ultimately.
    And obviously, I, for the poor, for the lower-income 
people, you have to have some type of a transition program over 
time as the house is sold or something. For second homes and 
very valuable homes, I think you can move more quickly if not 
immediately.
    The last time I testified, I gave you several ideas. I 
would just want to reiterate a couple of those, but I do 
reiterate all of them. You have that in the record. I believe 
you should move to a 500-year requirement for both mitigation 
and purchase requirement. You should eliminate the subsidy on 
high value structures immediately, also on second homes and on 
homes with previous serious flood damage and particularly 
repetitive flood damage. Mid-value structures could have their 
subsidies phased out in the intermediate term and low-value 
structures when they are sold.
    Homes that would be in floodplains except for flood works 
such as levees and dams that can fail should be required to buy 
the coverage. That does not mean that they should not pay a 
lower rate to take into account that it is safer than it would 
be without those structures, but it still means they should buy 
it, because we know dams and levees fail. It happens all the 
time.
    Consider giving private insurers skin in the game. I 
mentioned that last time, at least for the actuarial part of 
the business. As you move toward actuarial rates, there is no 
reason why they cannot take over more of the action. 2005 is 
shaping up to be their third highest profit year in history. 
2004 was their largest profit year in history even with all 
these hurricanes and storms.
    I mentioned you should deal with the excessive expenses and 
the write-your-own program. In order to obtain greater market 
penetration, you must find ways to make the purchase 
requirement work. You can find out exactly how much shortfall 
there is, but it seems to me that from talking to victims, 
people who used to have flood insurance, a lot of times, the 
bank did not keep tracking them and keep them, although some 
banks do, some do not.
    But worse, State-regulated banks and State-regulated 
insurance companies do not have to require flood insurance at 
all, and you need to move to get those entities required. And 
GAO must be tasked with seeing if communities are really 
meeting their burdens of mitigation.
    Mr. Chairman, I never thought I would utter the words 
consider terminating the flood insurance program, really. It is 
a beautifully conceived program Congress created, but it has 
suffered from poor administration, and it is really a negative 
rather than a positive impact in the floodplains today, and I 
urge you to act to fix that.
    Chairman Shelby. Mr. Pressly.

                   STATEMENT OF DAVID PRESSLY

              NATIONAL ASSOCIATION OF HOMEBUILDERS

    Mr. Pressly. Chairman Shelby, Ranking Member Sarbanes, 
Members of the Committee, my name is David Pressly, and I am a 
homebuilder from Statesville, North Carolina, and the President 
of the National Association of Homebuilders, and I thank you 
for the opportunity to testify on behalf of the NAHB regarding 
reform of the National Flood Insurance Program.
    The Federal Emergency Management Agency's National Flood 
Insurance Program plays a critical role in directing the land 
use of flood-prone areas and managing the risk of flooding for 
residential properties. The availability and the affordability 
of flood insurance gives home buyers and homeowners the 
opportunity to live in the home of their choice and in a 
location of their choice even if that home may lie in a 
floodplain.
    The homebuilding industry depends upon the NFIP to be 
annually predictable, universally available, and indeed, 
fiscally viable. Unfortunately, the devastation brought about 
by the Hurricanes Katrina, Rita, and Wilma has severely taxed 
and indeed threatened the solvency of the NFIP. While these 
losses are severe, they are currently unprecedented in the 
history of the NFIP and therefore not a reflection of a 
fundamentally broken program.
    Therefore, while NAHB supports reforms aimed at supporting 
the long-term financial stability of the NFIP, any resulting 
reforms must not be an overreaction to unusual circumstances. 
And indeed, this reform should take the form of a thoughtful, 
deliberative, and reasonable solution.
    As part of a coalition of interested trade groups, NAHB has 
forwarded a list of reforms designed to allow FEMA and the NFIP 
to better adapt to changes, to risk, to inflation, and indeed, 
to the marketplace. These reforms include, first, providing 
FEMA with the authority to allow for slightly higher annual 
premium increases; second, to increase coverage limits to 
better reflect today's home values; third, to create a deluxe 
or enhanced flood insurance option, and certainly, increasing 
the minimum deductible paid on claims.
    Now, while these reforms I just mentioned can be enacted 
relatively quickly, other reforms require additional study. One 
option that has been widely considered is the mandatory 
purchase of flood insurance for homes located behind flood 
control structures. This strategy would obviously increase the 
number of policyholders and thereby the influx of premiums.
    However, it is much more complicated. The NFIP and its 
implementing provisions were created to balance the needs of 
growing communities with the need for reasonable protection of 
life and property. Therefore, FEMA should first demonstrate 
that the impacts stemming from any reforms will be more than 
offset by the increased premiums, required protections and, 
indeed, administrative burdens.
    A key component of such study is the need for accurate 
flood insurance rate maps. NAHB applauds the strong leadership 
of this Committee to direct FEMA to modernize its maps.
    While changes to the NFIP's mandatory flood insurance 
purchase requirements represents one set of issues, a change 
from the 100-year to a 500-year standard would present an 
entirely different set of issues. Changes to the 100-year flood 
plan have been considered in recent years, but even experts 
have failed to reach consensus on the issue. What has emerged, 
however, is a recognition of the tremendous implications that 
changing the standard floodplain would have on homebuilders, 
homebuyers, on communities and local government and indeed the 
Federal Government itself.
    Finally, I would like to talk to you about one of the basic 
tenets of the NFIP, and that is the residential design 
standards. Now, currently, FEMA requires every home that is 
built in the 100-year floodplain to be elevated above the base 
flood elevation. While this requirement may be appropriate for 
the 100-year floodplain, NAHB strongly opposes to expanding 
these requirements to any new classes of structure such as 
those located behind flood protection structures or those in 
any newly expanded NFIP floodplains.
    Additional construction requirements would increase the 
costs of a new home construction and impact housing 
affordability. For example, on the Gulf Coast, elevating new 
structures could add, on average, $30,000 to the cost of a new 
home. It is easy to see the tremendous impact that such reforms 
would have. NAHB urges Congress to soften the impact of any 
programmatic changes to the NFIP by ensuring that construction 
requirements remain tied to the current 1 percent standard.
    Mr. Chairman, I thank you for the opportunity to share our 
views with you and your Committee.
    Chairman Shelby. Mr. Gessing.

                  STATEMENT OF PAUL J. GESSING

                DIRECTOR OF GOVERNMENT AFFAIRS,

                    NATIONAL TAXPAYERS UNION

    Mr. Gessing. Chairman Shelby, Ranking Member Sarbanes, and 
distinguished Members of the Committee, thank you for holding 
these important hearings today. My name is Paul Gessing. I am 
Director of Government Affairs with the National Taxpayers 
Union, America's oldest and largest grassroots taxpayer 
lobbying organization, with 350,000 members nationwide.
    I would also note that my organization works closely with 
the group Taxpayers for Common Sense, and I am here to testify 
not only on behalf of my own organization but also on behalf of 
Taxpayers for Common Sense and their Vice President of 
Programs, Steve Ellis, who could not attend today.
    I come here today to offer testimony regarding what we 
believe are some rather significant problems with the National 
Flood Insurance Program as they relate to taxpayers to 
illustrate to the Committee why many of these taxpayer concerns 
also have a direct impact on those living in flood-prone areas, 
and last to outline the need for bold steps on the part of 
Congress to ensure that the next major hurricane or flood 
inflicts less of a toll, in the forms of human suffering and 
lost economic productivity and taxpayer money.
    Although the original intent of the existing Federal flood 
insurance program was to mitigate many of these problems, it 
has not done so, and as such, must be considered a failure. The 
recent spate of hurricanes may have been unique in recent 
history for their intensity and frequency, but they are 
perfectly normal in costing Federal taxpayers billions of 
dollars.
    Worse, there is wide agreement in the scientific community 
that the trend of increasing intensity and numbers of 
hurricanes will continue for several years. Even before these 
hurricanes, the NFIP had repeatedly relied on the U.S. Treasury 
to supplement its premium revenues. Last week, several of those 
testifying on NFIP stated that from 1986 through 2004, NFIP was 
self supporting. I would argue that those statements are in 
error. First of all, how can you bookend a program like that? 
Starting in 1986, the program shifted from direct 
appropriations to the current system, which the program borrows 
from the Treasury and repays its debt with interest. By the 
way, it must be noted that NFIP was forgiven well over $1 
billion in debt at that time.
    Then, over the 18-year period in question, NFIP borrowed 
when it needed to and repaid with interest, but the simple fact 
that it was able to borrow shows that it is not self-supporting 
or actuarially sound. There is no catastrophic reserve, because 
the program has the taxpayers to fall back on.
    In the aftermath of the 2005 hurricane season, the program 
will be forced to borrow an astonishing $24 billion the 
Treasury. It is time to face facts: With premium payments 
yielding $2 billion per year and flooding likely to continue, 
even if not at the level we have seen in recent years, there is 
little likelihood of taxpayers ever recouping much of the $24 
billion they are now owed.
    Thus, Mr. Chairman, as you said in your opening remarks, 
the NFIP is bankrupt. As taxpayer advocates, what we must do 
now is work to ensure that the NFIP no longer serves as a 
fiscal black hole. Prior to the NFIP's existence, insurance 
coverage for flood losses was not provided by any private 
insurance carriers. Insurance losses stemming from flood damage 
were largely the responsibility of the property owner, although 
the consequences were sometimes mitigated through provisions 
for disaster aid.
    Today, the owners of property in floodplains sometimes 
receive disaster aid and payments for insured losses, which in 
many ways negates the original intent of the NFIP, that being 
to encourage property owners to pay some of the up front costs 
of expected disasters rather than forcing taxpayers to foot the 
bill after the fact. These policy decisions have contributed to 
an escalation in losses stemming from the floods in recent 
years both in terms of property and life.
    Also, though this is not of primary importance to 
taxpayers, I must point out that subsidizing insurance in high 
-risk areas takes a significant environmental toll. Coastal 
areas are often among the most ecologically sensitive and 
diverse. Thus, it is disconcerting to know that while they 
spend untold billions of dollars annually on an array of 
environmental mitigation efforts and often see their lands' 
usefulness decline under Federal mandates also for the purpose 
of environmental mitigation, taxpayers are then forced to pay 
once again, this time for a program that actually encourages 
the destruction of environmentally sensitive areas.
    The final area of concern taxpayers have about this program 
are those involving fairness and moral hazard. Specifically, I 
would like to bring to your attention and submit for the record 
a story conducted by John Stossel of ABC News. In 2003, in the 
wake of Hurricane Isabel, Mr. Stossel did a story called 
Taxpayers Get Soaked by Government's Flood Insurance. In this 
piece, Stossel recounted his own personal experience of 
purchasing beachfront property on Long Island, New York, and 
constructing a house there in 1980.
    Stossel noted among other things that the most he ever paid 
was a few hundred dollars for insurance that actuaries say 
should realistically have been priced at thousands of dollars.
    John Stossel is not the only well-heeled individual taking 
advantage of the taxpayer-subsidized flood insurance. According 
to a 2000 report by the Philadelphia Inquirer, 6 of 10 NFIP-
insured properties are in beach towns, and since the program 
does not differentiate between primary residences and vacation 
homes, the program's mission could be said to include ensuring 
that wealthy Americans are protected from floods by the full 
faith and credit of the U.S. taxpayer.
    Asking taxpayers to spend billions annually on Government 
programs and revenue transfers designed with the purpose of 
assisting poor and lower-income Americans is one thing, but 
asking them to spend additional billions on the NFIP, which is 
more of a taxpayer financed safety net for millionaires, is yet 
another. It is, after all, predominantly wealthy people with 
enough disposable income to own beachfront property who choose 
to live or have a second home in risky areas.
    Then, because it is priced far below market value, flood 
insurance proves even more attractive to wealthy homeowners who 
know a good deal when they see it. Thus, the wealthy snap up 
coverage, while the poor are often left unprotected when 
disaster strikes.
    To continue with Stossel's story, as it turns out, despite 
beach replenishment efforts by the Army Corps of Engineers, 
again, taxpayer-financed, his house was washed away completely 
in a storm that he described as fairly ordinary. Of course, the 
NFIP paid for the house, the first $250,000 of which is insured 
under the Federal program, and its contents, insured to 
$100,000, and there were only minimum restrictions on 
rebuilding on the same piece of land. Worse, he pays the same 
price for insurance the day after the storm as the day before.
    Quite simply, this is a ridiculous policy. We have a clear 
result. The location is at great risk for loss, and yet, we do 
not restrict reconstruction, and we charge the same rate. I 
certainly cannot think of anyone who would run a business that 
way; no wonder we are in a hole.
    It is said that the road to hell is paved with good 
intentions, and like all Government programs, the NFIP was 
created with good intentions in mind. To this day, many of the 
program's supporters believe that the NFIP actually saves 
taxpayer dollars, because with insurance, taxpayers receive at 
least some compensation before the disaster strikes, whereas 
they are never compensated for disaster relief.
    Even had it been well-planned and executed effectively, the 
Federal flood insurance program has had other unintended 
consequences. Rather than simply compensating homeowners for 
losses, the cheap insurance has actually encouraged more people 
to build in flood-prone areas. Last week, David Maurstad 
testified that NFIP insured more than $800 million in assets on 
4.8 million policies. Back in fiscal year 2002, that number was 
only $644 million on 4.5 million policies. That is a 24 percent 
increase in insured assets on just more than a 6.5 percent 
increase in policies.
    Sure, the housing sector has been strong Nationwide, but as 
Senator Reed pointed out in his opening remarks, there is a 
building boom going on on our Nation's shorelines, as 
increasing numbers of wealthy people build their castles on the 
sand. It is self evident that this boom is subsidized at 
taxpayer expense.
    So what do we do now? As in a 12-step program, the first 
part of solving a problem is recognizing that you do, in fact, 
have one. The recent spate of hurricanes has only exposed what 
experts and taxpayers have known for a long time: Federal 
meddling in the marketplace inevitably results in subsidies for 
some and significant costs for all taxpayers. Congress must act 
now to restore some semblance of a marketplace for flood 
insurance that contains adequate taxpayer protections, or it 
must be willing to abandon the program entirely, leaving the 
responsibility of finding adequate insurance in the hands of 
individuals and insurance companies.
    If nothing else, at a bare minimum, Congress must consider 
taking action to address the subsidies inherent in the 25 
percent of NFIP's covered properties that predate flood 
insurance rating maps.
    NFIP has been in effect for nearly 40 years. That is far 
longer than even the longest mortgage. Surely, it is time to 
stop paying massive subsidies to the shrinking group of 
unaware, pre-FIRM homeowners. Other reform measures lawmakers 
might consider would be collecting actuarially sound rates to 
finance expected annual payments as well as catastrophic 
reserve, increasing program participation through greater 
enforcement and by expanding the floodplain areas requiring 
coverage, and increasing the use of disaster relief funds to 
mitigate future damage by making communities more flood and 
disaster resistant through flood proofing, elevating, and 
relocating repeatedly damaged properties.
    Unfortunately, the fact that for all these years, Congress 
has been unwilling to reform the NFIP in ways that adequately 
protect taxpayers, eliminate subsidies, and make the program 
actuarially sound may serve as a clear sign that the best way 
to address the program's shortcomings is to eliminate it 
entirely.
    Federal involvement in the provision of flood insurance has 
been on the whole counterproductive. Rather than discouraging 
development in flood-prone areas, it encourages development. 
Rather than protecting Americans from nature's ravages, it puts 
them in harm's way, and rather than saving taxpayers money, it 
has resulted in additional expenditures and subsidies on a 
massive scale. That sounds like a failure to most reasonable 
people.
    If, after the marketplace is freed of Federal subsidies 
that have kept for-profit firms out of the business, private 
companies remain skeptical of the profitability of providing 
flood insurance, all is still not lost. The reaction may be yet 
another tool to reinforce the message that living in flood 
prone areas is risky and that most people should be forced to 
bear the loss of such unwise moves.
    Of course, it is also quite possible that some 
entrepreneurial company might figure out a way to reduce its 
risks enough to make a profit, thus creating a performance 
flood insurance marketplace more viable than it has been in the 
past.
    I must note that although NTU and the Consumer Federation 
of America rarely agree on much, and we certainly do not have 
the same philosophical approach to many issues, Bob Hunter's 
comments at the Committee's October hearing on flood insurance 
were spot on when he suggested that the insurance industry 
might be better able to engage in the flood insurance market 
than they have been in the past due to the development of 
improved mapping technologies.
    Had the NFIP not been created in 1968, and we were 
discussing the possible creation of such a program today in the 
wake of recent hurricanes and flooding, I do not think anyone 
would choose to replicate the existing system. Thus, if I were 
sitting before you today to testify on whether or not to create 
the NFIP, and if so, what it should look like, I would tell you 
that at times during which we, as a Nation, are presented with 
difficult policy decisions, we as an organization advocate 
looking to the Constitution and the Founding Fathers for 
guidance.
    Thus, we believe that leaving flood insurance policymaking 
up to the States would allow for the most creative and 
responsible outcomes possible. State and local officials, aware 
of the unique needs and challenges of their own locations, 
could design the best solutions for their particular 
environments.
    Although this hearing is strictly about the Federal flood 
insurance program, as a brief aside, I would like to point out 
that NTU and our members believe that rather than centralizing 
the job of flood prevention in one Federal body that receives 
its funding and marching orders from Washington, States and 
localities should be likewise empowered to take charge of flood 
prevention efforts whenever possible.
    The emphasis on local control does not mean there is no 
Federal role, especially in disaster relief. But as we saw in 
New Orleans, when the responsibilities of Federal, State, and 
local governments overlap, too often, there are also massive 
cracks in the system through which responsibilities tend to 
fall. If Congress were to take a close look at the interactions 
among the various flood prevention insurance and relief tools, 
we believe it would discover that restoring the primary 
responsibility for natural disaster planning and responses to 
the States with Federal agencies in a supporting role would 
leave all of us, citizens, taxpayers, and policymakers alike, 
better off.
    Thank you for allowing me to testify and for your work on 
this topic.
    Chairman Shelby. Mr. John.

                   STATEMENT OF DAVID C. JOHN

                    SENIOR RESEARCH FELLOW,

      THOMAS A. ROE INSTITUTE FOR ECONOMIC POLICY STUDIES,

                    THE HERITAGE FOUNDATION

    Mr. John. Thank you. Mr. Chairman, Members of the 
Committee, thank you for the opportunity to testify this 
morning. I am David John. I am a Senior Research Fellow at the 
Heritage Foundation.
    The catastrophic losses that the National Flood Insurance 
Program faces in the wake of last year's hurricane season 
proves that it is time for Congress to fix the program once and 
for all. According to David Maurstad last week, the Acting 
Insurance Administrator of FEMA, claims due to Katrina and Rita 
could exceed $22 billion, about one and a half times the $15 
billion that NFIP paid out in claims between its creation in 
1968 and 2004.
    Congress' reaction has been very interesting so far. In 
September, NFIP's authority to borrow from Treasury was raised 
from $1.5 billion to $3.5 billion. November saw a further 
increase to $18.5 billion. And last week, Mr. Maurstad told the 
Committee that NFIP will need about another $6.5 billion more 
just to cover claims and expenses through the end of fiscal 
year 2006.
    Interestingly, it appears from his testimony that $670 
million of the roughly $25 billion that NFIP expects to borrow 
from the Treasury will go back to that agency, Treasury, that 
is, in the form of interest payments. Now, in theory, NFIP will 
repay these loans from its premium income, but if interest at 
$670 million a year eats up roughly 35 percent of its annual 
income of roughly $2 billion, the only way that repayment is 
going to be possible would be if premium income is greatly 
increased and average claims remain at the pre-Katrina level.
    Now, since NFIP is expected to repay the loans, its 
administrative expenses and average year losses from that $2 
billion, realistically, the only way to get these loans off of 
NFIP's books will be for Congress to eventually forgive them. 
Unfortunately, the demands on the flood insurance program are 
not likely to decline. While flood losses from a single storm 
like Hurricane Katrina may be exceptional, as has already been 
noted, scientists expect hurricane activity to continue to 
build in coming years. As millions of Americans continue to 
relocate to flood prone areas and property values in those 
areas continue to rise, NFIP can expect to face much higher 
levels of annual claims than it has in the past.
    Another challenge to the program's finances would develop 
if Congress increases the level of flood insurance coverage 
available on single structures and their contents. Such an 
increase would, in fairness, reflect rising property values, 
but it is questionable if premium income on the increased 
insurance levels would cover the higher losses.
    The only way to avoid constant deficits and increased 
borrowing is to reform the program. The current request for 
additional borrowing authority is an excellent opportunity to 
make substantial changes that will reduce the likelihood of 
continued NFIP bailouts. There are four steps that we think 
would be ways to deal with this: Step one, eliminate the 
current subsidy on older structures and require the coverage 
for replacement value of the property.
    Today's NFIP subsidizes roughly a quarter of the structures 
that it insures. That leaves roughly 24 percent receiving some 
kind of a subsidized level. We have already heard it estimated 
that that is roughly $1.3 billion a year. NFIP should eliminate 
the subsidy for older structures, because its continued 
existence is a danger to the program. In order to minimize the 
impact on home and business owners, the subsidy could be phased 
out over several years. To some extent, the higher premiums 
will make it more attractive to replace older structures that 
are prone to higher flood losses with new buildings that 
incorporate architectural features that would minimize such 
damage.
    In addition, many NFIP policies only cover the remaining 
balance of a structure's mortgage and not the cost of actually 
replacing it, subject to, of course, the $250,000 ceiling on 
coverage. This protects the lender, but it can leave homeowners 
with a ruined property that they cannot afford to rebuild. 
Flood insurance should also cover the cost of replacing the 
structure, again, subject to the $250,000 ceiling, rather than 
just the cost of repaying its mortgage. Although this would 
increase premiums, insuring to replacement value will make it 
more likely that homes and businesses will be able to rebuild 
rather than to relocate.
    Step two, require flood insurance where storm surges are 
possible, including areas behind a levee or other flood control 
measure. Currently as we have already heard, flood insurance is 
only required where there is a 1 percent chance of a flood and 
not in low-lying area where surges are likely following storms. 
A significant number of the property owners affected by 
Hurricane Katrina suffered water damage despite the fact that 
their structures were well outside of the 100-year floodplain, 
where flood insurance is required.
    Flood insurance should be required in all areas where a 
flood or storm surge is likely if a weather event reaches 
catastrophic levels. Especially with serious hurricanes more 
likely to occur in the future, it makes little sense to 
continue to leave structures at risk of storm surge damage or 
near levees that could fail outside the system. NFIP should 
also assess the possibility, probability, we have now learned, 
that flood control measures in an area are likely to fail or 
are inadequate when determining premiums. In addition to making 
actuarial sense, this step would help to better inform 
homeowners of the risk of flood damage that they actually face.
    Step three, strengthen the mitigation programs to reduce 
repeat losses. You have already heard this morning some rather 
alarming statistics about the impact of repeat losses on a 
program. Congress should pressure NFIP to step up mitigation, 
and that includes improving its maps, of course, by setting 
explicit goals for the agencies and establishing regular 
reports by an outside agency on its progress that are examined 
at regular oversight hearings.
    In most cases, retrofitting structures to reduce the flood 
damage, as we have heard, will save NFIP the cost of expensive 
repairs and the structure's owner the disruption caused by 
flood damage.
    Last but not least, step four, assess higher premiums for 
vacation homes and second homes. Currently, NFIP charges the 
same rates for both vacation homes and owner-occupied 
structures. However, the number of homes built on coastal 
barrier islands continued to grow very rapidly, with a 
significant proportion of these homes being expensive vacation 
homes that are rented out for most of the year.
    One way to raise NFIP's income would be to charge owners of 
these homes higher premiums. Initially, we would suggest second 
or vacation homes could be charged 15 to 20 percent more than 
owner occupied structures, but over time, this surcharge could 
be increased even higher if it was so desirable.
    The higher cost would be largely borne by increased rental 
fees, while the additional money could be used for a variety of 
purposes ranging from repaying the loans to the Treasury that 
you are authorizing this year, financing additional mitigation 
efforts, or even slightly subsidizing the flood insurance 
premiums of lower income homeowners.
    Especially in coastal areas, artificially low flood 
insurance premiums are subsidies that encourage people to live 
where natural disasters are more likely to occur. While people 
should be allowed to live where they please, they should also 
bear the risk that their choice may subject them to storms, 
floods, tornadoes, or other natural disasters.
    Hurricane Katrina caused what will eventually be recognized 
as a massive bailout of the flood insurance program, and 
current weather and population trends make future bailouts 
likely. Rather than waiting for the next time there is a storm 
and the next time you have to raise NFIP's borrowing level, 
Congress should make NFIP actuarially sound now.
    Thank you.
    Chairman Shelby. Ms. Pogue.

             STATEMENT OF PAMELA MAYER POGUE, CFM,

        CHAIR, ASSOCIATION OF STATE FLOODPLAIN MANAGERS

    Ms. Pogue. Mr. Chairman, Ranking Member Sarbanes, Committee 
Members, and Senator Reed, on behalf of the Association of 
State Floodplain Managers, I want to thank you for allowing us 
to be part of this very important discussion about ways to 
reform the National Flood Insurance Program.
    My name is Pam Pogue, and I am here as the Chair of the 
Association of State Floodplain Managers. The association and 
its 22 chapters represent over 9,000 State and local officials 
and other professionals who are engaged in all aspects of 
floodplain management and hazard mitigation. Many of our 
members are presently working with communities impacted by 
Hurricanes Katrina and Rita or work with organizations that are 
assisting those communities in rebuilding.
    I am also the State National Flood Insurance Program 
Manager and Earthquake and Hurricane Program Manager for the 
State of Rhode Island and a native Floridian. I was here for 
last week's hearing and enjoyed listening to the discussion, 
commentary, questions, and concerns, and I am very pleased to 
be here today to participate in this hearing. We want to 
express our appreciation to you for this thoughtful examination 
of the National Flood Insurance Program and ways to improve 
this program.
    What a year. As we all know, it has been a real challenge 
for the NFIP. This past season of natural disasters has 
highlighted problems that needed to be addressed within the 
existing framework and has called attention to the need for 
creative solutions for the long-term solvency of this program.
    Chairman Shelby, Senator Sarbanes, and others highlighted 
the problems presented by the totally unprecedented anticipated 
payouts of $24 billion. After all, there has only been $15 
billion worth of claims paid out in the whole history of the 
program.
    However, I would like to point out that since the inception 
of the National Flood Insurance Program 38 years ago, there has 
been much success. I ask you to keep in mind that there is much 
more to the NFIP than the provision of flood insurance. Bearing 
in mind that the NFIP is a quid pro quo program, the 
availability of flood insurance is contingent upon flood loss 
reduction measures embodied in State and local floodplain 
management regulations. These measures guide development in 
high risk flood hazard areas, both riverine and coastal areas, 
in order to reduce flood losses.
    As we have witnessed in the last two hurricane seasons, 
there are areas where the program needs to grow and mature. 
When the NFIP was created by Congress in 1968, there was little 
data available about what the size of a 100-year floodplain and 
the number of properties in it. It was a bold action by 
Congress to establish the insurance program to make citizens 
more nearly whole after a disaster than they would be with 
disaster relief, to make sure that citizens living in at-risk 
locations bore some portion of the risk through paying 
premiums, to save taxpayers money in disaster relief and to 
reduce flood losses over time through floodplain management.
    For nearly 20 years, the NFIP has afforded protection to 
policy holders, guided development out of harm's way, and 
repaid any Treasury borrowing with interest. Although the 
season of Katrina, Rita, and Wilma has been a wakeup call, let 
us not forget how effectively the NFIP has done its job for 
many years.
    Now, we see that the risk extends beyond the 100-year 
floodplain and includes the 500-year floodplain as well as 
residual risk areas behind levees and below dams. This is 
particularly true because of the predictions of more frequent 
and intense storms. Once again, Congress faces the questions 
associated with providing protection for those in at-risk 
areas.
    The answers will probably lie in a combination of reducing 
the subsidies in the NFIP, expanding the areas covered, 
improving investment in mitigation, and exploring creative 
solutions to those catastrophic losses that go well-beyond the 
average loss year.
    I will briefly list some of the mitigation ideas, program 
expansion, subsidy reduction recommendations that the ASFPM 
has. I would also like to suggest that the Committee request a 
study of the ways to accommodate those catastrophic loss years, 
whether through a catastrophic loss fund, a reinsurance 
arrangement, or some other technique.
    I mention only a few examples of these reforms to the NFIP 
as a means of strengthening the program. Obviously, it is in 
much greater detail in our submitted testimony. In terms of 
risk reduction, enforce the use of advisory maps. Advisory maps 
have been produced for much of the Gulf Coast area impacted by 
the hurricanes. We commend FEMA for working to tie the use of 
those maps showing the true risk to the receipt of Federal 
assistance.
    FEMA's Acting Director of Mitigation and Insurance, David 
Maurstad, testified here last week that about 30 percent of the 
communities in the region have adopted these new elevations, 
but that leaves 70 percent that have not. We urge the Committee 
to support FEMA's efforts. We urge other Federal agencies to 
require the use of these advisory flood maps. Insufficient 
coordination among Federal agencies leads to sometimes 
undercutting other agencies' programs and creating confusion 
for local officials. We urge a mechanism to ensure the 
adherence to Executive Order 11988, which calls for interagency 
coordination for disaster mitigation and floodplain management.
    Also provide for additional and more flexible increased 
cost of compliance coverage, or ICC. An ICC surcharge of up to 
$75 is applied to each policy premium to pay for bringing these 
substantially damaged properties up to code and floodplain 
management requirements. The ASFPM agrees with FEMA's request 
that the ICC limits be increased to $50,000 from $30,000. We do 
not agree with FEMA's request to increase the $75 cap on the 
surcharge, because the program has paid out very little of what 
it has collected at this time.
    We suggest that the Committee urge the FEMA Director to use 
the discretionary authority given to him in the law to use the 
ICC more flexibly. ICC funds could be used for the local 25 
percent match, which could therefore, obviously, enhance the 
leverage of the Stafford Act's Hazard Mitigation Grant Program.
    Implement the repetitive loss programs created in the Flood 
Insurance Reform Act of 2004. ASFPM urges FEMA to complete the 
regulations for this program as soon as possible. We urge that 
at least $40 million of the expanded regular Flood Mitigation 
Assistance Program be transferred from the Flood Insurance Fund 
as provided for in the fiscal year 2006 Homeland Security 
Appropriations bill. We ask the Committee to remove or at least 
double the per-State caps on repetitive flood loss spending 
under the regular FMA program, since the funding for this 
program was doubled.
    On subsidy reduction and program changes, please provide 
authority to eliminate subsidies over time for pre-FIRM 
properties, particularly for those properties that are not 
primary residences. In keeping with the original intent of the 
NFIP, if the subsidy reduction was focused on structures other 
than primary residences, those with limited incomes would not 
be impacted.
    Provide additional funding and time for FEMA's map 
modernization program. Last week, Committee Members fully 
realized the importance of producing quality maps that will 
accurately depict special flood hazard areas such as the 100-
year floodplain and areas of residual risk. We are concerned 
that the mandated 5-year timeframe to produce a certain number 
of new maps that will adequately address restudies of hydrology 
and hydraulics is not long enough, and therefore, the needed 
restudies are not getting done.
    As the sole person responsible for managing the map 
modernization program in Rhode Island, I did complete the 
required business study for my State in terms of our State's 
mapping needs. Although Rhode Island is the smallest State in 
the country, we have the oldest maps on average. It is going to 
be very difficult for us to meet this 5-year metric and also 
produce quality maps that accurately depict special flood 
hazard areas such as residual risk, storm surge, and coastal 
inundation.
    ASFPM believes that it would be reasonable to increase 
flood insurance coverage limits under the NFIP. There are a few 
areas where the program could be expanded. Again, you have 
heard this many times this morning: Mapping areas of residual 
risk and the 500-year floodplain. ASFPM strongly recommends 
that, as soon as possible, the Nation embark on a program to 
accurately identify these risk areas. I am proud that my 
Senator from Rhode Island, Senator Reed, has introduced Senate 
Bill 2005, that specifically addresses the concerns that ASFPM 
raises.
    These areas of risk need to be mapped: Areas behind levees, 
areas below dams, areas susceptible to coastal inundation and 
storm surge and the 500-year floodplain. Further, incorporate 
the necessary data that is already out there: The U.S. Army 
Corps of Engineers coastal inundation maps, NOAA storm surge 
data, and in addition to that, USGS stream gauging data; all of 
this should be put on FEMA flood insurance rate maps.
    Senator Reed's bill also provides the necessary funding to 
support this, since these areas are not currently funded under 
FEMA's existing map mod program. It is important to remember 
that the utility of the 1 percent chance of flooding was not 
mandated by statute, and therefore, mapping these and other 
flood risk areas is not incongruent with the intent of the 
NFIP.
    Senator Reed's bill also calls for the reactivation of the 
Technical Mapping Advisory Council, originally created in the 
Flood Insurance Reform Act of 1994. This will ensure the 
involvement of partners and stakeholders in ensuring the 
quality and utility of the maps produced under the existing 
Flood Map Modernization Program and under the program to map 
other risk areas.
    The other area for improving mandatory purchase is the 1 
percent floodplain. Currently, the NFIP requires insurance to 
be purchased by those with a federally backed mortgage, leaving 
out mortgages from non-federally regulated institutions and 
those structures without mortgages. Previous studies have 
indicated that perhaps as many as 40 percent of the mortgages 
come from non-federally regulated sources.
    And finally, from a broad perspective, we can do a better 
job of coordinating all Federal mitigation programs for maximum 
effectiveness as called for many years ago in Executive Order 
11988. We can study ways to handle the demand of catastrophic 
loss years. We can evaluate how the NFIP's ability to do its 
job has been compromised by FEMA's inclusion in the Department 
of Homeland Security.
    ASFPM has expressed its concern, in a resolution passed by 
the board that FEMA's nimbleness that has been hobbled by being 
part of DHS and that formerly effective Federal, State, and 
local partnerships and the resources, staffing, and funding for 
disaster mitigation, response, and recovery have been 
diminished. We suggest that the effect on loss reduction 
efforts of the NFIP in particular should be examined.
    In conclusion, as this Nation recovers from the impacts of 
the last 2 years, it is evident that change is needed. It is 
often said that after September 11, we are a Nation changed. It 
appears that after Katrina, we are again a Nation changed. This 
Congress faces similar challenges that the Congress in 1968 
faced. How do we make the necessary changes to our framework of 
national policies and programs necessary to fulfill multiple 
missions: Protect the American public, protect taxpayers from 
excessive post-disaster costs, assist communities in recovering 
from catastrophic events, and balance all of these costs?
    Luckily, we have a framework through the NFIP that we did 
not have in 1968 that is effective for the average loss year. 
Thank you, sir, 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 towards our common goal of 
reducing flood losses in this Nation.
    Chairman Shelby. We thank all of you.
    If insurance is predicated on risk, as we have always been 
told, the pricing of that insurance based on the risk logically 
follows. I do not know how you get around that premise. Having 
said that, all of us should question the wisdom of encouraging 
families to continue to live in areas where their lives and 
property are subject to continued risk.
    Mr. Pressly, you mentioned in your testimony the 
opportunity for homebuyers to live wherever they choose, even 
within a floodplain, and Ms. Lowrie, your testimony talked to 
the importance of mortgage availability in flood-prone areas.
    I will direct this question first to you, Mr. Pressly, and 
Ms. Lowrie: Should there be any restrictions or any questioning 
of subsidizing families to live in harm's way? As a matter of 
public policy, should our position be live where you want, and 
the taxpayer will always bail you out? Is that good public 
policy, Mr. Pressly?
    Mr. Pressly. Mr. Chairman, that is a great question. I can 
understand how it would come up today. Any taxpayer would ask 
that question.
    Chairman Shelby. Should ask that question.
    Mr. Pressly. Absolutely. Fundamental to that program is 
this local government decision on where people live in any 
locality, and it is the local government administrator, whether 
it is the municipal government, county government, whoever it 
is who makes a decision to participate in your program. If that 
local government makes a decision not to participate in the 
Federal flood insurance program, obviously, nothing gets built 
there.
    So it is easy for us to say here in the capital of the 
country to say we do not want people building on the coasts in 
those high hazard areas. There are circumstances in those 
towns--I think about the coast of North Carolina, and I think 
about those counties along the coast of North Carolina that 
come from backgrounds of poverty. There was no industry. There 
was absolutely nothing at all there. Now, there is an 
opportunity to enhance the tax base, enhance retail sales 
simply from these people who want to come out and live there.
    Chairman Shelby. But at what cost?
    Mr. Pressly. Let us examine that as well. FEMA itself has 
said, Mr. Chairman, that 76 percent of their policies pay for 
themselves, are actuarially sound, you see? And indeed, these 
homes, I do not know the number of the homes, but I would 
expect most of these vacation homes have been built in the past 
37 years since we have had this program. Most are certainly 
paying their own way in that program. So, I think it is a 
mispremise to throw stones----
    Chairman Shelby. Are you saying to us today that most of 
the people are paying their own way? Look at the program. It is 
broke. It is broken. It is bankrupt.
    Mr. Pressly. Mr. Chairman, the program, until the past 
couple of years, has paid its way. And FEMA itself has said 
that 76 percent of those policyholders are actuarially sound in 
that sense. The other 24 percent are people who are typically 
in older houses, houses that are in floodway areas that were 
built long before the program was established. And there is a 
reason for that.
    As we think how our country developed, we think about the 
infrastructure of our country, certainly, riverways and 
waterways and oceans were where the commerce was. And until 
certainly, after the Second World War, that is where the 
transportation was, that is where rail was, that is where 
factories were built, and that is where homes were built.
    Now, many people in that 24 percent sector find themselves 
in those areas and stuck in those homes, and I think that the 
Congress in its great wisdom 37 years ago when it developed 
this program recognized that. And the panelists have talked 
about other areas, areas behind dams, areas behind levees, 
where we do not charge premiums now. I think those people will 
find themselves in similar structures. I am certainly not at 
all saying we do not need to examine that, but we certainly do.
    But there is a similar structure that we had 37 years ago 
when Congress set this program up to say those people are going 
to be paying rate structures under the same program. So, I 
thank you for asking me that.
    Chairman Shelby. Ms. Lowrie.
    Ms. Lowrie. Senator Shelby, I think that is--I agree with 
Mr. Pressly--an excellent question, and I think we have to look 
at it in two different areas: One, when we talk about pricing 
to risk and making the National Flood Insurance Program and its 
rates actuarially sound, there is a difference between those 
building in new constructions in coastal areas that are 
actually paying the actuarial rates versus those pre-FIRM 
structures that were built prior to the maps or were built 
subsequent to remapping being done.
    And those are the properties that, you know, I think have--
are the subsidy, and those are people who have been in those 
areas for long periods of time. I think in addition to that, we 
have to look at the changing demographics in our society.
    The aging baby boomers that now are purchasing second homes 
in coastal areas at some point plan on that being their primary 
residence.
    Chairman Shelby. Should we subsidize that?
    Ms. Lowrie. I do not think we are.
    Chairman Shelby. Especially $1 million homes.
    Ms. Lowrie. And I do not think we are, Senator, because the 
cap is $250,000, and a lot of those homeowners are going out to 
the private sector and insuring over that.
    Chairman Shelby. Mr. Hunter, do you have a comment on that?
    Mr. Hunter. Yes, the 76 percent actuarially sound are not 
actuarially sound because the maps are so antiquated.
    Chairman Shelby. You used to run this program, did you not?
    Mr. Hunter. Yes, and I am an actuary.
    [Laughter.]
    And this is the same kind of argument we have heard since 
the beginning of the program when we were trying to mitigate. I 
can recall a hearing in Miami where a developer from Pinellas 
County came to the hearing and accused us of taking the land 
and saying it was going to cost too much to elevate the houses, 
and I asked him a simple question, where is your land? He said 
I have not dredged it up yet.
    [Laughter.]
    And that is the problem. If the flood program allows that 
kind of development out in the Gulf of Mexico where hurricanes 
are going to come, and people are going to get killed, and we 
subsidize that, that is not an appropriate program.
    Chairman Shelby. Mr. Gessing, do you have any comments on 
that? Do you agree with Mr. Hunter again?
    Mr. Gessing. There is certainly room for improvement in the 
program, and if there is a way to--it has been almost 40 years 
since the program was created, and I think that even if you do 
keep the program intact, which is not necessarily what I am 
advocating, you can shift the pre-FIRM properties to paying a 
more market-based pricing structure, and you can ensure that 
higher priced properties along the coastlines, second homes, 
that thing are not receiving subsidies or at least are not put 
on the same footing as people's first homes.
    This would be common sense, or at least part of it would 
be, to a private entity, but when it comes to the Federal 
Government and a Federal program, it is politically a bit of a 
challenge. I do not think you will find too much disagreement 
on some of these things even among a diverse group like 
ourselves, but getting it done in Congress can be a challenge.
    Chairman Shelby. Mr. John, do you have a comment?
    Mr. John. I have one comment. One of the assumptions seems 
to be that a pre-FIRM structure continues to be owned by the 
family that has owned it for the last 40 or 50 years, and that 
is actually not true in most cases. A large number of these 
structures are now second homes. They are rented out for 
vacation dwellings and things like that, and there is actually 
no excuse in the slightest to continue to subsidize them at the 
current rate.
    Chairman Shelby. Are we basically subsidizing the upper 
middle class people all over the country?
    Mr. John. Yes, basically.
    Chairman Shelby. Second and third homes; is that right, Mr. 
Hunter?
    Mr. Hunter. Yes, and wealthy people. I mean, there is a 
great attraction. I have a house on a lake up in Maine. I like 
to be near the water.
    Chairman Shelby. We know.
    Mr. Hunter. But I do not think we should subsidize that.
    Mr. John. My wife and I vacation in Ocracoke Island, North 
Carolina, and at one point, we were a couple of years ago 
wandering around an antique shop that was located in a house, 
and there was a teacher who had just come to teach at the 
Ocracoke school. He and his wife could not find a place to live 
because so many of the houses were converted to rental 
structures, and they could not afford $2,000 a week.
    Chairman Shelby. Ms. Pogue, I believe that you are right on 
point as far as remapping, repricing this program is the only 
way it can survive, is it not?
    Ms. Pogue. I could not agree more. As the State Floodplain 
Manager, I have a very close relationship with all of my 
building officials who have to implement the building code and 
the floodplain management regulations. The greatest challenge 
we face on a daily basis is trying to determine whether or not 
a particular structure is in or out of a floodplain and which 
one and at what elevation. So those maps are absolutely 
critical.
    Chairman Shelby. Mr. Hunter, do we have any sense of the 
typical income of households basically being subsidized by the 
flood insurance program?
    Mr. Hunter. I have not seen a demographic distribution of 
that, but that is obviously achievable by looking at the 
counties where these are. But clearly, along the coast of 
Florida or someplace like that, you are talking people in very 
valuable structures.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Yes; thank you very much, Mr. Chairman. 
First, let me address the issue that was just being discussed 
about pre-FIRM subsidized housing. Now, I am looking at FEMA 
figures, which seem not to square with what some members of the 
panel are saying. They have 1.2 million subsidized, of which 
just under 800,000 are primary residences, and 400,000 are 
other than primary residence, which seems to contradict what 
some were just saying, which seemed to have these subsidies 
going primarily to other than primary residence.
    Do people disagree with these figures?
    Ms. Pogue. No.
    Senator Sarbanes. Because I think it is important to keep 
our facts straight. Now, let me ask this question: Who on the 
panel takes the view that as a realistic matter, the National 
Flood Insurance Program can be structured to handle damage of 
the magnitude of Hurricane Katrina?
    Mr. Hunter. I do.
    Senator Sarbanes. And how would you do that, recognizing 
that at the moment, it brings in about $2 billion a year; lots 
of changes have been suggested here, and I am interested in 
getting at what the order of magnitude of revenues would be as 
a consequence of those changes but recognizing that Katrina was 
a $24 billion hit and that the biggest previous year was, I 
think, just over $2 billion and that it averages at about $1.2 
billion a year.
    Mr. Hunter. The program--first of all, it is a scientific 
question. What would be the actuarial rate which would be 
sufficient----
    Senator Sarbanes. No, you can set an actuarial rate. That 
is why I put in the phrase in a realistic manner, because the--
--
    Mr. Hunter. I think the actuarial rates are----
    Senator Sarbanes. Because if you are going to jump the 
rates--let us say you jump them 20 times.
    Mr. Hunter. No, no, you do not have to.
    Senator Sarbanes. Ten times.
    Mr. Hunter. No, it is 65 percent.
    Senator Sarbanes. Go ahead.
    Mr. Hunter. The current actuarial shortfall is $1.3 billion 
according to FEMA. The current premium collected is $2 billion. 
So if actuarial rates were charged to everybody, that would be 
$3.3 billion a year.
    Senator Sarbanes. Now, how is that going to enable you to 
handle Katrina?
    Mr. Hunter. If you had been collecting actuarial rates from 
the beginning and putting aside a reserve as a real insurance 
company would do, you would collect enough.
    Now, the other problem is that the actuarial rates, the 
part of the premium that is supposedly actuarial is not 
actuarial currently because of the map problem. It is woefully 
below. Can you imagine a 12-foot shortfall if you actually had 
the 100-year storm in Hancock County, Mississippi? The 
actuarial rates would be hundreds if not a thousand or more. So 
you would be collecting much more if you were charging the real 
actuarial rates.
    I think it is very feasible and scientifically possible. 
Now, will there be cause for concern and strain for low income 
and so on? Yes, and that is why I talked about the need for 
direct help and that and a long transition program, perhaps, of 
sales, et cetera. But it is feasible, very feasible, and in 
fact, that is what insurance companies do with wind storm 
damage. It is feasible. They do it privately. They put up 
reserves. They change their deductibles.
    Senator Sarbanes. But they will not do it with flood 
insurance, will they.
    Mr. Hunter. They have not done it with flood insurance 
historically.
    Senator Sarbanes. Why not?
    Mr. Hunter. Because they had no way to force people to buy, 
and only the people would--if they set a price at X, only the 
people next to the river would buy, so if they tried to lower 
the price, maybe a few more would buy, but nobody on the hill 
would buy.
    Senator Sarbanes. How are you going to overcome that in the 
public program?
    Mr. Hunter. The public program does overcome it by a 
purchase requirement.
    Senator Sarbanes. Only by the people who are at risk.
    Mr. Hunter. Yes, well, of the people who are at risk; yes, 
a purchase requirement. That is another reason to expand to the 
500-year level.
    Senator Sarbanes. I mean, they do fire insurance; everyone 
buys it, right?
    Mr. Hunter. Everyone buys it, yes.
    Senator Sarbanes. Yes, everyone.
    Mr. Hunter. Yes.
    Senator Sarbanes. There is no fire plain like a floodplain, 
right?
    Mr. Hunter. No, there are fires everywhere. There are some 
higher risk areas.
    Senator Sarbanes. Let me examine abolishing the program.
    Mr. Hunter. Okay.
    Senator Sarbanes. No flood insurance program.
    Mr. Hunter. Right.
    Senator Sarbanes. And now, you have a lot of the people who 
live in the floodplain. They get flooded. What do you think the 
public response is going to be to that damage?
    Mr. Hunter. There will be disaster relief, but people will 
learn to build like they did in the Garden District in New 
Orleans. People knew how to build. If you go out into 
floodplains and look, as I have, and walk through many, you 
look at the oldest structures, preflood insurance structures, 
and you see most of them are elevated. Most of them are on the 
high land. It is only after the flood program----
    Senator Sarbanes. Senator Lott had a house like that, and 
it is gone. He told me it was elevated, I do not know, 20 feet 
or something above the requirement, and it is gone now.
    Mr. Hunter. There are examples of that, and of course, part 
of the fault is the requirement.
    Senator Sarbanes. People in the Garden District are fairly 
prosperous, are they not?
    Mr. Hunter. They were not when they built them.
    Senator Sarbanes. All right; that is a good point. So you 
think the lower-income people would be able to adjust to this?
    Mr. Hunter. Over time. I do not think you should 
immediately impose, but the lower-income people can adjust, 
yes, and there will be disaster relief, certainly, continuing, 
but there would be no more incentive to go into floodplains.
    Ms. Lowrie. Senator, just an interesting point I want to 
make. Back in 1999, PriceWaterhouseCoopers did a study on the 
impact of charging actuarial rates on the subsidized pre-FIRM 
structures we are talking about here today, and----
    Senator Sarbanes. Mr. Hunter says that the people who are 
supposedly paying actuarial rates are not doing so, so he wants 
those rates to go up, too, I guess substantially.
    Mr. Hunter. Absolutely----
    Ms. Lowrie. Well, and I am not sure--Mr. Hunter, I thought 
what you were saying, and I agree with this, is that the need 
for remapping and for the appropriation to do remapping on an 
ongoing basis is so critical to the viability and future of the 
National Flood Insurance Program, because there are a number of 
properties that have flooded that when flood determinations 
were done did not show to be in the 100-year floodplain when, 
in fact, they were.
    And had the maps been updated, those borrowers, those 
homeowners would have been required to purchase flood insurance 
at the time they purchased the property. So there are a lot of 
components to this, and I think the other thing that we have to 
focus on is the mitigation efforts, too.
    There has been a tremendous amount of progress when you 
look at a lot of the coastal areas and the compliance with the 
State and local authorities in mandating that properties be 
built up on stilts and at higher elevations that, you know, we 
are talking about a program that has been viable since its 
inception up until a catastrophic event that has had a negative 
impact on our entire economy.
    So, I applaud the effort in what this Committee is doing. I 
just want to caution us to be very careful in proceeding 
forward that we do not cause unintended consequences to overall 
values.
    Senator Sarbanes. I think there is a need, obviously, to 
strengthen the flood insurance program. But the question I want 
to get at is whether in the course of doing that, you are 
advocating taking on the task of structuring it in such a way 
that it is able to encompass or handle within the program 
rather than in some outside special way a catastrophe of the 
magnitude of Katrina. That is the question here. This is 20 
times the normal year; 10 times the worst previous year.
    Mr. Hunter. Katrina is much less than the modeled 
catastrophes that can happen like a Category 5 storm hitting 
Miami or like a major storm hitting the New York area.
    Senator Sarbanes. Do you think the program should be 
structured to encompass within the boundaries of the program 
and its premium charges and so forth to handle that kind of 
catastrophe?
    Mr. Hunter. Yes.
    Senator Sarbanes. The kind of catastrophe so great that it 
needs to be handled outside of the program, because it is not 
realistic to try to handle it within the program?
    Mr. Hunter. The rate for covering those kinds of events, 
since they only occur every 50 or 100 years or less, is small 
enough that when spread, it does not make the rate 
unaffordable. Actuarial rates can be affordable as long as they 
are built for the future. You cannot recoup this last one, I do 
not think, but I think you can prepare and build reserves for 
those future ones.
    Senator Sarbanes. Let me stop you right there. Do you think 
that we should try to recoup the last one?
    Mr. Hunter. That would not be actuarially sound, in my 
view. You do not go back. You look to the future, and you try 
to cover that. If you want to do that, then, you have to add 
something on top of actuarial rates to try to recoup. But the 
actuarial rate does not recoup history; it tries to take care 
of----
    Senator Sarbanes. Do you think that building in certain 
areas should be prohibited?
    Mr. Hunter. I think the actuarial rates and the maps will 
take care of that: the V-zones, the high risk zones of, say, 
storm search or riverain floodways are places where building is 
very difficult if possible at all, and I think if the true 
actuarial rate is charged, in some of those places, you could 
not build.
    Ms. Pogue. Excuse me.
    Senator Sarbanes. Yes.
    Ms. Pogue. Senator Sarbanes, I want to hit on your point, 
and that is, I am telling you as a regulator and somebody who 
has to deal with this constantly, particularly in Rhode Island, 
very few parcels are left that are, dare I say, buildable. They 
are all challenged. One of the things that I think is not being 
taken advantage of on a national basis, quite frankly, is 
mitigation.
    I think it is going to be critical at this time, now, and 
as Mr. Hunter says, to look forward to truly invest in 
mitigation. A report was released recently by the National 
Institute of Building Sciences which tells us that for every $1 
of taxpayers' money, we receive up to $4 of mitigation 
benefits. I think that when we look forward, and we look at the 
density of the coastline, as Senator Reed said, it is a very 
critical challenge, because we are constantly being called to 
deal with people who want to build on the shoreline. They are 
getting rid of the smaller homes and putting up the McMansions 
and so forth; mitigation is critical.
    We have recently held about 18 training courses; FEMA put 
together a coastal construction manual, which is the state-of-
the-art building in terms of not necessarily encouraging 
development in a coastal area but at least getting toward smart 
development. Ms. Lowrie alluded to this stilts or pilings or 
looking at wind loads, water loads, and so forth.
    So, I think it is absolutely critical, and the ASFPM 
strongly supports truly looking not only at mitigation but also 
other Federal programs that include mitigation as well, because 
they are linked to the National Flood Insurance Program.
    Senator Sarbanes. I think that is a good point, but I am 
just trying to cut through all of this, because a lot of buzz 
words are being used. You just used one, which is McMansions.
    Ms. Pogue. Sorry.
    [Laughter.]
    Senator Sarbanes. And that is not going to get any sympathy 
out of me. But on the other hand, before, everyone was throwing 
around the notion that most of the houses getting a subsidized 
rate were second homes. Now, the figures--well, they are from 
FEMA, so I am not going to vouch for these figures.
    [Laughter.]
    But the figures would indicate that two-thirds of them were 
a primary residence. And the fact remains that a lot of poor 
people or lower-income people live in coastal areas and in 
flood zones, and they are there. And many of them have been 
there for a long time.
    Mr. John. Let me point out something.
    Senator Sarbanes. Now, how do we address that situation?
    Mr. John. Could I address the statistic for one thing?
    Senator Sarbanes. Yes.
    Mr. John. All right; you have 1.2 million who are receiving 
subsidized pre-FIRM rates essentially.
    Senator Sarbanes. According to this table.
    Mr. John. According to that table.
    Senator Sarbanes. Right.
    Mr. John. Now, where those are located is a key matter, 
because you could very well include houses there such as a farm 
in rural Missouri, a farm in Alabama, et cetera, et cetera, 
which is located on a floodplain. But flip that side over. That 
also means that you have 400,000 structures there that are 
receiving the pre-FIRM subsidized rates that are vacation 
homes.
    Senator Sarbanes. Right.
    Mr. John. Now, 400,000 is a fairly substantial number.
    Senator Sarbanes. Fine; fine. I mean, you are shifting the 
goalpost, and I do not mind you pointing that out, but the 
goalpost that was previously being advanced at the table was 
that a majority of these homes were not primary residences. 
That is the only point I was trying to make. I mean, we have to 
have a pretty hard-headed discussion about this thing. That is 
all.
    Now, I accept the point: There are 400,000 that are not, 
but previously, the discussion was along the path that a 
majority of these homes were not primary residences, and the 
FEMA figures show to the contrary; in fact, two-thirds of them, 
according to these figures, are primary residences. That is the 
only point I was making.
    Mr. Hunter. Senator, I would recommend that you ask FEMA--
--
    Senator Sarbanes. Well, I did not vouch for the FEMA----
    Mr. Hunter. No, ask them to break out within these numbers 
how many have had floods before, how many are, say, homes of 
value in excess of----
    Senator Sarbanes. I think those are all good points.
    Chairman Shelby. We will ask those questions.
    Senator Sarbanes. The repetitive loss houses are a real 
problem; we need to address that.
    But I am trying to see whether doing all these things, 
where it gets us in terms of the kind of magnitude of the 
catastrophe that occurred in Katrina. And furthermore, I feel 
very strongly that these borrowing limits should be raised now 
so that the people who had the policies and got flooded in New 
Orleans can get their claims satisfied.
    FEMA tells us they are going to run out of this money by 
mid-February and that people with legitimate claims are not 
going to be able to get them settled, and I want to separate 
that problem out and take care of that. Is there anyone at the 
table who thinks that we should not separate that problem out 
and take care of those people?
    Ms. Lowrie. It needs to----
    Senator Sarbanes. We should honor our contracts.
    Ms. Lowrie. The Federal Government has an obligation, FEMA 
has an obligation, and that is separate from the issue of 
reform, which is just as critical, but there is a lot of need.
    Chairman Shelby. Senator Sarbanes points out an immediate 
problem, and he is absolutely right, and they should honor 
their agreement. We are looking to the future prospectively, 
about looking at the whole program, can we afford it? How can 
we change it to make it work and so forth?
    Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Mr. Chairman, thank you, and I want to 
commend you for delving into this problem. This is the second 
of a number of hearings I think you anticipate having, and I 
think we need to have them. I have enjoyed this discussion; I 
have enjoyed the testimony from the panel. Even though I have 
come in late, I come from the Budget Committee; I also posed a 
question there on flood insurance, because of the $23 billion-
possible debt limit that we might end up with.
    I want to go back to the technical aspects of this. Before 
you can do anything with a program like NFIP, you have to have 
adequate and accurate data. I have visited a company that uses 
a jet plane to take pictures at 34,000 feet in the air. They 
use the old USGS maps, and they use the GPS system to create 
new maps, and they are extremely accurate, very accurate, 
within a matter of feet.
    It seems to me it is accurate enough for us to deal with 
floodplain issues. They showed in the program where, if you 
hypothetically have a 50-foot tidal wave come in, here are the 
homes that are going to be impacted. There are a number of 
areas along the coast where they have already done it. They 
have been contracted out quite a bit.
    And so, I see the technology where we can do this. We can 
get it, and we can get it in rather rapid order, I believe. I 
know there are some States that have already been totally 
mapped with this technology, and there are some that have not 
done anything.
    FEMA is making the argument that they have covered a 
certain percent of the population, but the problem is they have 
not covered the land mass; the population is a very small part 
of the whole country. What is it that we can do? I understand 
that this program is a partnership, between the States. They 
lay out the plan, and local governments, they help lay out the 
plan. Perhaps some of the delay in this is happening because 
that partnership has not evolved.
    There is a financial obligation, that is incurred by the 
cities as well as from the States. We are now dealing with a 
deadline, but what is it that we can do over the long haul, to 
create incentives for them to continue updating maps; these 
things are going to change with time, so what is it that we can 
do to continue updating? If we construct dams, what incentives 
do we get to remap there when we have done that, as that could 
change the floodplain dynamics below that dam, for example, or 
maybe a big hurricane may change the flood dynamics and move 
the coast around?
    What kind of local incentives can we put into place for 
State and local governments to buy into this program and keep 
us updating it, especially those that have been reluctant to 
participate? What is it that we can do to get them more 
participatory in the program?
    Ms. Pogue. Senator Allard, I actually have a meeting 
Monday, Tuesday, and Wednesday with all my communities in Rhode 
Island to go through the initial first cut, if you will, of 
scoping what needs to be done and what FEMA is proposing to do. 
I think the first thing to recognize is the deadline itself, 5 
years is insane. It is very difficult, as you are talking----
    Senator Allard. I think we can do it with the technology I 
saw.
    Ms. Pogue. The problem we are having is the funding.
    Senator Allard. It is the cost.
    Ms. Pogue. A lot of these communities do not have the match 
that is needed to meet that. And the other thing, too, though, 
is also trying to----
    Senator Allard. Why do they not come up with that money? I 
mean, this is really important stuff.
    Ms. Pogue. I could not agree with you more.
    Senator Allard. Yes.
    Ms. Pogue. But I will tell you the problem in Rhode Island, 
for example, is that we have not had--I have to be careful how 
I couch this--we have not had a disaster since 1991, so we have 
no money. We have no Hazard Mitigation Grant Program money 
floating around or anything like that. So the coffers are truly 
dry.
    Because of the parameters by which the money was assigned 
and distributed to States, we are getting very little money, 
which is clearly not going to address the need given the 
density of how our shoreline and how it has changed.
    Senator Allard. Why do local governments not put it in 
their budget? Why does the State not put it in their budget? 
Afterall, zoning is a big part of municipality function. I do 
not understand why they fail to put something in their budget. 
It seems to me it would save them money. They could make better 
policy decisions at the local level.
    Is there an incentive that we can provide other than a 
subsidy? It seems they have all got their hands out; you know, 
we do not want to tax our constituents; you just give it to us, 
Mr. Federal Government.
    Are there other incentives that we can put in place that 
would drive them to put in the proper policy so they can do 
their share of making this happen?
    Ms. Pogue. Primarily what we are dealing with is the lack 
of money. We have 39 cities and towns, of which two-thirds are 
looking at serious financial problems dealing with things such 
as education, property tax increases, and so forth. They just 
clearly feel they do not have the money. I could not agree with 
you more. Not only do our cities and towns need to put money up 
front, but also so does our State legislature.
    We have no money. Nobody is willing to take that extra 
step. In light of that, what they are willing to do, and what 
we are looking at, are partnerships, looking at data 
collection. The data you are mentioning is LIDAR. It is 
basically doing an overflight of the coastline and the State 
looking at one-foot contours, which is vastly better and much 
more improved than, say, the 22-foot USGS topos.
    So that would be ideal, because it looks at vertical 
elevation as well as horizontal. As you are saying, you could 
look at a 28-foot storm surge, which is predicted to occur in 
Narragansett Bay, to see who all would be impacted.
    What we are imploring to be done is to take the data that 
is already out there that NOAA has that USGS has, that the Army 
Corps has, and use that data. Right now, the situation that we 
are dealing with is that our scoping that was handed back to us 
by FEMA will not include that data. We are pushing hard to say 
yes, we do want coastal inundation, coastal flooding, storm 
surge, and residual risks covered on the Rhode Island flood 
insurance rate maps. It is that important.
    Senator Allard. Well, I just think that an effort needs to 
be made to collect the accurate data and somehow or the other 
figure out and get more cooperation from States and local 
governments.
    Ms. Pogue. I agree.
    Senator Allard. You know, they have a lot of recreation 
programs, often a big part of their budget.
    Ms. Pogue. That is right.
    Senator Allard. Now, what is more important? Recreation or 
trying to protect somebody's homes so they make right 
decisions, you make right zoning decisions, you do not put 
their businesses or their properties at risk of a flood? I 
think that we need to put in some incentives where they will 
make the right decisions with the taxpayer dollars that they 
are getting.
    Some of the communities in my State of Colorado, are buying 
farms and ranches for open space and not trying to take care of 
their floodplain issues. It seems to me that we need to put 
some incentives in place so they are spending that money in an 
area that is going to reduce the liability on the floodplain 
insurance program. And also, I think they would serve their 
constituents, their citizens in their communities much better 
if they made good decisions to, in effect, keep them out of 
trouble when floods occur.
    Ms. Pogue. I just wish some of our community officials 
would think more long-term.
    Senator Allard. Thank you, Mr. Chairman.
    Chairman Shelby. Ms. Lowrie, in your own business as a 
mortgage banker, do you charge every borrower the same mortgage 
rate regardless of risk, and do you charge lower income buyers 
a lower mortgage rate in order to encourage homeownership?
    Ms. Lowrie. The industry, Senator, has moved primarily as a 
result of the secondary market, what we have seen with Fannie, 
Freddie, and the regulators, to a risk-based pricing 
environment, and the industry is pricing to that risk. Those 
borrowers with lower credit scores pay a slightly higher 
premium than those with a higher credit score.
    Chairman Shelby. But as I understand your testimony today, 
your written testimony and your other statements, you argue for 
maintaining the subsidies in the flood insurance program to 
ensure affordability. Yet, this is a practice that mortgage 
bankers have rejected in their own pricing. Could you just tell 
us why risk-based pricing is appropriate in setting mortgage 
rates but not insurance premiums, where there is really risk?
    Ms. Lowrie. That is an excellent question.
    Our industry has evolved, and I have been in the industry 
over 28 years, and over the last 10 to 15 years, we have seen 
the industry evolve to price to that risk. It did not happen 
overnight. It happened over a period of 10 to 15 years, and it 
was very gradual as the market accepted it and as the consumers 
understood it and accepted it.
    My concern in my statement, what I was trying to point out, 
is that this is something, number one, it is so important we 
have to study it and make sure we understand it and understand 
what the unintended consequences of that could be, and previous 
studies like the PriceWaterhouseCoopers study that was done 
that showed evidence of a 10 to 32 percent decrease in value.
    So for someone who represents the lending, the mortgage 
association, we are committed to homeownership. It is one of 
the primary ways in this country that Americans build wealth. 
So anything we would do to reform the National Flood Insurance 
Program should take into consideration the impact that that 
would have on homeowners and the values in their properties, 
which for a lot of these people is their sole accumulation of 
wealth.
    Chairman Shelby. Should we take into consideration the hit 
on the taxpayers, possibly, too?
    Ms. Lowrie. Absolutely.
    Chairman Shelby. Okay.
    Ms. Lowrie. And I think this is such a critical issue. I 
know I said it before, but there is a lot of areas that need to 
be studied.
    Take, for example, I think today, FEMA is permitted to 
increase premiums by 10 percent per year, and that has been in 
place for quite a long time. And we are recommending--there is 
a lot of different areas that we can study, such as reducing 
the subsidies and moving more toward actuarials and see what 
the impact of that would be and the impact of phasing that in; 
increasing rates, increasing or reducing or eliminating 
subsidies in areas that are behind levees and dams.
    So there is a multitude of issues that I think we have a--
--
    Chairman Shelby. Should we also look at the possibility, 
because of a lot of poor people are living in some of these 
areas and have been, look at risks, I mean, at means testing, 
too?
    Ms. Lowrie. I think that that is--that is as interesting an 
idea to look at and study as replacement costs, which I think 
someone mentioned here today. It is one of the many things that 
we should look at as we look at the program.
    Chairman Shelby. As we continue here today, we have been 
told that within the 100-year floodplain, there is a 1-percent 
chance of flooding. However, the likelihood of flooding over a 
30-year mortgage is 26 percent for structures within the 100-
year floodplain. During Mr. Conrad's testimony we also heard 
that 20 percent of repetitive loss properties are located 
outside of the 100-year mandatory coverage area.
    Mr. Hunter, given what we now know, do you think that the 
terminology used to describe the maps leads individuals to 
believe that they are safe from flooding when, most likely, 
they are not safe from flooding?
    Mr. Hunter. Unfortunately, I am one of the ones who helped 
make sure that that was the terminology, so I do think we 
should improve it. The 1 percent risk flood is the right 
terminology, and you can put it in the terms of how frequently 
it is in 30 years or 50 years, and I think the 500-year storm, 
instead of calling it that, we should call it the two-tenths of 
1-percent-per-year risk, and we can also put that in the 30 and 
50 year. I think that the terminology should be improved, yes.
    Chairman Shelby. Mr. Pressly, you stated in your testimony 
that the cost of building to code outside the 100-year 
floodplain would simply be overwhelming and unnecessary. After 
the testimony you have heard here today from Mr. Conrad about 
the repetitive loss problem outside the 100-year floodplain, do 
you remain opposed to protective flood mitigation standards 
outside of the 100-year floodplain? Surely, it looks to me that 
the cost to build to a higher standard is less costly than 
rebuilding damaged structures over and over again.
    Mr. Pressly. First of all, Mr. Chairman, as you and the 
members of this panel have pointed out that indeed, structures 
that are within that 1 percent flood risk have additional 
costs, additional construction components, additional code 
requirements to make sure they are safe within that area. What 
fundamentally comes back, as these panelists have addressed, is 
what should that risk be? Should it be 1 percent? Should it be 
two-tenths of a percent? And I think we have a series of sister 
agencies within the Federal Government that will make that 
calculation.
    I do not know how to do it. I know NASA would say here is 
what percent risk we have. I know EPA would say here is what 
percent of how clean we have the air, how clean we have the 
water, and it is a fundamental decision here, whether it is a 
1-percent risk, or whether it is a two-tenths of a percent 
risk. I do not know what it is, but I am here to say that there 
needs to be a balance within that, Mr. Chairman.
    Chairman Shelby. Do you believe that constantly remapping, 
bringing maps up-to-date is essential to this program?
    Mr. Pressly. I think each of your panelists has made that 
same point. I think each of the members at this table here 
today is consistent in that comment to say that if we can bring 
those maps up-to-date, your panelists have said conditions do 
change over time. If we can bring those maps up-to-date with 
great expedience, then, there is a high probability that we can 
reduce our risks and reduce our demands on the system.
    Chairman Shelby. If you spread the risk, you reduce the 
costs, do you not?
    Mr. Pressly. Yes, sir.
    Chairman Shelby. Mr. Hunter, having run the flood insurance 
program, you are uniquely qualified to answer this, I believe. 
Are the program's current problems solely the result of 
Hurricane Katrina?
    Mr. Hunter. No, no, no. The problems have been developing 
over time. Obviously, had maps been kept up-to-date, we would 
have seen much safer construction when Katrina hit. We would 
see more people with flood insurance. It was a slowly 
developing disaster over decades, and Katrina just made the 
exclamation point on it.
    Chairman Shelby. Mr. Pressly and Ms. Lowrie, I will direct 
this to you, too, if I could. Both your testimonies suggest 
raising the current coverage limit. Could you explain to the 
Committee here today how this would impact the future solvency 
of the program? Do you believe such a change would move the 
program toward being actuarially sound? In other words, if we 
move the coverage limit up, are we not going to have to factor 
in actuarial costs there, too?
    Ms. Lowrie. Absolutely, Senator.
    One other comment, though, if I can make back to your 
previous question. The average life of a loan from a servicer's 
perspective in the mortgage industry is 3 to 5 years, running 
more on the average of 3 years. So if you look at the fact that 
the maps have not been kept updated with the increase in 
refinance activity over the last 5 to 10 years, people 
refinance every 2 to 3 years, and the lender requires a new 
special flood hazard determination, a lot of loans would have 
been required to have flood insurance had those maps been kept 
up-to-date.
    Chairman Shelby. Mr. Hunter, last week, we heard here in 
the Committee that the cost of running the flood insurance 
program amounts to almost half of the program's premium income.
    Mr. Hunter. Yes.
    Chairman Shelby. A large portion of these costs are 
administrative costs that go to the insurance companies 
involved in the program. How do these administrative costs 
compare to other lines of insurance? Do you believe enough 
administrative savings could be found to bring the program to 
solvency in the absence of increasing premiums, or would that 
be folly?
    Mr. Hunter. Oh, you cannot do it just by that, because for 
example, homeowners' insurance, which is more complex and 
should cost more, is about 28 percent, and flood insurance is 
about 30. But I think flood insurance could easily save 5 
percent in the administrative costs if it was more competitive 
among the write-your-own companies or something. But it will 
not solve the whole problem, no, not at all.
    Chairman Shelby. Ms. Lowrie, why are lenders not simply 
requiring flood insurance beyond what the law requires to 
protect themselves from loss?
    Ms. Lowrie. As I mentioned in my testimony, even before, 
there were many lenders, before the National Flood Disaster Act 
was passed.
    Chairman Shelby. Before 1968.
    Ms. Lowrie. Before 1968, who were requiring flood insurance 
to protect their collateral. I think that it becomes a 
competitive issue. It becomes an issue of consumer choice, and 
the increased costs to the consumer, the fact that it is not 
part of the law, it is not written in the law that you cover 
the replacement value versus the unpaid principal balance 
becomes a consumer issue.
    Chairman Shelby. How many times, Mr. John, should the 
taxpayer have to rebuild any particular home, and what is the 
value to the taxpayer of continuing to rebuild the same homes 
over and over?
    Mr. John. Absolutely no value to the taxpayer to rebuild 
the same home over and over again. I mean, there are a certain 
number of losses that are going to be catastrophic, accidental, 
et cetera, et cetera. But there is no reason to subsidize 
continuous rebuilding. I do not know a particular number, but I 
would certainly think that over a relatively short period of 
time that once you start to get over three times, say, in 5 
years or something like that or three times in 10 years that 
you are certainly in a rather serious problem.
    Chairman Shelby. Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Thanks, Mr. Chairman. To our witnesses, 
welcome. I have three hearings going at the same time right 
now, and this is--just glad to get here and glad that you are 
still here. Thank you for your testimony and your response to 
our questions.
    I understand we are about at the end of this hearing, and 
what I would like to ask almost as a wrap-up question is where 
do you agree on what we should do going forward? Where is the 
consensus among each of you that an appropriate step that we 
should take? Where do you think you agree as witnesses, and we 
will just start with Ms. Pogue and go to your right.
    Ms. Pogue. Thank you.
    I think the first thing we agree on, just about everybody 
here, despite our diverse backgrounds, is the absolute 
necessity for continuing to identify accurately the hazards and 
the risks that we are trying to insure people against; the 
mapping and modernization program for FEMA, that is absolutely 
critical. I think we all also agree that there needs to be 
investment in, and there needs to be a greater support of 
mitigation. As I mentioned earlier, a national report came out 
saying that for every $1 taxpayer money, we get $4 back in 
benefits from mitigation.
    I will take a stab at a third and final item, and that is I 
think we are in agreement in terms of relooking at pre-FIRM, 
pre-flood insurance program properties and whether or not those 
should continue to be subsidized and how to address the issue.
    Senator Carper. All right; thank you.
    Mr. John, where do you think this panel agrees?
    Mr. John. Well, I think that I would agree with what has 
just been said. I think that with the possible exception of one 
of one or two members of the panel, there is also an 
understanding that we cannot assume that the Katrina 
catastrophe is a one-time event and that in addition to paying 
the contractual costs of the program now, what is owed to 
people who had the policies, there is also a need to look 
forward and to make sure that we are adequately prepared next 
time so we do not get caught flat-footed.
    Senator Carper. I am afraid you might be right on that.
    Is it Mr. Gessing?
    Mr. Gessing. Mr. Gessing, yes.
    One thing we definitely all agreed on is that improved 
mapping is necessary. Senator Allard made a point earlier about 
providing incentives for that, and I, in my testimony as a 
representative of the National Taxpayers Union, called for 
eliminating the program over the long-term, and I think that 
one of the ways--now, this is not a point of agreement--the 
mapping general point is.
    Senator Carper. What I am looking for, Mr. Gessing, is 
where do you think the witnesses on the panel agree? That is my 
question. Just answer it, because I do not have much time, 
please.
    Mr. Gessing. Okay; the mapping is necessary, and improved 
mapping is essential, and I would say that the best way to do 
that is leverage private markets to do that.
    Senator Carper. Good; thank you sir.
    Mr. Pressly.
    Mr. Pressly. Senator Carper, I think we all agree that 
without doubt, the mapping is fundamental, updating those maps, 
and I think that is the fundamental comment that we have all 
made.
    Senator Carper. Given the technology that we have today, we 
are actually able to make some real progress there, are we not?
    Mr. Pressly. Yes, sir.
    Senator Carper. Okay; is it Mr. Hunter?
    Mr. Hunter. Yes.
    Senator Carper. Mr. Hunter.
    Mr. Hunter. I think one thing that we probably had 
agreement on, although I am not absolutely sure, at least 
consensus is that when we do make changes, if we go to 
eliminating subsidies, that we do have to be careful how we do 
it on poorer people. There has to be some way of transitioning 
for them if there is a move in that direction.
    Senator Carper. Okay; Ms. Lowrie, where do you think this 
panel agrees?
    Ms. Lowrie. Well, it has already been said, but the 
updating of mapping, number one, critical; increased focus on 
mitigation second. I think careful study as we move forward 
looking at some of the other things like reducing the subsidy, 
moving more toward actuarial that it is critical that those 
issues be studied and see what the overall impact would be, not 
only to homeownership values but also the overall economy and 
to make sure that there are no unintended consequences from 
what we do to try and enhance the viability of the NFIP.
    Senator Carper. Good; thanks.
    Is it Mr. Conrad?
    Mr. Conrad. Okay; I think I will agree with all of what has 
been said we agree upon.
    I think I am going to agree that I think everyone pretty 
much agrees that the circumstance that we find ourselves in at 
this point with a very extraordinary catastrophic set of years 
is a wakeup call that this program has failed on a number of 
fronts to keep pace with where we really need to be and that it 
is a very serious situation, and it needs attention in all of 
these areas: The pricing of insurance; I think the location of 
where insurance needs to go; and also the need for hazard 
mitigation, improvement of the maps, et cetera.
    Senator Carper. My time has expired.
    Mr. Chairman, can I ask one more quick question just of Ms. 
Lowrie?
    Chairman Shelby. Go ahead.
    Senator Carper. If I could, please.
    Ms. Lowrie, I guess for roughly 20 years or so, we have 
been discussing the proposal to require banks to escrow flood 
insurance payments for buildings that are located in 
floodplains, because some of us believe that this would ensure 
higher participation in the program. When we consider the 
damage to properties along the Gulf Coast last year and the 
potential loss that mortgage holders in this area know they one 
day might experience, could you just discuss with us why you 
think mortgage lenders have not done this on their own?
    Ms. Lowrie. Well, it is a consumer issue, Senator, and just 
like hazard insurance has not always been escrowed, many 
borrowers prefer to pay their own taxes and insurance, and 
lenders deal with it more as a customer service issue based on 
certain criteria on the loan that they feel that that customer 
is a good credit quality that if they have paid their credit 
and their mortgage on time that they are going to make sure 
that their insurance is paid on time.
    The other reason is that the lenders, seller servicers, 
have instituted very diligent monitoring systems to monitor 
expiration dates on policies through third party providers, 
even if they are not escrowing it.
    And then, finally, I think we have to be cautious, the 
Committee needs to be cautious that mandatory escrows sometimes 
not only run contrary to proconsumer issues but also to State 
requirements. For example, California law prohibits the lender 
from actually requiring escrows as a condition of granting a 
loan if the borrower has an LTV of 90 percent or less.
    So, it falls into one of those categories, Senator, that we 
have talked about, and there are a number of them that we need 
to study more closely, and I think the mortgage industry as a 
whole is open to work with the Committee on this issue and 
numerous others as we go forward to try and improve the 
program.
    Senator Carper. All right; thank you.
    To my colleagues, I would just say gentlemen, this is an 
issue that I think has come again, and I mentioned this in one 
of the earlier hearings on this; I think it was 1988, 1989 when 
I was on the House Banking Committee, and I think Mr. Shelby, 
our Chairman, had already left the House at that point in time, 
but this is one we worked on, legislated on, and we ended up 
passing a bill in the House that attempted to speak to some of 
these issues, not a strong bill, and died, I think, in 
conference.
    And I know we have tried with the assistance of Senator 
Bunning to get back into the game here, and I am pleased that 
we are going to have this opportunity and encourage that with 
this hearing and your determination to get us on the right 
track.
    Thank you.
    Chairman Shelby. Thank you.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    I just have a couple of questions. One, Ms. Pogue, you say 
in your testimony; ``the four successive hurricanes that 
impacted Florida in 2004 provide an example of a difficult 
disaster season that could be handled within the existing 
program with limited Treasury borrowing, fully within the 
capability of the National Flood Insurance Program to repay,'' 
and the FEMA people have testified that through 2004, they have 
been able to pay claims through premium income or in the 
alternative borrowed and paid back funds to the Treasury, and 
they say that over the last couple of decades, they have been 
able to pay back borrowed funds with interest in a timely 
manner.
    Is that your understanding?
    Ms. Pogue. That is my understanding.
    Senator Sarbanes. Does anyone on the panel differ with that 
understanding?
    Mr. Pressly. Senator Sarbanes, I think that demonstrates 
how solid that program has been.
    Senator Sarbanes. I am not trying to draw the lessons, but 
I just want to get agreement on the facts here, yes.
    Mr. Conrad. It is correct, but we had a period before, in 
1986, where there has to be some forgiveness of debt so that 
this is----
    Senator Sarbanes. Because of the size of the catastrophe or 
what?
    Mr. Conrad. No, I think it was just----
    Mr. Hunter. Cumulative subsidies.
    Mr. Conrad. Cumulative subsidies that came up at that time. 
So this, the entire 38-year history of the program would not 
fit the category you just----
    Senator Sarbanes. Okay; just over the last 20 years, you 
would say.
    How many people on the panel think the National Flood 
Insurance Program should be abolished.
    Mr. Hunter. Only as a last resort if you do not fix the 
mitigation and the maps and all that.
    Senator Sarbanes. Mr. Gessing, it is not a last resort with 
you; it is a first resort; is that right?
    Mr. Gessing. It is certainly one of the most important 
options we would like to see the Committee explore.
    Senator Sarbanes. Anyone else in that camp?
    Mr. Chairman, I just want to thank the witnesses. I think 
this has been a very helpful panel. I think we have looked at 
the statements. We are going to take a much more careful look 
at them. But obviously, a good deal of time and effort went 
into these statements, and there are many proposals that I 
think--not all, but many proposals that I think are very worthy 
of very careful attention, and I certainly intend to give that 
kind of attention as we move ahead here.
    Thank you very much.
    Chairman Shelby. Thank you.
    We have had mixed views here today, but I believe it is 
very clear to me that if this program is going to work in the 
future, the National Flood Insurance Program, there has to be 
fundamental changes made to the program. Mapping, Ms. Pogue is 
absolutely right on this. I believe that as far as the 
actuarial soundness, Mr. John, Mr. Gessing, Mr. Hunter, you are 
all right on point. We have our work cut out here, but 
obviously, the program is broke. It is crying out for change, 
and this is part of our jurisdiction, and we are going to try 
to meet that responsibility.
    Thank you all for appearing. The hearing is adjourned.
    [Whereupon, at 12:19 p.m., the hearing was adjourned.]
    [Prepared statements and response to written questions 
supplied for the record follow:]
                PREPARED STATEMENT OF SENATOR JACK REED
    Mr. Chairman and Senator Sarbanes, thank you for holding this 
hearing on reforming the National Flood Insurance Program (NFIP). I 
want to welcome Pam Pogue, who is representing the Association of State 
Floodplain Managers, and is Rhode Island's Floodplain Manager. I want 
to thank the Association and the National Wildlife Federation for their 
endorsement of S. 2005, my legislation to modernize FEMA's flood 
mapping program.
    Today, more than half of the United States' population lives in 
coastal counties and that number will continue to grow in the future. 
Coastal development is changing ecosystems as we convert wetlands into 
cities and suburbs, and attempt to protect people with levees, dams, 
and hurricane barriers. This development and the 
resulting environmental changes are placing communities in harms way as 
Hurricanes Katrina and Rita visibly demonstrated last year. I believe 
it is up to us--elected officials, government agencies, realtors, 
developers, mortgage bankers, homeowners, and environmentalists--to 
figure out how we manage development along our coasts and in flood 
hazard area.
    Before 1989, no single coastal storm had caused insured losses 
greater than $1 billion. Since then, Hurricanes Andrew, Wilma, Katrina, 
and Rita and others have well-exceeded that figure. There is billions 
of dollars worth of real estate development in high-risk coastal areas, 
and the Federal, State, and local governments as well as our economy 
will have a difficult time bearing the costs of an additional hurricane 
season like this past year.
    Reforms to the flood insurance program are necessary. I believe 
that reforms must balance making the program actuarially sound with 
ensuring that working American families living in flood hazard areas 
have access to affordable flood insurance and take advantage of that 
insurance.
    FEMA also needs to work more closely with communities on hazard 
mitigation programs. A recent study by the National Institute of 
Building Sciences found that for every dollar invested in disaster 
mitigation, there were $4 of cost savings, or said differently, $4 in 
avoided losses to taxpayers. Strengthening NFIP's mitigation standards 
will improve the program's financial solvency, but more importantly, 
better protect families and businesses from future natural disasters.
    Finally, as I have stated before, FEMA must modernize their flood 
maps. The Federal Government needs to provide Americans with the most 
accurate data that reflects flooding hazards from hurricanes and other 
natural events. Currently, FEMA's flood maps do not reflect the real 
flood hazard risks. New development, community growth, erosion, and a 
variety of other factors have altered watersheds and floodplains. This 
new development and its affects on floodplains are not accurately 
reflected in FEMA flood maps. In addition, these maps do not include 
information on coastal flooding reflected in the Army Corps of 
Engineers' inundation maps. This is important information needed by the 
public to assess their risks.
    I am very interested to hear from our witnesses about how they 
would propose to reform the flood insurance program to ensure that 
development along our coasts and rivers is environmentally and fiscally 
sound so that the Federal Government does not encourage building in 
areas of substantial risk. Specifically, I hope witnesses will discuss 
whether Federal Government programs such as Federal flood 
insurance is unintentionally inducing coastal development in high-risk 
areas, especially by continuing coverage to repetitive loss properties, 
as well as whether government-financed flood control, beach 
restoration, and shoreline projects have created a false sense of 
security for residents in these low-lying areas and encouraged unwise 
development along our coasts and floodplains.

                               ----------

                 PREPARED STATEMENT OF DAVID R. CONRAD
    Senior Water Resources Specialist, National Wildlife Federation
                            February 2, 2006

    Good morning Chairman Shelby, Ranking Member Sarbanes, and Members 
of the Committee. My name is David Conrad, and I serve as Senior Water 
Resources Specialist for the National Wildlife Federation, the Nation's 
largest conservation education and advocacy organization, with four 
million members and supporters, and 46 State and territorial affiliate 
conservation organizations. The National Wildlife Federation has a long 
history of involvement with and concern for the success of the National 
Flood Insurance Program (NFIP), particularly because of the critical 
help it provides people and communities in the wake of devastating 
flood events and as the Federal Government's principal program to 
promote wise floodplain management for the benefit of people and the 
environment.
    I appreciate the opportunity to present the Federation's views on 
recommendations for strengthening the financial solvency of the NFIP.
    The Federation also wishes to express its sincere support and 
appreciation for the continuing efforts of Chairman Bunning, Chairman 
Shelby, Ranking Member Sarbanes, and the Members of the Senate Banking 
Committee to strengthen and reform the NFIP. The Federation was a 
strong supporter of the Flood Insurance Reform Acts in 1994 and 2004. 
Both of these laws made substantial improvements, but it is now 
abundantly clear more needs to be done.
Status of the NFIP after Katrina
    Mr. Chairman, the National Flood Insurance Program is currently 
facing the most serious crisis in its 38-year history. The four major 
hurricanes which struck Florida in 2004 set a stage for a major strain 
on the NFIP's solvency. Hurricanes Katrina, Rita, and Wilma have now 
demonstrated what has long been predicted--that the program's lack of 
an actuarially based financial structure leaves it vulnerable to major 
catastrophic losses--losses which can now only be repaid with enormous 
bailouts from the American taxpayers. With a lack of accumulated 
``catastrophic reserves,'' only $2 billion in annual revenues, the need 
to borrow in excess of $24 billion from the Treasury to pay claims, and 
interest payments that will approach $1 billion from the borrowing, it 
is clear that without a bailout, the NFIP would soon collapse. We are 
assuming that some level of bailout will be provided, but we would hope 
that concurrently Congress will take significant actions to put the 
program on a much sounder footing in the future.
    To reach a sounder footing, improvements will have to be made both 
financially in how, where, and at what and price we provide insurance 
and through a concerted effort to better manage risk. This; in turn, 
requires a commitment to apply the best scientific methods of 
determining risk and the best policy-setting regarding where and under 
what circumstances we allow building in the vicinity of floodprone 
areas.
    We believe it would be wise to view the experiences of 2004 and 
2005 as critical to bringing greater recognition to potential risks 
that many communities could find themselves facing in the future. 
Katrina has been a wake-up call for many communities to consider their 
own risks and vulnerabilities. In October, Dr. Chris Landsea of NOAA's 
National Hurricane Center told the Committee ``an Atlantic hurricane 
era is underway, similar to that last seen from the late 1920's to the 
late 1960's. Our research suggests that many of the hurricane seasons 
in the next two or three decades may be much more active than they were 
in the 1970's through the early 1990's. Warmer sea surface temperatures 
are expected to contribute to conditions that foster increased 
hurricane development over this period.'' Other research has also 
supported the notion that we may be seeing more storms of increased 
intensity and duration. Katrina shows the need to plan for the 
potential of larger, catastrophic storm events to better protect our 
citizens from their impacts.
Repetitive Losses Are Continuing to Drain the Flood Insurance Fund
    In 1998, National Wildlife Federation published a 3-year study we 
had conducted on the NFIP and Federal flood policies called ``Higher 
Ground--A Report on Voluntary Buyouts in the Nation's Floodplains.'' 
This was the study that found that from 1978 through August of 1995, 
while repetitive loss properties represented only 2 percent of all 
insured properties they had experienced 25 percent of the losses and 
received 40 percent of total NFIP claims payments.
    These properties have continued to be a large and chronic drain on 
the National Flood Insurance Fund. In 1995, the 74,000 repetitive loss 
properties had received $2.8 billion in claims and were costing the 
NFIP $200 million annually. Just prior to Hurricane Katrina (7-31-05), 
these numbers had grown to more than 111,000 properties nationally that 
have cost the NFIP a total of $5.6 billion, doubling the total 
cumulative cost in only 10 years, and again, cumulatively, having 
received 38 percent of all NFIP claims. The information generated in 
this study, we believe, was helpful to alerting FEMA and the Congress 
of problems with the NFIP and was one factor that led to the eventual 
passage of the FIRA 2004.
    There were other significant findings that may be relevant to 
today's concerns:

 Nationally, flood losses have risen alarmingly through this 
    century, despite huge expenditures on traditional flood control 
    projects. Twenty-five year average national flood losses (in 
    constant dollars) had soared to $4.2 billion annually, more than 
    double what they were early in the century. For the 5-year period 
    1993--1998, the losses were more than $8 billion each year. 
    Approximately $140 billion in Federal tax revenues has been spent 
    during the past 25 years preparing for and recovering from natural 
    disasters.
 A large number of properties (5,629--10 percent of all single 
    family residence repetitive loss properties) had already received 
    cumulative flood insurance payments in excess of the highest 
    reported value of the property. At the top end, a single family 
    residence in the Houston area was valued at $114,000, yet it 
    received $806,000 in payments for 16 floods over 18 years. [In July 
    of 2005 FEMA reported that there were more than 12,500 currently 
    insured properties with either 4 or more losses or total cumulative 
    claims that exceeded the property value.]
 Properties that sustained ``substantial damage'' were not 
    subject to NFIP hazard mitigation requirements. NFIP regulations 
    require any owner of a building sustaining a single loss event 
    exceeding 50 percent of the building's value to either remove the 
    building or reconstruct the building to current code requirements, 
    including elevation to at least the base flood level to reduce 
    flood risk. Nearly 11,000 repetitive loss properties (approximately 
    15 percent of the total) had sustained substantial damage on one or 
    more occasions during the 18 years studied (costing more than $500 
    million in NFIP claims though the point of first being 
    substantially damaged), yet overall they continued to sustain 
    losses essentially as they did before they were substantially 
    damaged. This suggested that many NFIP communities were delinquent 
    in their enforcement of substantial damage rules. In all, 5,578 of 
    the repetitive loss properties received $167 million in insurance 
    payments after they were substantially damaged. We concluded that 
    with better enforcement of substantial damage rules, it would be 
    reasonable to expect that the subsequent damage would have been 
    greatly reduced.
 15,275 repetitive loss properties, or 20 percent of all 
    repetitive loss properties, were classified as being outside the 
    designated 100-year floodplain. These structures had received a 
    total of $530 million in NFIP payments. This raised serious 
    concerns about the accuracy of flood insurance maps and further 
    concern that the public was not being adequately informed of the 
    risks of living in the vicinity of floodplain areas. We do not 
    today have updated statistics for this class of properties.
 The vast majority of repetitive loss properties (94 percent) 
    are older ``pre-FIRM'' properties, which were initially constructed 
    before the establishment of flood insurance rate maps and NFIP 
    building standards.

    Our report showed that historically many repetitive loss building 
owners have simply continued to reinvest in extremely high risk 
properties with chronic flooding problems, often without instituting 
mitigation measures to reduce the associated risk, and at extremely 
high cost to the NFIP and other disaster relief programs.
    It can well be expected that when statistics are aggregated after 
last year's hurricanes, most of these numbers will be much higher.
    It is obvious from last week's testimony that repetitive losses 
continue to be a major problem for the NFIP . We were most pleased that 
the Conference Committee on the Department of Homeland Security 
recently chose to fully fund the FIRA 2004 flood hazard mitigation and 
pilot programs. These can begin to reduce the $200+ million costs of 
repetitive losses to the NFIP. Yet, we are concerned that the current 
dire financial straights of the program and failure to develop 
regulations may result in these monies not getting to hazard 
mitigation, or at least on a timely basis.
Desirability of Moving All Policy Premiums to Actuarially Sound Rates
    The NFIP began in 1968 with a promise to do two things: Provide 
affordable insurance for properties with flood-related risks--and, 
working with local communities--to guide new at-risk development out of 
harm's way. Failure to accomplish either of these goals would likely 
result in the overall failure of the NFIP.
    The National Wildlife Federation believes the reduction and 
elimination of subsidies, especially for pre-FIRM structures and 
repetitive loss properties, is a long overdue reform of the NFIP and 
should be an urgent goal today. The initial assumption when the program 
began was that overtime the highly subsidized pre-FIRM properties would 
be damaged and either be demolished and removed from the floodplain or 
rebuilt to safer standards, yet our study showed that this was seldom 
happening. The continuing drain on the National Flood Insurance Fund, 
combined with the wrong financial signals which subsidies send that 
discourage hazard mitigation are critical reasons the NFIP is 
financially unsound. It has been suggested that an initial step could 
be to eliminate subsidies for vacation homes, nonprimary residences, 
and commercial properties. We would agree with this. An equally 
important alternative to help those for whom increased rates would 
constitute a significant hardship, is to provide substantial and 
sustained support through hazard mitigation grants to reduce risk.
Suggestions for Reducing Flood Damages Through Increased Mitigation
    In addition to eliminating NFIP subsidies, greater attention to 
hazard mitigation and strengthening NFTP standards should be 
cornerstones of restoring financial integrity to the NFIP.
    Often the greatest strides that have been made toward reducing 
existing flooding risk have been made in the wake of flood disasters. 
After the Great Midwest Flood, FEMA approved more than 170 hazard 
mitigation projects in 9 States where some 10,000 highly flood prone 
and damaged structures were acquired and removed from floodplains. Many 
others were elevated, relocated, or floodproofed. These efforts were 
made possible especially with monies provided through the Stafford Act 
(Section 404 Hazard Mitigation Grants Program) and the NFIP's Flood 
Mitigation Assistance Program.
    In August 2004 (see attachment), FEMA reported it had to that point 
mitigated through acquisition, elevation, floodproofing, relocation, 
and retrofitting more than 28,000 properties. The vast bulk of funding 
for these activities came through the HMGP, which is made available 
after Presidentially declared disasters.
    We are concerned that in recent years there has been a reduction of 
overall HMGP funding and an unfortunate confusion over the relative 
importance of predisaster vs. post-disaster mitigation. Both are 
necessary. As a budget-cutting measure, in 2003 the formula for HMGP 
funds was cut from 15 percent to 7\1/2\ percent of Stafford Act 
expenditures. Yet, it is almost always after disasters that the 
greatest potential exists to implement meaningful hazard mitigation. 
While HMGP is not specifically targeted at pre-FIRM structures, by far 
the most flood hazard HMGP funds (more than FMA and the new pilot 
program) go toward mitigating these structures. We strongly urge the 
Committee to support restoration of the 15 percent HMGP formula, and we 
would further urge that the increase be applied the to recent Gulf 
Coast disasters to meet the current restoration and mitigation needs.
    In addition, there are a range of measures that should be taken 
immediately to strengthen NFIP mitigation standards and improve the 
program's financial solvency.
    Basic community participation standards have remained largely 
unchanged since the start of the NFIP. Initially the program planners 
chose minimum standards such as requiring all new construction first 
floor elevation to be ``at or above'' the Base Flood Elevation (1 
percent chance flood) to encourage all communities to join. While some 
communities adopted higher standards, others chose only the minimums. 
Thirty-eight years into the program we would urge that key standards be 
increased in light of what we have learned and to promote greater 
safety. We would specifically urge that FEMA:
    Require that all new and substantially improved buildings in the 
SFHA have the first floor elevated to at least one-foot above the Base 
Flood Elevation (BFE). This would, in part, compensate for the large 
range of uncertainties associated with defining a base flood;
    Adopt a ``no-rise'' standard for restricting flows in the 100-year 
flood instead of the current ``one-foot rise.'' The current standard 
has worked to draw large encroachment onto floodplains that through 
time results in substantial new flood risk and damages.
    Require all ``critical facilities'' to be elevated above and flood 
protection structures to be designed and constructed to protect from at 
least the 500-year (.2 percent annual chance) flood. A host of 
government and professional reports and studies support the need for 
much higher than 100-year standards for urban flood protection and for 
key community infrastructure (for example schools, hospitals, 
eldercare, police, fire, and other public facilities, important roads, 
bridges, and transportation facilities).
    The NFIP's Community Rating System has identified and rated 18 
types of best management practices that can be employed by communities 
to reduce flood hazards. Communities representing about half the 
Nation's population have already participated in this voluntary 
program. We would urge the Committee to direct FEMA to identify what 
practices from the CRS could be adapted universally as part of the 
basic community participation criteria to reduce risks.
    I would also call special attention to the situation we found with 
substantial damages. Because the calculation and decisions related to 
substantial damage determinations in the current NFIP is left with 
local government officials, who are often subject to immense pressure 
in the wake of disasters, often these decisions result in negative 
determinations when all reasonable evidence points in the direction of 
requiring the reconstruction to be elevated to modern code. We believe 
for the sake of improving the financial stability of the NFIP and 
consistency of decisionmaking, that FEMA should be directly involved 
with substantial damage determinations. We would also suggest that the 
determinations be based on cumulative damage claims and not simply 
single events.
Places Where Insurance Should Not Be Provided
    When the NFIP was first conceived, it was recognized that there 
were places where insurance should be withheld--particularly in 
floodways and areas of moving water. These were excluded because of the 
prohibitive cost of insuring these locations and the risks that 
building there posed to owners, their neighbors, first 
responders, and the public. Subsequently, Congress established a 
Coastal Barrier Resources System that withholds insurance on 
undeveloped barrier islands. In light of the history of the program, we 
would urge the Committee to work with FEMA to identify what other such 
areas have flooding histories or risks or values that would warrant 
exclusion of availability of insurance.
Expanding Insurance Participation
    The National Wildlife Federation was a strong supporter during 
development of the 1994 Flood Insurance Reform Act of strengthening 
escrow authorities and improving Federal bank regulator oversight and 
enforcement of the mandatory purchase requirements. Substantial 
measures were adopted, yet it still appears that many who should have 
insurance do not have it when disasters occur.
    We believe that still not enough is being done by the Nation's 
financial sector and government regulators to assure that those living 
in flood prone areas purchase insurance and maintain their policies. We 
would urge the Committee to consider stronger enforcement measures and 
penalties for failures to assure that there is required coverage.
    We would also strongly support changes in the NFIP to expand the 
mandatory purchase requirement to ``residual risk'' areas behind levees 
and below dams within the natural floodplains. Too often, communities 
falsely believe that because there is a levee or other structure 
shielding them from floodwaters, that they are essentially safe. The 
fact that today no flood insurance is required only encourages this 
false sense of reality. In our 1998 report, we found in particular that 
across the Nation damages from more rare, catastrophic-type flood 
events are growing at the greatest magnitude--in many cases when flood 
control structures fail and inundate populated areas or spread out 
beyond what is identified as the 100-year floodplain.
Improving NFIP Mapping Accuracy and Adequacy of the 1 Percent Chance 
        Flood
Standard
    Because the flood insurance maps are literally the foundation of 
the NFIP and they are basic planning documents for the Nation's urban 
and rural areas, it continues to be critical that the maps be updated 
and made accurate as possible. With one-third of the Nation's 100,000 
maps greater than 15-years old and another 30 percent at least 10-years 
old, we are seeing more and more instances of storms that result in 
much greater flooding than would be predicted by current maps. Again, 
we were rather shocked to learn in our 1998 study that fully 20 percent 
of repetitive loss properties were located outside the designated 
Special Flood Hazard Areas (1 percent chance flood zones). The 
repetitive loss properties had, on average more than 3 losses over 18 
years, meaning that statistically they are probably located in the 5-10 
year floodplains.
    The National Wildlife Federation strongly supports continuation of 
FEMA's Map Modernization program and appreciates the Administration and 
Congress' continued support and funding. We are concerned, however, 
that in order to help place the NFIP on a course to fiscal solvency, 
the program needs to be expanded and extended.
    The 1 percent chance standard was admittedly a compromise when the 
original drafters of the NFIP conceived the program. It was even 
recognized at the time that the 1 percent chance flood was probably too 
high a risk for most cities and urban areas, yet it was adopted as a 
``minimum'' in order to entice reluctant communities to join the 
program. Unfortunately, the minimum became the maximum for many areas, 
and the choice of terminology has failed to adequately convey the risks 
of flooding to the public. Many communities sought the minimum levels 
of protection behind levees or dams, then nurtured the notion that. 
they were safe and did not need flood insurance or elevation or other 
protection for their properties.
    Today, it is clear that basic to helping put the NFIP in a 
financially sound position, we need to build out from the 1 percent 
chance standard. A critical step must be to map beyond the I percent 
chance area, and we strongly recommend that mapping extend to the .2 
percent chance (500-year) flood level, and to all ``residual risk'' 
areas behind levees and below dams, in the event of structural failure. 
Furthermore, mapping should include other hazards, such as land 
subsidence, coastal erosion, sediment, and mud flow areas, and areas 
subject to ice jams. In addition, mapping should be based upon 
reasonable estimates of ``future conditions''--when growing communities 
are changing hydrologic regimes through their growth. Each of these is 
well within current technical capabilities.
    Senator Reed has introduced S. 2005, critically important 
legislation that would continue the Map Modernization Program, direct 
the mapping of the additional dimensions and authorize $400 million 
annually from 2006 to 2012 to accomplish the mapping. We strongly urge 
the Committee to support this legislation as part of its efforts to 
reform the NFIP.
Conclusion
    Once again, Mr. Chairman and Members of the Banking Committee, we 
applaud your work to reform the National Flood Insurance Program. The 
program has fallen short of its initial promises and currently finds 
itself in extremely serious financial trouble. The program has been 
successful in many ways to reduce the adverse impacts of flooding on 
many of the Nation's communities, yet it has overall failed to put 
insurance on an actuarial footing, failed to accurately assess flood 
risks, failed to adequately communicate those risks to the public and 
failed to adequately discourage building and rebuilding in high and 
substantial risk areas. For 38 years, it has continued to highly 
subsidize many of the policies it sells, thus skewing market signals as 
to the risks involved with certain floodplain locations and in some 
cases serving as an inducement to develop in high risk areas, rather 
than the opposite.
    Perversely, this has also had a substantial adverse impact on many 
sensitive and critical ecosystems that support a large portion of the 
Nation's wildlife--with the result sometimes being intensive 
urbanization and fill immediately along the Nation's rivers, streams, 
coastlines, estuaries and barrier islands, with heightened flooding 
risks.
    We are ready to work with the Committee to make needed 
improvements. Thank you for allowing me to provide the views of the 
National Wildlife Federation and I would be happy to respond to any 
questions you may have.



              PREPARED STATEMENT OF REGINA M. LOWRIE, CMB
                 Chairman, Mortgage Bankers Association
                            February 2, 2006

    Good morning, Chairman Shelby, Ranking Member Sarbanes, and Members 
of the Committee. Thank you for inviting the Mortgage Bankers 
Association (MBA) \1\ to testify today. My name is Regina Lowrie and I 
am President and Founder of Gateway Funding Diversified Financial 
Services, headquartered in Fort Washington, Pennsylvania. I founded 
Gateway in 1994 with seven employees and $1.5 million in startup 
capital. The company now has more than 800 employees, more than 58 
offices and is Greater Philadelphia's largest independent mortgage 
company, serving all of Pennsylvania, Delaware, New Jersey, and 
Maryland. Gateway annually originates $3 billion in loans. I serve on 
the Fannie Mae National Advisory Council, the Pennsylvania Housing 
Forum, and the Montgomery County Community College Foundation Board of 
Directors. I am here today as the 2006 Chairman of the Mortgage Bankers 
Association.
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    \1\ The Mortgage Bankers Association (MBA) is the national 
association representing the real estate finance industry, an industry 
that employs more than 500,000 people in virtually every community in 
the country. Headquartered in Washington, DC, the association works to 
ensure the continued strength of the Nation's residential and 
commercial real estate markets; to expand homeownership and extend 
access to affordable housing to all Americans. MBA promotes fair and 
ethical lending practices and fosters professional excellence among 
real estate finance employees through a wide range of educational 
programs and a variety of publications. Its membership of over 3,000 
companies includes all elements of real estate finance: Mortgage 
companies, mortgage brokers, commercial banks, thrifts, Wall Street 
conduits, life insurance companies, and others in the mortgage lending 
field. For additional information, visit MBA's website: 
www.mortgagebankers.org.
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    Over the years, the nationwide availability of affordable flood 
insurance has been important to expanding homeownership and building 
communities. The National Flood Insurance Program (NFIP) serves a very 
important function in the mortgage lending industry as it reduces the 
overall cost of financing a property located in a flood prone area by 
providing affordable and reliable flood insurance. Even before the 
statutory mandatory purchase requirement was enacted, lenders often 
required flood insurance to protect their collateral interests. With 
the passage of the Flood Disaster Protection Act of 1973, however, it 
became unlawful to make, increase, extend or renew a loan secured by a 
structure located in a Special Flood Hazard Area (SFHA) without flood 
insurance coverage for the life of the loan. Without a reliable and 
uninterrupted source of flood insurance, we believe mortgage credit 
would, at best--be more expensive, or at worst--unavailable in many 
markets.
    Although there are private providers of flood insurance, MBA 
estimates that 90 percent of all residential flood policies are written 
through the National Flood Insurance Program (NFIP). The mortgage 
industry wants to ensure the continued viability of the NFIP. At the 
same time, overly expansive extension of the flood insurance 
requirements could have unintended consequences, increasing the costs 
of homeownership, affordable rental housing, and occupancy costs for 
businesses. It could also increase delinquencies and foreclosures, 
increase business failures, and reduce property values.
    Another unintended consequence of a further expansion of the NFIP 
is the impact on State-regulated life insurance companies that include 
commercial and multifamily loans in their overall investment portfolio 
used to pay policyholders. The National Flood Insurance Reform Act of 
1994 (NFIRA) did not address loans made by non-federally chartered 
lending institutions. Life companies are regulated by State insurance 
commissioners. The mandatory inclusion of life company loans in the 
NFIP would preempt State regulatory authority for life companies. If 
expansion of the law is being considered to include State-licensed 
companies, such a preemption should be carefully considered, given the 
historic role that States have played in the regulation of life 
companies and other mortgage lenders and servicers.
    Reform of the flood insurance program should be exercised with 
caution and full awareness of the implications of any actions. We do 
not believe there is a quick fix.
    The unprecedented number of natural disasters last year placed the 
NFIP in a deficit. Currently, it is estimated that total claims will 
top $23 billion for 2005. The NFIP has already borrowed $18.5 billion 
from the Treasury and will need an additional $5.6 billion in borrowing 
authority to pay current outstanding claimants. Of course, the largest 
contributing factor to this financial situation is Hurricane Katrina, 
which alone resulted in nearly $22 billion in claims. The number one 
priority must be to ensure that NFIP has sufficient funds to pay 
outstanding claims. We, therefore, urge Congress to provide the 
additional borrowing authority NFIP will need to pay claims that are 
due to policyholders.
    We would also like to take this opportunity to discuss reforms 
currently being mentioned, including expanding the scope of the 
mandatory purchase of flood insurance requirement to the 500-year 
floodplain and removing current premium subsidies.
Expanding the Special Flood Hazard Area
    In November of last year, the House Financial Services Committee 
reported out H.R. 4320 by voice vote. Among other things, this bill 
requires a study of increasing the size of the Special Flood Hazard 
Area (SFHA) to the 500-year floodplain and areas that would have such a 
chance of flooding ``but for the existence of a structural flood 
protection system.'' At this time, MBA does not support expanding the 
Special Flood Hazard Area to include the 500-year floodplain. MBA 
believes further study is necessary before expanding the Special Flood 
Hazard Area designation and the mandatory purchase requirement to the 
500-year floodplain.
    Based on preliminary analysis, MBA estimates that approximately 
three to four million properties \2\ are located in the 500-year 
floodplain and, thus, the scope of the mandatory purchase requirement 
would increase substantially. Of course, not all properties are subject 
to the mandatory purchase requirement. In fact, approximately 35 
percent of homeowners do not have a mortgage \3\ and thus cannot be 
required to purchase insurance under current law.
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    \2\ Information compiled by MBA from flood determination companies.
    \3\ MBA's ``Housing and Mortgage Markets: An Analysis'' (using the 
Census Bureau's American Housing Survey), September 2005.
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    It is unclear without further study, what such an expansion would 
do to housing affordability, home retention, commercial and multifamily 
property values, small businesses, and regional markets.
    A concern with moving to a 500-year floodplain is the fact that 
some maps do not currently indicate the 0.2 percent risk (1 in 500 year 
occurrence). Because community mitigation, building codes, and 
mandatory purchase requirements are tied to the 100-year floodplain, 
some maps fail to reflect the 500-year designation; therefore, 
significant map adjustments may be required.
    There are other unanswered questions associated with expanding the 
SFHA designation that deserve further investigation, such as whether 
including the 500-year floodplain within the SFHA designation will 
trigger unintended building standards and higher premiums that will 
drive up the cost of homeownership and home retention, as well as 
commercial development and operating costs.
    As mentioned earlier, H.R. 1A4320 calls for such a study and we 
believe it should be conducted before any action is taken. We believe, 
however, that special attention should be given to the feasibility and 
implications of expanding the mandatory purchase requirements on 
structures located in areas of residual risk, that is, properties 
behind levees, dams, and other man-made structures. MBA is aware that 
many properties in the New Orleans area, for example, did not have 
flood insurance because the presence of the man-made levees reduced the 
annual risk below 1 percent (100-year floodplain). Yet, it was the 
inadequacy of the levees and not the immediate impact of the hurricane 
that caused the flood damage.
    There also should be evidence that the standard flood insurance 
policy would cover the type of damage likely to be experienced by the 
property owners in the newly expanded SFHA. For example, given that 
structures in a 500-year floodplain are not subject to the same 
elevation concerns, many properties have basements. The NFIP policy, 
however, excludes finished basements, where flooding would most likely 
occur in these cases.
Increasing Premiums/Reducing Subsidies
    In testimony before this Committee last week, NFIP's Acting 
Director for Mitigation suggested phasing out subsidized premiums in 
order to charge policyholders more market-oriented actuarially sound 
premiums.
    There are two basic forms of rate subsidies offered to property 
owners under the NFIP. The first is given to so-called pre-FIRM 
structures--that is structures built prior to the completion of the 
flood insurance rate maps (FIRM). They are generally older housing 
stock. The other form of subsidy is the ``administrative grandfather.'' 
In this case, post-FIRM structures that are remapped into a SFHA or 
subject to base-flood elevation changes are allowed to retain the rates 
associated with the property's former designation. These policies were 
put in place to avoid undue financial burden on property owners who 
complied with construction codes and flood information when their 
structures were built.
    Now that the NFIP has had to borrow substantial funds from the 
Treasury, the thought of an actuarial rate structure is attractive, but 
the reality may be problematic. Last week, the Acting Director of the 
Congressional Budget Office (CBO) indicated that nearly 25 percent of 
policyholders receive subsidized rates. He indicated that if subsidies 
were removed, the average policy cost on a pre-FIRM structure would go 
from $710 to $1,800 a year. There are many individual cases where the 
rates would be significantly higher. For example, a pre-FIRM structure 
with total flood coverage of $150,000 is currently subject to a pre-
FIRM premium of $590 a year. The same property, if subject to the full 
post-FIRM actuarial rate structure, would incur an annual premium of 
$2,200 if the lowest floor were two feet below base flood elevation; 
$5,875 if the floor were five feet below base flood elevation; and 
$17,050 if the floor were eight feet below the base flood elevation.\4\
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    \4\ Data provided by FEMA based on 2003 rates.
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    Moving to a fully actuarial premium structure could have a 
significant impact on Hurricanes Katrina and Rita victims who wish to 
remain or return to the Gulf area. NFIP's remapping efforts in the Gulf 
are underway and are expected to result in increased base flood 
elevations in several Louisiana coastal parishes and portions of 
Mississippi. Base flood elevation levels for certain parishes in 
Louisiana may rise one to nine feet based on flood frequency analysis 
conducted by the Federal Emergency Management Administration (FEMA).\5\ 
Under a true actuarial scheme, many homeowners and commercial property 
owners who are unable to raise their properties to the base flood 
elevation could find it financially impossible to retain or repair 
their structures. These properties could be rendered unmarketable. 
Defaults and foreclosures would mount further. Given the 
``unmarketable'' nature of the properties, homeowners, commercial 
property owners, and lenders would bear the cost of the government's 
change in policy. For commercial properties, the cost of raising the 
occupied floor level to the mandated base flood elevation could render 
the property economically infeasible. Additionally, parking ingress and 
egress issues would be created by significantly elevating the occupied 
portion of the commercial structure.
---------------------------------------------------------------------------
    \5\ FEMA's Flood Recovery Guidance, Frequently Asked Questions 
(Dec. 1, 2005).
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    In 1999, FEMA commissioned a study of the impact of charging 
actuarial rates on pre-FIRM structures. As can be expected, this 
independent study by PriceWaterhouseCoopers,\6\ shows that certain 
communities would fare worse than others. Of significance in that 
study, is a finding that the most severely affected communities could 
see a 10-32 percent loss in home values.\7\ Such a reduction would have 
a dramatic impact on the local tax base; affecting the funding of 
education and emergency services. Additionally, household wealth 
formation in these communities would be dramatically impacted. These 
negative impacts would reverberate throughout the economic base of a 
community.
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    \6\ Executive Summary, ``Study of the Economic Effects of Charging 
Actuarially Based Premium Rates for Pre-FIRM Structures,'' 
PricewaterhouseCoopers (May 14, 1999).
    \7\ Id at 20.
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    One of the key benefits of a government flood insurance program is 
to provide affordable insurance coverage to all property owners in 
participating communities. Clearly a number of homeowners and 
commercial property owners with older structures would be severely 
impacted by a change in rates through no fault of their own. We, 
therefore, respectfully urge Congress to further study the consequences 
before making a decision to move to a fully actuarial premium 
structure. MBA does not support such a concept at this time.
    MBA, however, does support an increase in the annual premium cap. 
Today, FEMA is permitted to increase premiums by 10 percent per annum. 
We support allowing an increase in premiums of 15 percent per year.
    There have been several attempts to deal with the problem of 
repetitive loss properties. MBA believes the best way to deal with 
repetitive loss properties is through the existing mitigation programs 
and to implement the programs passed into law in 2004. To the extent 
that properties with subsidized rates are producing significant losses 
for the NFIP, which we expect some do, the homes should be eligible for 
buy-out or elevation changes.
Lender Compliance
    Mortgage lenders have been the only enforcers of the mandatory 
purchase requirements since enactment of the Flood Disaster Protection 
Act of 1973 (P.L. 93-234). The 1973 Act, for the first time, restricted 
federally insured depository institutions from making loans in a 
Special Flood Hazard Area without flood insurance. It also prohibited 
Federal agencies, such as the Federal Housing Administration and the 
Department of Veterans Affairs, from providing financial assistance for 
acquisition or construction purposes.\8\
---------------------------------------------------------------------------
    \8\ Federal Insurance Administration (FIA) notice 1978b stated that 
Federal financial assistance includes ``loans, guarantees, and similar 
forms of direct and indirect assistance from Federal agencies.'' 43 
Fed. Reg. 7140-41.
---------------------------------------------------------------------------
    The National Flood Insurance Reform Act of 1994 (NFIRA) expanded 
the mandatory purchase requirement to loans purchased by Fannie Mae or 
Freddie Mac. Both Fannie Mae and Freddie Mac, however, already required 
the purchase of flood insurance at the time of enactment of NFIRA. 
NFIRA also reaffirmed the lender's obligation to keep the policy 
obtained at origination in force for the life of the loan through the 
use of lender-placed insurance, if necessary.
    We are very concerned, with certain remarks made last week before 
this Committee. During questioning, the NFIP Acting Director of 
Mitigation indicated in 
response to questioning that he believed the level of noncompliance 
with the mandatory purchase requirement was between 40-60 percent. We 
recognize the comments were made without the benefit of data before the 
witness, and, thus, would like to take this opportunity to comment on 
lender compliance.
    As an industry, mortgage companies execute the flood insurance 
obligations consistently, in good faith, and with few errors. In fact, 
an independent study produced for FEMA by the American Institutes for 
Research (AIR) in March of 2005 \9\ shows significant compliance with 
the law. Of relevance to the mortgage industry, the study interviewed 
representatives from Fannie Mae, Freddie Mac, the Federal Deposit 
Insurance Corporation (FDIC), the Federal Reserve Board (FRB), the 
Office of the Comptroller of the Currency (OCC), and the Office of 
Thrift Supervision (OTS) to determine the level of compliance.
---------------------------------------------------------------------------
    \9\ ``The National Flood Insurance Program's Mandatory Purchase 
Requirement: Policies Processes, and Stakeholders,'' American 
Institutes for Research, (March 2005).
---------------------------------------------------------------------------
    In the study, Fannie Mae indicates that it ``finds high compliance 
with the mandatory purchase requirements among its seller/servicers. It 
infrequently encounters a loan that does not have flood insurance when 
it is supposed to, and it does not often detect a pattern of 
noncompliance or any systemic issues related to noncompliance with the 
requirement.'' \10\ The study also interviewed Freddie Mac 
representatives and found that ``when it [Freddie Mac] does find 
noncompliance, however, it is usually the lenders' failure to provide 
proof of insurance, and they [the lenders] typically address the 
problem.'' \11\
---------------------------------------------------------------------------
    \10\ Id at 84.
    \11\ Id at 85.
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    The bank regulators had similar findings. The FDIC which supervises 
and examines 5,300 banks and savings institutions, or more than half of 
all the financial institutions in the United States, imposed 58 civil 
money penalties (CMP) between 2001 and 2004 for a pattern or practice 
of violating the Flood Disaster Protection Act. The majority of these 
infractions, or 70 percent, were for $5,000 or less, indicating that 
noncompliant institutions had only a handful of violations when they 
had them at all. The Federal Reserve Board imposed 20 CMP's in 2004. 
The OTS issued 5 CMP's between 2001 and 2004 and the OCC assessed 11 
CMP's as of December 2004.\12\
---------------------------------------------------------------------------
    \12\ Id at 69-79.
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    The NFIRA is a complicated law with a multitude of requirements 
including the requirement to: Notify NFIP's designee when servicing is 
transferred; notify the borrower when the property is deemed to be 
located in a SFHA; mandate the purchase of insurance and place such 
insurance on the borrower's behalf when necessary--to name a few. Our 
members have instituted significant procedures to ensure compliance 
with these and other statutory obligations. It is, however, important 
to note that despite a high level of due diligence, human error cannot 
be completely eliminated in a complex compliance setting such as the 
statutory flood insurance requirements.
    At this time, I would like to describe what servicers do to ensure 
that flood insurance is obtained where required and stays in force.
    At origination, the lender will request a flood determination on 
every loan in its pipeline. That means sending a request to a specialty 
flood determination company to read the flood maps to determine if a 
particular structure is in a SFHA.
    If the property is located in an SFHA, the lender will notify the 
borrower of the SFHA designation, require him or her to purchase flood 
insurance and require evidence of such insurance before closing. The 
first year's premium is paid up front, prior to closing.
    After the loan closing, the servicer enters information into its 
computer system indicating the flood zone designation associated with 
the structure, if the loan is subject to the mandatory purchase 
requirement, the policy expiration date and other pertinent policy 
information. At that time, the servicer reviews the insurance policy to 
make sure that the servicer's name is listed as the ``mortgagee/loss 
payee.'' This ensures that future billing notices and insurance claim 
checks will be sent to the right servicer.
    On escrowed loans, the servicer will pay the insurance premium 
based on the expiration date in the system and the renewal billing sent 
to the servicer by the insurer. This is monitored closely. To protect 
against the occasional nonreceipt of 
renewal notices, servicers produce weekly or monthly reports that alert 
them to upcoming expiration dates of both hazard and flood insurance 
policies.
    Even if a loan is not escrowed, the insurer will normally send the 
servicer a notice of policy renewal when a premium is paid. Servicers 
track the expiration date of the policy and the receipt of the renewal 
notices. If a notice of policy renewal is not obtained from the 
insurer, the servicer will notify the property owner that a policy 
renewal has not been received, as required by the terms of the mortgage 
agreement, and if not provided, will result in the lender obtaining 
adequate insurance on the borrower's behalf. Generally two notices are 
sent to the borrower within 45 days after the expiration date of the 
policy before the servicer imposes lender-placed insurance. These 
notices also generally point out that lender-placed coverage is often 
more expensive and may provide less coverage than a borrower-placed 
policy.
    Finally, if the borrower cancels the flood insurance policy, the 
insurer is required by contract to notify the lender--as mortgagee/loss 
payee--of the cancellation. This cancellation notice occurs regardless 
of whether the premiums are escrowed. It is important to note, that in 
many cases, cancellations are due to a borrower's change in insurance 
carrier. If a cancellation notice is received and the borrower has not 
otherwise notified the servicer of a change in insurance carrier and 
provided proof of insurance, the lender will send the notices described 
above warning the borrower that if he or she does not provide proof of 
insurance in 45 days, the lender will impose lender-placed coverage.
    Again, if the lender does not receive proof of insurance by the 
date specified in the letter, a flood insurance policy is purchased by 
the lender and charged to the borrower. The servicer also notifies the 
borrower when it has obtained lender- placed coverage. Should the 
borrower subsequently provide proof of insurance and no lapse in 
coverage has occurred, the premiums are returned to the borrower in 
full.
    Lender-placed insurance policies are generally obtained through 
private insurers, not from the NFIP's forced placed program, the 
Mortgage Portfolio Protection Program (MPPP). This is because the MPPP 
policy is effective on the date the application is completed and the 
premium is paid. Because NFIRA prohibits lenders from force-placing 
insurance for 45 days from borrower notification, there is generally a 
30-day gap in insurance coverage under the MPPP. Conversely, private 
lender-placed policies are effective as of the expiration date of the 
policy and thus eliminate this gap. We believe that part of FEMA's 
stated concern over their retention rate is due to this factor. FEMA 
loses almost every lender-placed policy to the private insurance 
market.
    In addition to the regular monitoring mentioned above, servicers 
also perform periodic review to make sure, for example, that properties 
with high risk A and V flood designations (that is, SFHA designations) 
are covered by insurance. If specific investors require additional 
monitoring, as is the case with Fannie Mae and Freddie, that is 
performed as well.
Opposition to Expanding the Triggering Events/Requiring On-going Map
Monitoring
    Servicers vigorously comply with the law to ensure that flood 
insurance when required at the time of origination does not lapse or 
get cancelled after closing. Unfortunately, discussion has surfaced 
once again about requiring on-going monitoring of all loans that are 
not in SFHA's at origination to determine if they later get remapped 
into an SFHA. If the law is expanded to require on-going map monitoring 
or adds remapping as a triggering event for the mandatory purchase 
requirement, residential and commercial lenders will face increased 
administrative, liability, and enforcement issues.
    Collectively, the top five commercial servicers service over 
120,000 loans, residential loan servicers service over 52 million 
loans.\13\ If on-going map monitoring is required, the servicer will be 
required to review each loan and every insurance policy on existing 
mortgages that may be in an affected (remapped) area to ensure 
compliance with the legislation. There is a heavy administrative cost 
associated with this type of review and, when coupled with the 
potential increase in penalties imposed on lenders/servicers that do 
not enforce the legislation, the requirement is unduly burdensome.
---------------------------------------------------------------------------
    \13\ MBA Research Department.
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    In addition, on existing mortgages, there may be issues with 
increased contract liability and the servicer's right to enforce the 
revised floodplains or mandatory insurance requirements. As soon as the 
requirement would become law, the lender/servicer becomes subject to 
contractual liability, based on its relationship with investors and 
other transactional parties, for nonenforcement of revisions to the 
legislation. At the same time, the servicer may not be able to enforce 
the revisions with borrowers based on their contractual language. For 
example, some commercial loan contracts do not permit the servicer to 
add insurance coverage that was not contemplated originally. This very 
issue prompted several lawsuits after September 11, with respect to 
terrorism insurance. This creates a gap between what the servicer can 
contractually obtain from the borrower and what the servicer is 
statutorily obligated to do.
    MBA opposes any requirement that would expand the current 
triggering events for the mandatory purchase requirement from the 
making, increasing, extending, and renewing of a loan. Otherwise 
stated, we oppose expanding the triggering events to include 
publication of a map revision and we oppose on-going map monitoring.
Potential Reforms
    We believe there are several reforms that NFIP should consider that 
will help increase its market penetration and revenues. These 
recommendations are based on the existing statutes and presume no 
increase in the scope of coverage of the law. Of course, each one of 
these suggestions carries some level of risk and potential costs that 
must be weighed by the benefits of additional premium income. We would 
like to address each one in turn:

 Provide Additional Funding for Map Modernization--It is 
    crucial for the NFIP to have the most up-to-date maps to mitigate 
    hazards and more completely determine the risks to homeowners and 
    property owners. Every year, flooding occurs in areas outside of 
    designated floodplains. The Federal Government should to ensure 
    sufficient funding for this activity.
 Consider Increasing Deductibles--Under the current program, 
    the lowest deductible for structures and contents is $500, and we 
    believe this could be increased to $1,000 for single-family 
    residential and up to 5 percent for five or more unit multifamily 
    properties. Increasing the minimum deductible could have many 
    positive effects. First, it would help to increase capacity to 
    write additional insurance. Second, by increasing the share of the 
    risk that the policyholder assumes, there would be a greater 
    incentive for the policyholder to engage in mitigation efforts. 
    Third, higher deductibles would help keep premiums more affordable.
 Reclassify Multifamily Properties--Increase the maximum 
    structural coverage for multifamily properties (apartment 
    buildings) to $500,000 adjusted annually for inflation and increase 
    the maximum content coverage to $500,000, also adjusted for 
    inflation.
 Increase Coverage Limits--Increase maximum residential 
    coverage from $250,000 to a level based on the rate of inflation 
    since 1994. Increase the content coverage from $100,000 for 
    residential to a level more consistent with inflation. The NFIP 
    maximum limits have not been increased since 1994, yet labor and 
    materials costs have increased significantly since that time.
 Consider Creating a ``Deluxe'' Flood Insurance Policy--For an 
    extra premium, the policy could include the following optional 
    features: (1) alternative living expense coverage, set at a 
    percentage of the structure limits, including lost rental income 
    for residential, commercial, and multifamily rental properties; (2) 
    mortgage assistance payments; (3) replacement cost coverage for 
    personal property; and (4) basement coverage. Some consumers 
    believe that the current flood policy does not provide meaningful 
    coverage. The policy would also cover losses associated when civil 
    authority declarations that prevent the use or occupancy of a 
    property even though it may have not been directly impacted by 
    flooding.
 Inclusion of Deadlines for FEMA Responsibilities under 2004 
    Reform Act--This includes the appeals process; minimum training and 
    education requirement; mitigation programs and a report to Congress 
    on the implementation on the 2004 reform bill.
Conclusion
    There is clearly no easy recipe to ensure the NFIP brings in 
sufficient premiums to cover the Federal outlay of funds used to pay 
claims without affecting a home or business owner in another part of 
the country. But there are clearly things that can be done and should 
be done to improve the program, including increasing maximum policy 
coverage. As a representative of the mortgage industry, I also want to 
assure you that lenders take very seriously their compliance with the 
flood laws and do what is in our power to ensure compliance. As a 
result, we would oppose increased sanctions on the industry or 
expanding lender obligations. In sum, MBA believes it is crucial that 
Congress move quickly to increase the borrowing authority in order for 
the program to continue to meet its obligations to current policy 
holders and claimants in the affected Gulf Region.
    Thank you for allowing MBA the opportunity to share the industry's 
views with the Committee.

                               ----------

                 PREPARED STATEMENT OF J. ROBERT HUNTER
         Director of Insurance, Consumer Federation of America
                            February 2, 2006

    Mr. Chairman and Members of the Committee, I appreciate the 
invitation to 
appear before you today to discuss current issues regarding the 
National Flood Insurance Program. I am J. Robert Hunter, Director of 
Insurance for the Consumer Federation of America. CFA is a nonprofit 
association of 300 organizations that, since 1968, has sought to 
advance the consumer interest through research, advocacy, and 
education. I am a former Federal Insurance Administrator under 
Presidents Ford and Carter and have also served as Texas Insurance 
Commissioner. As Administrator, I ran the National Flood Insurance 
Program (NFIP) in the 1970's.
    I love the National Flood Insurance Program. I poured 10 years of 
my life into getting it started. If it worked as Congress intended it 
to work, it would bless the Nation by making sure new building in areas 
prone to flooding was wise and provide coverage to all Americans 
exposed to high flood hazard. The program would not allow unwise 
construction in the highest risk velocity (or V) zones and would 
require elevations to the true 100-year flood line, at least in the 
other high-risk (A) zones.
    I say this as background because I must sadly raise the question of 
whether the flood insurance program should be ended. If the program 
encourages unwise construction in floodplains, it is a danger to the 
Nation rather than a blessing. If the program lures people into 
floodplains, if it subsidizes construction in unsafe places, if it 
cannot stop communities that defy the program's mitigation 
requirements, if it falsely assures people that they are in a low-risk 
area that does not need flood insurance, then it must be reformed to 
keep the promises of safer construction made to the taxpayers when the 
program was begun or it must be abolished.
    I also love New Orleans, my birthplace. I have been a strong 
advocate for the poor. My heart is broken by the situation facing many 
low-income residents of New Orleans. However, we cannot afford to 
ignore unwise construction or reconstruction in New Orleans. News 
reports indicate that the city may be allowing people with damage to 
their homes in excess of 50 percent to rebuild without elevating their 
homes to the 100-year level, in wholesale violation of the requirements 
of the NFIP.\1\ It is not doing lower-income residents in high-risk 
areas a favor to let them build the same way as before Katrina. This is 
just setting them up for destruction by the next flood.
---------------------------------------------------------------------------
    \1\ Jeffrey Meitrodt, ``Permit Appeals Pay Off for N.O. Residents; 
FEMA concerned about city's leniency,'' The Times-Picayune, January 15, 
2006.
---------------------------------------------------------------------------
    FEMA must not allow sympathy for beleaguered New Orleans residents 
to stop it from doing what is necessary to allow the NFIP to survive. 
The program must be enforced if the program is to work. I support 
helping the residents with direct aid, if necessary, to rebuild 
properly or move to higher ground. But we cannot afford, as a Nation, 
to allow rebuilding in high-risk areas without proper first-floor 
elevation. If Congress allows this, how could the 50 percent rule be 
enforced ever again? If a flood hits in Ohio, how could the 50 percent 
rule be enforced there, but not in New Orleans? To allow the wholesale 
violation of rules in New Orleans will destroy the NFIP. FEMA must 
suspend New Orleans from the program if it does not comply with the 
program's standards.
    The program should also be terminated if the maps are not kept 
current. The antiquated maps in use right now are a disgrace. When I 
was Administrator of this program, we had a goal of updating the maps 
every 3 to 5 years. Even at that fairly frequent rate, I was 
considering adding freeboard (extra height over the 100-year level) 
because development drives up surface elevations. It is like sitting in 
a bathtub in which the water goes up as you sit down. If you put on 
weight, the water level goes higher. New development is like putting on 
weight. Lots of development drives the water level much higher.
    Consider Hancock County, Mississippi. There are 76 different maps 
covering most of that county on FEMA's webpage. These maps, called 
``Hurricane Katrina Surge Inundation and Advisory Base Flood Elevation 
Maps,'' are a ``smoking gun'' that demonstrates how FEMA's lack of 
action contributed to the destruction and loss of life caused by 
Hurricane Katrina. They show that the antiquated 100-year flood levels 
are woefully out of date and extremely low.
    Consider map MS-E8.\2\ In this area, Katrina's surge was 23 to 24 
feet above sea level. The current map required structures to be built 
at 14 to 19 feet above sea level at the waterfront and 11 to 13 feet 
elsewhere in the county, but the revised suggested elevations are 20 to 
30 feet throughout the entire area. Thus a person who just prior to 
Katrina built to FEMA's standard, was building about 10 feet below the 
real 100-year risk. This was a disaster waiting to happen because of 
FEMA's incompetence.
---------------------------------------------------------------------------
    \2\ http://www.fema.gov/hazards/floods/recoverydata/maps/
katrina_ms_topo-e8.pdf.
    http://www.fema.gov/hazards/floods/recoverydata/maps/katrina_ms-
e8.pdf.
---------------------------------------------------------------------------
    Consider map MS-G8.\3\ Here, a person complying with FEMA's 100-
year map just before the hurricane hit would have elevated to between 9 
and 11 feet above sea level. The real 100-year risk was at 18 to 27 
feet. Katrina came in with elevations of 19 to 24 feet, so people were 
building 10 feet or more below the real risk level. On average, the V 
zones in the entire county were 12 feet too low when comparing current 
maps with the new proposals. For A zones, the average shortfall was 13 
feet. These old maps are a tragedy for the Nation. People all over the 
country are building what they think are safe homes but, to varying 
degrees, are not. They are in peril.
---------------------------------------------------------------------------
    \3\ http://www.fema.gov/hazards/floods/recoverydata/maps/
katrina_ms_topo-g8.pdf.
    http://www.fema.gov/hazards/floods/recoverydata/maps/katrina_ms-
g8.pdf.
---------------------------------------------------------------------------
    Taxpayers are subsidizing unwise construction as a result of these 
bad maps. Actuarial rates are predicated upon the maps and if they are 
too low, huge Federal taxpayer subsidies of unwise construction occur. 
Further, large areas that appeared to be outside of the special flood 
hazard area should actually be in the high-hazard area. People who 
should have been warned that their homes were in high-risk areas were 
not warned and many of these, who had mortgage commitments over the 
past two decades or more, would have been required to purchase 
insurance had the maps been up to date. In Hancock County, for example, 
a lot more people would have had flood insurance when Katrina hit. If 
maps are not quickly brought up to date and kept that way, the program 
should be terminated.
Other NFIP Issues in the Wake of Katrina
    As I told you when I last addressed the Committee, I have several 
ideas for your consideration on some of the key questions that this 
tragic hurricane raises:
Long-Term Solvency
    Obviously, Congress cannot decide not to pay legitimate claims to 
those persons holding flood insurance policies. These policies have the 
full faith and credit of the country behind them. But Katrina and the 
other storms, with payouts well over $20 billion, raise the question of 
how best to make sure the program works in ways that do not bust the 
Federal budget in the future and indeed minimize taxpayer exposure. In 
this context, the subsidy of existing structures is an important 
consideration. When the flood insurance program began, it was assumed 
that existing structures would, over time, be ``washed out'' (literally 
or figuratively) from the program. But many subsidized structures 
remain in the program.
    I believe that the time has come to find ways to lower the subsidy 
over the relatively short-term. I submit the following ideas for your 
consideration:

 A 500-year mitigation and purchase requirement, rather than 
    the current 100-year standard, would mean no subsidies in the areas 
    that have experienced storms between 100-year and 500-year storm 
    levels.
 Subsidies should be immediately ended on structures with 
    market values in excess of some significant amount (for instance 
    $500,000).
 Subsidies should be eliminated on all additional homes for an 
    insured with more than one home.
 Subsidies should be phased out over a certain number of years 
    (perhaps 10) on all structures with market values greater than, for 
    example, $250,000 but less than $500,000.
 Subsidies should be eliminated on all structures that have 
    experienced more than one flood with over $5,000 in program losses 
    in the past.
 Subsidies should be reduced for homes with market values under 
    $250,000 each time the home is sold. This should be done in 
    increments that will eliminate the subsidy over three sales of the 
    structure. Persons who have received flood insurance claims 
    payments or flood disaster relief should not get a subsidy when 
    purchasing a new home.

    I must again raise the question of why private insurers cannot 
assume a greater role in writing flood insurance? The original reason 
insurers objected to a private role when the National Academy of 
Sciences (NAS) conducted a feasibility study was that they said they 
could not price policies to avoid adverse selection--attracting 
properties that were extremely likely to be flooded. This concern could 
be resolved today by using technology to better assess risk and by 
requiring purchase of the coverage (perhaps up to the 500-year storm 
level) to assure the spread of risk. Congress should explore a long-
term program to shift flood insurance back into the private sector 
where political pressures to bring rates below the actuarial level will 
not be present.
    However, if the program is to remain a fully Federal one, then why 
continue the Write Your Own Program (WYO)? It appears to be terribly 
expensive \4\ and has not accomplished what insurers said it would 
(that is, increasing market penetration of flood insurance). It results 
in wind/water claims adjustment conflicts of interest that could be 
avoided by using competitively bid contractors.
---------------------------------------------------------------------------
    \4\ The Committee should ask for this information from FEMA to 
determine the program's actual cost. I suggest not only looking at the 
costs of service compared to that of a competitively bid contractor but 
also to compare the cost to that of private insurers selling homeowners 
insurance (a more complex product than flood insurance and more costly 
to produce since homeowners insurance is not simply added to a policy 
as WYO flood insurance is). In 2004, underwriting expenses for the 
homeowners line were 28.4 percent of written premium, of which 
commissions were 13.0 percent and State taxes were 2.6 percent--so that 
the comparable figure for servicing to compare to flood insurance is 
12.8 percent (28.4 percent -(13.0 percent + 2.6 percent)). Source: 
Best's Aggregates & Averages, 2005 Edition.
---------------------------------------------------------------------------
    I continue to urge this Committee to immediately request a GAO 
study of the efficiency of the WYO program compared to those of 
competitively bid contractors. Such a study would likely show that the 
costs of the WYO program are too high, use of contractors should be 
expanded and the WYO contracts should be renegotiated to save 
significant taxpayer cost. At the very least, the payment of commission 
dollars to insurers who do not use commissions (such as USAA) should 
stop. Why should taxpayers pay agent commissions when no agent receives 
such commissions? Further, consideration should be given to having FEMA 
set only the part of the rate that covers the risk and let the WYO 
insurers add their own percentage loading for their costs, subject to a 
maximum load of, say, 25 percent.
    Coverage levels should also be variable, at the consumer's option. 
The use of a higher deductible policy with a lower premium is one 
option that should exist. Policyholders could also be permitted to 
raise the $250,000 cap on coverage, but only at full actuarial prices, 
even for currently subsidized structures.
    The 100-year storm standard for the elevation of new structures and 
the purchase requirement within that area should be revisited. 
Requiring coverage up to the 500-year storm for the Nation would result 
in greater spread of risk, fewer surprises when storms occur and 
greater market penetration. The price for flood insurance outside the 
100-year area would be very reasonable.
    A very serious concern is the low market penetration that the flood 
insurance program has achieved. Over 2 million homes were insured in 
the 1970's when I left the program. In 2004, there were only 4.4 
million, about double the 1970's level. In less than 10 years, we sold 
what it took an additional 15 years to match despite amazing population 
growth along the coasts and lender requirements to purchase insurance 
in the high flood hazard zones. Something is wrong.
    One of the rationales for allowing insurers back into the NFIP was 
that they would achieve greater market penetration. They have failed to 
do a very good job other than to receive costly reimbursement for their 
servicing of policies. Further, the success of the lenders in requiring 
coverage on properties receiving new loans in flood prone areas is 
questionable and also needs to be studied. Are lenders failing to 
follow through to keep homes covered after they are purchased? I am 
aware that many lenders do have tracking programs to assure continuous 
coverage. However, questions persist because of the continued low 
penetration of flood coverage 35 years after the founding of the 
program. Better market penetration will help assure NFIP solvency.
    Consideration should also be given to increasing the amount of 
mandatory coverage in at least the 100-year flood risk zone. Flood 
after flood shows market penetration of 10 to 20 percent. This is a 
serious problem. What is the ``hook'' for expanding mandatory coverage 
beyond the purchase requirement on federally backed mortgages, which 
appears not to work very well all by itself ? This is a tough question, 
but an answer must be found. Perhaps non-Federal lenders could be 
required by States to get flood cover on high-risk homes. As an 
incentive, Federal benefits for floodplain management programs in 
participating States could be increased in those States that required 
their banks to require flood insurance coverage. A review of Federal 
benefit programs in high-risk flood areas might reveal other ways to 
obtain greater mandates on structures/inhabitants in the floodplains. 
Also, communities could, as part of their flood management requirements 
to qualify for the NFIP, demand covenants on the sale of properties in 
floodplains stipulating that flood insurance must be carried in the 
future. I am not expert in these matters, but it is clear that experts 
on Federal benefit programs and real estate should help find the answer 
to this vital question of expanding coverage in high-risk areas.
    I have always thought that some of the burden for obtaining 
coverage for new structures should fall on the builders of these 
structures. Consideration should be given to requiring builders of new 
homes to purchase a 30-year (or at least a 5 or 10-year) policy. There 
are many advantages to this idea, including an immediate infusion of 
higher premiums into the program; but most important is the mitigation 
effect that such a requirement will have. Consider the difference in 
purchase price of two identical homes with builder-purchased flood 
coverage if one is built in harm's way the other is not. It will not 
take long for contractors to learn not to build in high-risk areas if 
they cannot market the high-risk homes.
    There should also be verification by a GAO audit that participating 
communities forbid building in floodways and other V zones, such as 
storm surge areas. GAO should study the actual development that has 
taken place after the Flood Insurance Rate Maps (FIRM's) were put in 
place in participating communities to see how the development conforms 
to the requirements of the FIRM's. If mitigation is not working, costs 
will go up and people will be killed. Mitigation failures must be fixed 
or the program will just encourage unwise construction into the future. 
Finally, the legislation to reduce losses to repetitively flooded 
properties passed by Congress last year should be a significant help in 
controlling costs.
    In summary, the NFIP collects too little money to cover losses over 
the long haul. It now collects only enough to pay for relatively normal 
flooding in a year, with no long-term build up of reserves to cover 
larger than normal loss years. Katrina is but one example of this 
shortfall. But even bigger flooding events than Katrina are possible 
and, over the long-term, certain. Category 5 hurricane storm surges at 
high tide hitting Miami Beach or New York City and Long Island are 
examples of much larger potential flooding events. Stated simply, for 
the program to be actuarially sound, actuarially sound rates must be 
charged.
    There are other steps beyond raising rates that should be taken to 
save money for the program, such as eliminating the excessive WYO 
expense charges for immediate savings and making sure that mitigation 
is fully enforced for longer-term savings. While these are necessary 
steps to bring the program into actuarial soundness, they are not 
sufficient. Only moving over time to full actuarial rates for all 
properties can achieve that.
WYO Conflicts of Interest: Wind v. Water
    Since Hurricane Katrina devastated the Gulf Coast, there has been 
much public discussion about whether damage to homes was caused by wind 
and rain, or by flooding. Many policyholders have policies covering 
wind and rain damage (under homeowners' policies), but not flooding, 
which is a separate policy underwritten by NFIP. Many court challenges 
to the industry's no coverage determinations have begun.
    The importance of this legal dispute to the flood insurance program 
is obvious. To the extent that insurers underpay wind when allocating 
damage between their homeowners' policy and the NFIP policy, taxpayers 
will suffer. It is also true that the more lax the Federal Government 
is in demanding that the allocation be fair to taxpayers, the more 
likely it is that persons without flood insurance will receive unfair 
or no compensation under their wind policies. Take the situation of two 
damaged homes next to each other, one with flood coverage and one 
without. If the Federal Government is vigilant regarding the home with 
flood coverage and the resulting allocation is 50/50 versus the insurer 
suggestion of 25 percent wind/75 percent flood, the insurer will be 
hard-pressed to assess the similarly damaged home next door at 25 
percent wind damage.
    For the benefit of taxpayers and those with no flood insurance, it 
is essential that the Government assure a fair and proper allocation of 
the wind/flood damage by the WYO insurance companies who have a serious 
conflict of interest. CFA urges this Committee to insure that the GAO 
audits these allocations starting right now, so that any tendency of 
the insurers to diminish their wind losses for their own benefit is 
stopped quickly.
Conclusion
    There are two crucial steps that must be taken to make the NFIP 
work properly. The first is making sure that mitigation works so 
taxpayers can realize the program's promise of reduced taxpayer 
exposure in the future. The second is moving to actuarial soundness.
    I never thought I would utter the words that consideration must be 
given to ending this beautifully designed but hopelessly administered 
National Flood Insurance Program. However, repeal of the NFIP should be 
considered only as a last resort if the integrity of the program is not 
restored. This means bringing the program back quickly to its promise 
of covering all high-risk homes and businesses, eliminating unwise 
construction in the Nation's floodplains and taking steps to ultimately 
achieve full actuarial soundness. This time, however, there must be 
tight oversight of FEMA's implementation of the program to achieve 
these vital goals.

                               ----------
                  PREPARED STATEMENT OF DAVID PRESSLY
            President, National Association of Homebuilders
                            February 2, 2006

    Chairman Shelby, Ranking Member Sarbanes and Members of the Senate 
Banking, Housing, and Urban Affairs Committee, I am pleased to appear 
before you today on behalf of the National Association of Homebuilders 
(NAHB) to share our views concerning efforts to reform the National 
Flood Insurance Program (NFIP). We appreciate the invitation to appear 
before the Committee on this important issue.
    My name is David Pressly and I am the 2006 President of NAHB and 
President of Pressly Development Company, Inc. of Statesville, North 
Carolina. I am a homebuilder with more than 25 years of experience 
constructing single-family homes and apartments and light commercial 
projects in the Statesville area.
    Mr. Chairman, NAHB represents more than 225,000 member firms 
involved in homebuilding, 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 homebuilding 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, 
and affordable housing to consumers. 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 more than 4.8 million 
policyholders, enabling them to protect their properties and 
investments against flood losses. 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 and a financially 
stable Federal component, allows local communities to direct 
development where it best suits the needs of their constituents and 
consumers. This arrangement has, in large part, worked well.
    Unfortunately, the losses suffered in the 2004 and 2005 hurricane 
seasons, including the devastation brought about by Hurricanes Katrina, 
Rita, and Wilma, have severely taxed and threatened the solvency of the 
NFIP. According to FEMA, between the NFIP's inception in 1968, through 
2004, a total of $15 billion has been needed to cover more than 1.3 
million losses. The 2004 hurricane season required close to $2 billion 
dollars in NFIP coverage, and the 2005 hurricane season resulted in 
payments totaling over $13.5 billion--more than the total amount paid 
during the entire 37-year existence of the NFIP program. While these 
losses are severe, they are clearly unprecedented in the history of 
this important program and, in our opinion, not a reflection of a 
fundamentally broken program. Nevertheless, NAHB recognizes the need to 
support efforts to ensure the long-term financial stability of the NFIP 
and looks forward to working with this Committee to implement needed 
reforms.
    While NAHB supports reform of the NFIP to ensure its financial 
stability, it is absolutely critical that Congress approach this 
legislation with care. The NFIP is not simply about flood insurance 
premiums and payouts. Rather, it is a comprehensive program that guides 
future development and mitigates against future loss. While a 
financially stable NFIP is in all of our interests, the steps that 
Congress takes to ensure that financial stability have the potential to 
greatly impact housing affordability and the ability of local 
communities to exercise control over their growth and development 
options. Therefore, NAHB supports several reforms that we feel can be 
achieved quickly and provide needed reform to the overall program. As 
part of a coalition of interested industry trade groups, NAHB has 
publicly forwarded a list of consensus NFIP program reforms that can be 
implemented immediately. However, NAHB has strong reservations on 
several additional reforms that have been put forward in this debate, 
namely the proposals to expand the regulated floodplain beyond the 
current 100-year standard, and mandating coverage for those sited 
behind flood protection structures within the 100-year floodplain. 
While these reforms may be feasible, NAHB believes that adoption of 
such reforms without proper documentation that quantifies the risks, 
hazards, and costs of such reforms would be premature at this time.
    Allow me to expand on these general themes further.
NAHB Supports Thoughtful NFIP Reforms
    The unprecedented losses suffered in 2004 and 2005, including the 
devastation brought about by Hurricanes Katrina, Rita, and Wilma, have 
severely taxed and threatened the solvency of the NFIP. While these 
events have been tragic, sobering, and have exposed shortcomings in the 
NFIP, any resulting reforms must not be an overreaction to unusual 
circumstances. Instead, reform should take the form of thoughtful, 
deliberative, and reasoned solutions. A key step in this process is to 
take stock of where we are today, what has worked, and what has not.
    An important part of the reform process is determining what area or 
areas of the NFIP are in actual need of reform. Unfortunately, a key 
tool in the NFIP's implementation, the Flood Insurance Rate maps 
(FIRM's), have been recognized by 
Congress to be inaccurate and out-of-date. Through the strong 
leadership of this Committee, FEMA is in the midst of a multiyear map 
modernization effort aimed at digitizing, updating, and modernizing the 
Nation's aging flood maps. The first of these updated maps is just now 
being rolled out, and in some areas there are large discrepancies 
between what was mapped as the 100-year floodplain decades ago and what 
the 100-year floodplain is today. Clearly, this information will help 
to ensure better and more informed decisionmaking. Accordingly, 
thoughtful consideration of the overall effectiveness of the NFIP, 
including those provisions relating to mandatory flood insurance 
purchase, can only come after the critically important FIRM's are 
modernized, updated, accepted, and reflected upon.
Increases to Premiums and Payouts
    In an attempt to improve both the solvency of the program and its 
attractiveness to potential policyholders, NAHB supports a number of 
reforms designed to allow FEMA and the NFIP to better adapt to changes 
to risk, inflation, and the marketplace. Providing FEMA the authority 
to allow for slightly higher annual premium increases, to a maximum of 
15 percent, for example, would allow the agency to reduce its 
indebtedness to the Federal Treasury. Increasing coverage limits to 
better reflect today's home values would provide more assurances that 
losses will be covered and benefit program solvency by generating 
increased premiums. Similarly, creation of a more expansive ``deluxe'' 
flood insurance option, or a menu of insurance options from which 
policyholders could pick and choose, could provide additional homeowner 
benefits while aiding program solvency. Finally, increasing the minimum 
deductible for paid claims would provide a strong incentive for 
homeowners to mitigate and protect their homes, thereby reducing 
potential future losses to the NFIP.
Mandatory Flood Insurance Purchase Requirements
    NAHB believes that modifying the numbers, location, or types of 
structures required to be covered by flood insurance may play an 
important part in ensuring the NFIP's continued financial stability. 
Two options that have been widely considered include mandatory flood 
insurance purchase for structures located behind flood control 
structures, such as levees or dams, and all structures in a floodplain, 
regardless of whether or not they currently hold a mortgage serviced by 
a federally licensed or insured carrier. Both of these strategies would 
increase the number of residences participating in the NFIP, 
buttressing the program against greater losses. While this seems simple 
in reality, it is much more complicated.
    The NFIP and its implementing provisions were not created solely to 
alleviate risk and generate premiums--they were created to balance the 
needs of growing communities with the need for reasonable protection of 
life and property. Accordingly, NAHB believes that before any reforms 
are enacted to change the numbers, location, or types of structures 
required to be covered by flood insurance, FEMA should first 
demonstrate that the resulting impacts on property owners, local 
communities, and local land use are more than offset by the increased 
premiums generated and the hazard mitigation steps taken. Only after 
such documentation is 
provided, documentation that includes the regulatory, financial and 
economic impact of reform efforts, can Congress, FEMA, stakeholders, 
and the general public fully understand whether or not such actions are 
appropriate. For this reason, NAHB recommends that FEMA conduct a study 
of the feasibility and implications of such a change in the NFIP's 
mandatory purchase requirements prior to enacting any changes. Likewise 
we applaud FEMA for recognizing the need for such a study, as reflected 
in testimony delivered to this Committee on January 25, 2006.
NAHB is Concerned with Potential Negative Reforms
    As Congress considers strategies to bolster the financial stability 
of the NFIP, NAHB cautions against those reforms that have far-reaching 
and unintended consequences, including reforms that decrease housing 
affordability and the ability of communities to meet current and future 
growth needs. Chief among these concerns are changes that would expand 
the Special Flood Hazard Area (SFHA), fail to take into account flood 
protection structures when setting premiums, or expand the current 
Federal minimum residential design, construction, and modification 
standards.
Revision of the SFHA Standard has Broad Implications
    While changes to the NFIP's mandatory flood insurance purchase 
requirements present one set of issues, a programmatic change of the 
SFHA presents an entirely different and overwhelming set of concerns. 
Changing the SFHA from a 100-year standard to a 500-year (or .2 percent 
annual chance) standard would not only require more homeowners to 
purchase flood insurance, but would also impose mandatory construction 
requirements on a whole new set of structures. Furthermore, those 
homeowners who had been in compliance with the 100-year standards will 
suddenly find themselves below the design flood elevation for the 500-
year flood. Although these structures may be grandfathered and avoid 
higher premiums as a 
result of their noncompliant status, this ends when the structure is 
sold or substantially improved. Placing these homes in this category 
impacts their resale value in a very real way, as any new buyer may be 
faced with substantially higher premiums or retrofit and compliance 
costs.
    The revision of the SHFA standard not only affects homeowners, but 
also homebuilders, local communities, and FEMA. An expanded floodplain 
means an expanded number of activities taking place in the floodplain, 
and a corresponding increase in the overhead needed to manage and 
coordinate these activities. A larger floodplain would likely result in 
an increased number of flood map amendments and revisions, placing 
additional burdens on Federal resources to makes these revisions and 
amendments in a timely fashion. Residents located in a newly designated 
SFHA would need to be notified through systematic outreach efforts. 
Communities would likely need to modify their floodplain ordinances and 
policies to reflect the new SFHA. In short, the entire infrastructure 
of flood management and mitigation practice and procedures 
institutionalized around the 1 percent standard would need to change.
    Although a revision of the 1 percent SFHA standard has been 
considered in recent years, even specially convened policy forums have 
failed to reach consensus on the issue. What has started to emerge, 
however, is a recognition of the tremendous 
implications that changing the SFHA would have on homebuilders, 
homebuyers, communities, and the Federal Government itself. NAHB 
strongly cautions against making such sweeping changes to the NFIP 
without first having all the facts in-hand. Only after Congress and 
FEMA have adequately documented that a drastic revision of the SFHA is 
absolutely necessary to the continued existence and operation of the 
NFIP, should a programmatic revision of the SFHA be considered.
Required Purchase Behind Flood Control Structures must Reflect Reduced 
        Risk
    One important component of the NFIP is the ability of communities, 
with the assistance of the Federal Government, to design, install, and 
maintain flood protection structures. In most instances, residential 
structures located behind dams or levees providing protection to the 1 
percent annual chance level are not required to purchase flood 
insurance. This is because most structures are removed from the 100-
year floodplain or SFHA on the relevant FIRM through the Letter of Map 
Revision, or LOMR, process. Accordingly, any reforms that contemplate 
bringing these same residences back under a mandatory purchase 
requirement raise very real and powerful equity and fairness issues. 
Should Congress or FEMA produce adequate documentation indicating that 
the benefits of mandating flood insurance purchase for residences 
behind flood control structures outweigh the costs to homeowners, NAHB 
would support these residences being charged premiums at a reduced rate 
to reflect their reduced risk. A great deal of time and taxpayer money 
were invested to provide additional flood protection to these 
residences, and it is only fair that homeowners in these areas, if 
required to purchase insurance, be recognized for their communities' 
efforts.
Building Requirements Must Remain Tied to the 1 Percent Standard
    While requiring mandatory flood insurance purchase is one option, 
another option may be to require that structures meet Federal 
residential design, construction, and modification requirements. NAHB 
is strongly opposed to expanding such requirements to new classes of 
structures, including those found behind flood protection structures 
and those affected by any programmatic change to the SFHA. These 
requirements would substantially increase the cost of new home 
construction and severely impact housing affordability. For example, on 
the Gulf Coast, elevating new structures could add $30,000 to the cost 
of the homes, depending on the estimate source and size of the home. 
NAHB has conducted research that shows that a $5,000 increase in 
housing price in New Orleans would eliminate 6,089 households from the 
housing market. It is easy to see the tremendous impact that such 
reforms would have not only on Nation's homebuilders, but on the 
Nation's homebuyers. NAHB urges Congress to soften the impact of any 
programmatic changes to the NFIP by ensuring that construction 
requirements remain tied to the 1 percent standard.
Conclusion
    Mr. Chairman, thank you for this opportunity to share the views of 
the National Association of Homebuilders on this important issue. We 
look forward to working with you and your colleagues as you contemplate 
changes to the National Flood Insurance Program to ensure that 
federally backed flood insurance remains available, affordable, and 
financially stable. We urge you to fully consider NAHB's positions on 
this issue and how this program enables the homebuilding industry to 
deliver safe, decent, affordable housing to consumers. I look forward 
to any questions you or other Members of the Committee may have for me.

                               ----------

                 PREPARED STATEMENT OF PAUL J. GESSING
        Director of Government Affairs, National Taxpayers Union
                            February 2, 2006

    Chairman Shelby, Ranking Member Sarbanes, and distinguished Members 
of the Committee, thank you for holding these important hearings today. 
My name is Paul Gessing. I am Director of Government Affairs with the 
National Taxpayers Union (NTU), America's oldest and largest grassroots 
taxpayer lobbying organization with 350,000 members nationwide (you can 
learn more about NTU--and our educational affiliate, the National 
Taxpayers Union Foundation--on our website: www.ntu.org). I would also 
note that my organization works closely with the group Taxpayers for 
Common Sense, and that I am here to testify not only on behalf of my 
own organization, but also on behalf of Taxpayers for Common Sense, and 
their Vice President of Programs Steve Ellis who could not attend 
today.
    I come here to offer testimony regarding what we believe to be some 
rather significant problems with the National Flood Insurance Program 
(NFIP) as they relate to taxpayers, to illustrate to the Committee why 
many of these taxpayer concerns also have a direct impact on those who 
living in flood-prone areas, and last, to outline the need for bold 
steps on the part of Congress to ensure that the next major hurricane 
or flood inflicts less of a toll, both in the form of human suffering 
and lost economic productivity and taxpayer money. Although the 
original intent of the existing Federal flood insurance program was to 
mitigate many of these problems, it has not done so and as such must be 
considered a failure.
    The recent spate of hurricanes may have been unique in recent 
history for their intensity and frequency, but they are perfectly 
normal in costing Federal taxpayers billions of dollars. Worse, there 
is wide agreement in the scientific community that the trend of 
increasing intensity and numbers of hurricanes will continue for 
several years. Even before these hurricanes, the NFIP had repeatedly 
relied on the U.S. Treasury to supplement its premium revenues.
    Last week, several of those testifying on NFIP stated that from 
1986 through 2004, NFIP was self-supporting. I would argue that those 
statements are in error. First of all, how can you bookend a program 
like that? Starting in 1986, the program shifted from direct 
appropriations to the current system in which the program borrows from 
the Treasury and repays its debt with interest. (By the way, it must be 
noted that NFIP was forgiven well over a billion in debt at that time). 
Then over the 18-year period in question, the NFIP borrowed when it 
needed to and repaid with interest, but the simple fact that it was 
able to borrow shows that it is not self-supporting or even actuarially 
sound. There is no catastrophic reserve because the program has the 
Federal taxpayer to fall back on.
    In the aftermath of the 2005 hurricane season, the program will be 
forced to borrow an astonishing $24 billion from the Treasury. It's 
time to face facts: With premium payments yielding $2 billion per year 
and flooding likely to continue, even if not at the level we have seen 
in recent years, there is little likelihood of taxpayers ever recouping 
much of the $24 billion they are now owed. Thus, as Chairman Shelby 
said in his opening remarks at last week's hearing, the NFIP is 
bankrupt. As taxpayer advocates, what we must do now is work to ensure 
that the NFIP no longer serves as a fiscal black hole into which 
taxpayer dollars continually go, never to be seen again.
    Prior to the NFIP's existence, insurance coverage for flood losses 
was not provided by any private insurance carriers. Insurance losses 
stemming from flood damage were largely the responsibility of the 
property owner, although the consequences were sometimes mitigated 
through provisions for disaster aid. Today, owners of property in 
floodplains sometimes receive disaster aid AND payment for insured 
losses, which in many ways negates the original intent of the NFIP 
(that being to encourage property owners to pay some of the upfront 
costs of expected disasters, rather than forcing taxpayers to foot the 
bill after the fact).\1\ These policy decisions have contributed to an 
escalation in losses stemming from floods in recent years, both in 
terms of property and life.
---------------------------------------------------------------------------
    \1\ First American Flood Data Services, ``Frequently Asked 
Questions,'' http://fafds.floodcert.com/faqs/.
---------------------------------------------------------------------------
    Also, although this is not of primary importance to taxpayers, I 
must point out that subsidizing insurance in high-risk areas takes a 
significant environmental toll. Coastal areas are often among the most 
ecologically sensitive and diverse. Thus, it is disconcerting to know 
that while they spend untold billions of dollars annually on an array 
of environmental mitigation efforts, and often see their land's 
usefulness decline under Federal mandates (also created for the purpose 
of environmental mitigation), taxpayers would then be forced to pay 
once again--this time for a program that actually encourages the 
destruction of environmentally sensitive areas.
    The final areas of concern taxpayers have about this program are 
those involving fairness and moral hazard. Specifically, I would like 
to bring to your attention and submit for the record a story conducted 
by John Stossel of ABC News. In 2003, in the wake of Hurricane Isabel, 
Mr. Stossel did a story called Taxpayers Get Soaked by Government's 
Flood Insurance. In this piece, Stossel recounted his own personal 
experience of purchasing beachfront property on Long Island, New York 
and constructing a house there in 1980. Stossel noted, among other 
things, that the most he ever paid was a few hundred dollars for 
insurance that actuaries say should realistically have been priced at 
thousands of dollars.
    John Stossel is not the only well-heeled individual taking 
advantage of taxpayer-subsidized flood insurance. According to a 2000 
report done by The Philadelphia Inquirer, six of 10 NFIP insured 
properties are in beach towns and, since the program does not 
differentiate between primary residences and vacation homes, the 
program's mission could be said to include ensuring that wealthy 
Americans are protected from floods by the full faith and credit of the 
U.S. taxpayer.\2\
---------------------------------------------------------------------------
    \2\ Gilbert Gaul and Anthony Wood, ``A Flawed Program Facilitates 
Building in Hazardous Areas,'' The Philadelphia Inquirer, March 7, 
2000, http://marine.rutgers.edu/mrs/education/coast08.htm.
---------------------------------------------------------------------------
    Asking U.S. taxpayers to spend billions annually on government 
programs and revenue transfers designed with the purpose of assisting 
poor and lower-income Americans is one thing; but asking them to spend 
additional billions on the NFIP, which is more of a taxpayer-financed 
``safety net'' for millionaires, is yet another. It is after all 
predominantly wealthy people with enough disposable income to own 
beachfront property who choose to live or have a second home in risky 
areas. Then, because it is priced far below market value, flood 
insurance proves even more attractive to wealthy homeowners who know a 
good deal when they see it. Thus, the wealthy snap up coverage while 
the poor are often left unprotected when disaster strikes.
    To continue with John Stossel's story, as it turns out--despite 
beach replenishment efforts by the Army Corps of Engineers (again 
taxpayer-financed)--his house was washed completely away in a storm 
that he described as ``fairly ordinary.'' Of course, the NFIP paid for 
the house (the first $250,000 of which is insured under the Federal 
program) and its contents (insured to $100,000) and there were only 
minimal restrictions prohibiting him from rebuilding on the same piece 
of land. Worse, he pays the same price for insurance the day after the 
storm as the day before. Quite simply, this is ridiculous policy. We 
have clear results that a location is at great risk for loss and yet we 
do not restrict reconstruction and we charge the same rate. I certainly 
cannot think of anyone who would run a business that way; no wonder we 
are in the hole.
    It is said that the road to hell is paved with good intentions, and 
like all government programs, NFIP was created with good intentions in 
mind. To this day, many of the program's supporters believe that the 
NFIP actually saves taxpayer dollars because with insurance, taxpayers 
receive at least some compensation before the disaster strikes whereas 
they are never compensated for disaster relief. Even had it been well-
planned and executed effectively, the Federal flood insurance program 
has had other unintended consequences.
    Rather than simply compensating homeowners for losses, the cheap 
insurance has actually encouraged more people to build in flood prone 
areas. Last week, David Maurstad testified that NFIP insured more than 
$800 billion in assets on 4.8 million policies.\3\ Back in fiscal year 
2002, that number was ``only'' $644 billion on 4.5 million policies.\4\ 
That's a 24 percent increase in insured assets on just more than a 6.5 
percent increase in policies. Sure, the housing sector has been strong 
nationwide, but clearly there is a taxpayer-subsidized building boom 
going on at our Nation's shorelines, as increasing numbers of wealthy 
people build their ``castles'' on the sand.
---------------------------------------------------------------------------
    \3\ David Maurstad, ``Testimony before the Banking, Housing, and 
Urban Affairs Committee of the United States Senate,'' January 25, 
2006, http://banking.senate.gov/_files/ACF43B7.pdf.
    \4\ Federal Emergency Management Agency, ``Total Policies in Force 
by Fiscal Year,''http://www.fema.gov/nfip/fy04pif.shtm.
---------------------------------------------------------------------------
    So, what do we do now? As in a twelve-step program, the first part 
of solving a problem is recognizing that you do in fact have one. The 
recent spate of hurricanes has only exposed what experts and taxpayers 
have known for a long time: Federal meddling in the marketplace 
inevitably results in subsidies for some and significant costs for all 
taxpayers. Congress must act now to restore some semblance of a 
marketplace for flood insurance that provides adequate taxpayer 
protections or it must be willing to abandon the program entirely, 
leaving the responsibility of finding adequate insurance in the hands 
of individuals and insurance companies.
    If nothing else, at a bare minimum, Congress must consider taking 
action to address the subsidies inherent in the 25 percent of NFIP's 
covered properties that preflood insurance rate map (FIRM). NFIP has 
been in effect for nearly 40 years. That is far longer than even the 
longest mortgage. Surely, it is time to stop paying massive subsidies 
to the shrinking group of unaware pre-FIRM homeowners. Other reform 
measures lawmakers might consider would be: Collecting actuarially 
sound rates that finance expected annual payments as well as a 
catastrophic reserve; increasing program participation through greater 
enforcement and by expanding the floodplain areas requiring coverage; 
and, increasing the use of disaster relief funds to mitigate future 
damage by making communities more flood/disaster resistant (through 
flood-proofing, elevating, and relocating repetitively damaged 
properties).
    Unfortunately, the fact that for all these years Congress has been 
unwilling to reform the NFIP in ways that adequately protect taxpayers, 
eliminate subsidies, and make the program actuarially sound, may serve 
as a clear sign that the best way to address the program's shortcomings 
may be to eliminate it entirely. Federal 
involvement in the provision of flood insurance has been, on the whole, 
counterproductive. Rather than discouraging development in flood-prone 
areas, it encourages such development; rather than protecting Americans 
from nature's ravages, it puts them in harm's way; and rather than 
saving taxpayers money, it has resulted in additional expenditures and 
subsidies on a massive scale. That sounds like failure to most 
reasonable people!
    If, after the marketplace is free of Federal subsidies that have 
kept for-profit firms out of the business, private companies remain 
skeptical of the profitability of providing flood insurance, all is 
still not lost. That reaction may be yet another tool to reinforce the 
message that living in flood-prone areas is risky and that people 
should be forced to bear the costs of such an unwise move. Of course, 
it is also quite possible that some entrepreneurial company might 
figure out a way to reduce its risks enough to make a profit, thus 
creating a private flood insurance marketplace more viable than it has 
been in the past. I must note that although NTU and the Consumer 
Federation of America rarely agree on much and we certainly do not have 
the same philosophical approach to many issues, Bob Hunter's comments 
at the Committee's October hearing on flood insurance were spot on when 
he suggested the insurance industry might be better able to engage in 
the flood insurance market than they have been in the past due to the 
development of improved mapping technologies.\5\
---------------------------------------------------------------------------
    \5\ J. Robert Hunter, Consumer Federation of America, ``Testimony 
before the Banking, Housing, and Urban Affairs Committee of the U.S. 
Senate,'' October 18, 2005, http://banking.senate.gov/_files/
ACFD8E.pdf.
---------------------------------------------------------------------------
    Had the NFIP not been created in 1968 and were we discussing the 
possible creation of such a program today, in the wake of the recent 
hurricane season and flooding, I do not think anyone would choose to 
replicate the existing system. Thus, if I were sitting before you today 
to testify on whether or not to create the NFIP and, if so, what it 
should look like, I would tell you that at times during which we as a 
Nation are presented with difficult policy decisions, we advocate 
looking to the Constitution and the Founding Fathers for guidance. 
Thus, it is our belief that leaving flood insurance policymaking up to 
the states would allow for the most creative and responsible outcomes 
possible. State and local officials, aware of the unique needs and 
challenges of their own states, could design the best solutions for 
their particular situations.
    Although this hearing is strictly about the Federal flood insurance 
program, as a brief aside I would like to point out that NTU and our 
members believe that rather than centralizing the job of flood 
prevention in one Federal body that receives its funding and marching 
orders from Washington, States, and localities should be likewise 
empowered to take charge of flood prevention efforts whenever possible. 
I point you to the example of Galveston, Texas: In the wake of the 
worst natural disaster in U.S. history in which approximately 6,000 
Galvestonians lost their lives (the Hurricane of 2000) citizens of the 
city--in their desire to make sure that such a profound tragedy never 
happened again--took it upon themselves to prepare for the next storm. 
Thus, to break the force of the waves, a concrete seawall three miles 
long was constructed. As an additional safeguard against flooding, the 
entire city was raised by picking up most of the structures and filling 
in beneath them with sand.\6\
---------------------------------------------------------------------------
    \6\ Mary G. Ramos, ``After the Great Storm: Galveston's Response to 
the Hurricane of September 8, 2000,'' Texas Almanac, 1998-1999, http://
www.texasalmanac.com/history/highlights/storm/.
---------------------------------------------------------------------------
    The entire project cost an estimated $3.5 million (or approximately 
$70 million in 2005 dollars based on 1913 Bureau of Labor Statistics 
data calculations). The county paid for the seawall through a bond 
issue and the Texas Legislature financed the grade elevation. Although 
hurricanes still threaten the Gulf of Mexico, Galveston is a far safer 
place to be in a hurricane than before. They also proved at a time 
before Americans had grown accustomed to relying so heavily on 
Washington, DC, that local responses to natural disasters are viable.
    The emphasis on local control does not mean that there is no 
Federal role, especially in disaster relief. But as we saw in New 
Orleans, when the responsibilities of Federal, State, and local 
governments overlap, too often there are also massive cracks in the 
system through which responsibilities tend to fall. If Congress were to 
take a close look at the interactions among the various flood 
prevention, insurance, and relief tools, we believe it would discover 
that restoring the primary responsibility for natural disaster planning 
and responses to the States (with Federal agencies in a supporting 
role) would leave all of us--citizens, taxpayers, and policymakers 
alike--better off.
    Thank you, Chairman Shelby for allowing NTU to testify today and 
for your work on this important topic. NTU and its 350,000 members 
stand ready to work with you in fixing or eliminating the problems 
associated with the National Flood Insurance Program.



                  PREPARED STATEMENT OF DAVID C. JOHN
                         Senior Research Fellow
          Thomas A. Roe Institute for Economic Policy Studies
                        The Heritage Foundation
                            February 2, 2006

    My name is David John. I am Senior Research Fellow at The Heritage 
Foundation. The views I express in this testimony are my own, and 
should not be construed as representing any official position of The 
Heritage Foundation.
    The catastrophic losses that the National Flood Insurance Program 
(NFIP) faces in the wake of this year's hurricane season prove that it 
is time for Congress to fix the program once and for all. The solution 
is to take steps to make NFIP actuarially sound. Such changes may not 
be popular among those who live in floodplains or along the coast, but 
they are the only responsible way to shore up the program and protect 
taxpayers.
    According to David Maurstad, Acting Insurance Administrator for the 
Federal Emergency Management Agency (FEMA), claims due to Katrina and 
Rita could exceed $22 billion, or about one-and-a-half times the $15 
billion NFIP paid out in claims between its creation in 1968 through 
2004. Maurstad's estimate amounts to more than 11 times the almost $2 
billion NFIP paid for flood insurance claims stemming from the 
hurricanes that hit Florida and other areas in 2004.
    So far, Congress' reaction to these losses has rightly focused on 
ensuring that the program has the money to pay claims against it. In 
September, NFIP's authority to borrow from the Treasury was raised from 
$1.5 billion to $3.5 billion. November saw a further increase to $18.5 
billion. Last week, Mr. Maurstad told this Committee that NFIP will 
need to borrow $5.6 billion more just to cover claims and expenses 
through the end of fiscal year 2006. Interestingly, it appears from his 
testimony that $670 million of the roughly $25 billion that NFIP 
expects to borrow from the Treasury will go back to that agency in the 
form of interest payments.
    In theory, NFIP will repay these loans from its premium income, but 
if interest alone eats up almost 35 percent of NFIP's annual income of 
roughly $2 billion, the only way that repayment is possible will be if 
premium income is greatly increased and average claims remain at the 
pre-Katrina level. Since NFIP is expected to repay the loans, pay its 
administrative expenses, and meet average year losses from that $2.0 
billion, realistically, the only way to get these loans off of NFIP's 
books will be for Congress eventually to forgive them.
    Unfortunately, the demands on NFIP are not likely to decline. While 
losses from a single storm like Hurricane Katrina may be exceptional, 
scientists expect hurricane activity to build in coming years. As 
millions of Americans continue to relocate to flood-prone areas and 
property values in those areas continue to rise, NFIP can expect to 
face much higher levels of annual claims then it has in the past. 
Unless premiums income grows at least as fast, the program's request 
for increased borrowing authority is likely to be an annual event 
rather than an exception caused by a catastrophe.
    Another challenge to the program's finances would develop if 
Congress increases the level of flood insurance coverage available on a 
single structure and its contents. Realistically, Congress is quite 
likely to do just that. Such an increase would reflect rising property 
values, but it is questionable if premium income on the increased 
insurance will cover the higher losses.
    The net result of these factors is an NFIP that is a permanent 
borrower, and represents a constant drain on taxpayers. The only way to 
avoid constant deficits and increased borrowing is to reform the 
program. The current request for additional borrowing authority is an 
excellent opportunity to make substantial changes that will reduce the 
likelihood of continued NFIP bailouts.
Four Necessary Steps to Avoid Future Bailouts
    Eliminate the current subsidy for older structures and require 
coverage for the 
replacement value of the property. The only way to avoid still more 
Congressional bailouts of NFIP is to make the program actuarially sound 
and to target it toward people who actually live or work full-time in 
covered structures. Today's NFIP subsidizes about one-fourth of the 
structures that it covers. About 76 percent of policyholders pay risk-
based premiums that include the possibility of a catastrophic loss. 
However, structures that existed before the surrounding community 
joined NFIP--24 percent of the total--receive flood insurance at 
subsidized rates that imply a substantially lower risk of flooding than 
actually exists. The Government Accountability Office (GAO) estimates 
that some premiums are only 35 to 40 percent of what they would be 
without the subsidy. The total value of this subsidy is an estimated 
$1.3 billion annually. In addition to making NFIP's finances shaky, the 
subsidy discourages private insurance companies from competing with the 
Federal program. Finally, the program assumes that flood control 
measures such as levies and dikes will protect the properties near 
them, regardless of whether they are adequate and in good repair.
    NFIP should eliminate the subsidy for older structures because its 
continued existence is a danger to the program. In order to minimize 
the impact on home and business owners, the subsidy could be phased out 
over several years. To some extent, the higher premiums will make it 
more attractive to replace older structures that are prone to higher 
flood losses with new buildings that incorporate architectural features 
that would minimize such damage.
    In addition, many NFIP policies only cover the remaining balance on 
a structure's mortgage, not the cost of actually replacing it. This 
protects the lender but can leave homeowners with a ruined property 
that they cannot afford to rebuild. Flood insurance should also cover 
the cost of replacing the structure, rather than just the cost of 
repaying its mortgage. Although this would increase premiums, insuring 
for replacement value will make it more likely that homes and 
businesses will be able to rebuild, rather than relocate.
    Require flood insurance where storm surges are possible--including 
areas behind a levee or other flood control measures. Currently, NFIP 
coverage is required only where there is a 1 percent chance of a flood 
and not in low-lying areas where surges are likely following major 
storms. A significant number of property owners affected by Hurricane 
Katrina suffered water damage despite the fact that their structures 
were outside of the 100-year floodplain where flood insurance is 
required by law. The most famous of these areas are the neighborhoods 
in New Orleans that were located behind a levee. Realistically, any 
flood control measure can be expected to only protect against events of 
a certain size. This means that there is some residual risk of flooding 
in areas that are behind levees, downstream of a dam, or in a coastal 
area that could see a major hurricane. The ability to predict where a 
flood will hit is more of an art than a science.
    Flood insurance should be required in all areas where a flood or 
storm surge is likely if a weather event reaches catastrophic levels. 
Especially with serious hurricanes more likely to occur in the future, 
it makes little sense to continue to leave structures at risk of storm-
surge damage or near levees that could fail outside the system. NFIP 
should also assess the possibility that flood control measures in an 
area are likely to fail or are inadequate when determining premiums. In 
addition to making actuarial sense, this step would help to better 
inform homeowners of the risk of flood damage that they actually face.
    Strengthen mitigation programs to reduce repeat losses. According 
to GAO, structures with repeat losses represented almost a third of all 
claims paid between 1978 and March 2004. Roughly 2,400 structures in 
Alabama and Mississippi that were damaged by Hurricane Katrina had 
suffered losses before, as had roughly 20,000 structures in Louisiana. 
If a property is responsible two or more claims of over $1,000 each in 
10 years, NFIP can offer to move, raise, flood-proof, or even buy the 
property to the reduce overall cost to the program. Unfortunately, 
these actions are often delayed or avoided altogether.
    Congress should pressure NFIP to step up mitigation efforts by 
setting explicit goals for the agency and establishing regular reports 
by an outside agency on its progress that are examined at regular 
oversight hearings. In most cases, retrofitting structures to reduce 
flood damage will save NFIP the cost of expensive repairs and the 
structure's owner the disruption caused by flood damage.
    Assess higher premiums for vacation homes and second homes: 
Currently, NFIP charges the same rates for both vacation homes and 
owner-occupied structures. However, the number of homes built on 
coastal barrier islands continues to grow very rapidly, with a 
significant proportion of these homes being expensive vacation homes 
that are rented out for most of the year. One way to raise NFIP's 
income would be to charge owners of these homes higher premiums. 
Initially, second or vacation homes could be charged 15 to 20 percent 
more than owner-occupied structures, but over time, this surcharge 
could be increased even higher. The higher cost would be largely borne 
by increased rental fees, while the additional money could be used for 
a variety of purposes, ranging from repaying the loans to the Treasury, 
financing additional mitigation efforts, or even slightly subsidizing 
the flood insurance premiums of lower income homeowners.
Conclusion
    Especially in coastal areas, artificially low flood insurance 
premiums are subsidies that encourage people to live where natural 
disasters are more likely to occur. While people should be allowed to 
live where they please, they should also bear the risk that their 
choice may subject them to storms, floods, tornados, and other natural 
disasters. Hurricane Katrina caused what eventually will be recognized 
as a massive bailout of NFIP, and current weather and population trends 
make future bailouts likely. Rather than wait around for the next 
bailout, Congress should make NFIP actuarially sound. These steps 
necessary to this end will not be popular with many people who live in 
a floodplain or on the coast, but they are responsible ways to prevent 
pouring still more scarce tax dollars into the program.


             PREPARED STATEMENT OF PAMELA MAYER POGUE, CFM
                      Chair, State of Rhode Island
                            February 2, 2006

    Mr. Chairman, Ranking Member Sarbanes and Committee Members, the 
Association of State Floodplain Managers is pleased to be part of this 
important discussion about ways to reform the National Flood Insurance 
Program (NFIP). We want to express our appreciation to you for this 
thoughtful examination of the program and ways to improve it. The past 
season of natural disasters has highlighted problems that needed to be 
addressed within the existing framework and has called attention to the 
need for creative solutions for the long-term solvency of the program.
Who We Are
    The Association of State Floodplain Managers, Inc. (ASFPM), and its 
22 Chapters represent over 9,000 State and local officials and other 
professionals who are engaged in all aspects of floodplain management 
and hazard mitigation, including management, mapping, engineering, 
planning, community development, hydrology, forecasting, emergency 
response, water resources, and insurance. Many of our members work with 
communities impacted by Hurricanes Katrina and Rita or work with 
organizations that are assisting those communities in rebuilding 
efforts. All ASFPM members 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 flood mitigation 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) and many others are involved in 
the administration of and participation in FEMA's mitigation programs. 
For more information on the Association, please visit http://
www.floods.org.
The Challenge
    Since the tragedies on the Gulf Coast, the Nation has been immersed 
in a discussion of how to deal with truly catastrophic events such as 
what happened in 2005. Clearly our policies developed and implemented 
through laws such as the National Flood Insurance Act and the Stafford 
Act, are better designed to respond to ``average'' loss years or to 
those events that may be considered large but not catastrophic. The 
four successive hurricanes that impacted Florida in 2004 provide an 
example of a difficult disaster season that could be handled within the 
existing program with limited Treasury borrowing, fully within the 
capability of the NFIP to repay. Although devastating, these storms 
were an entirely different order of magnitude than the combined power 
of Katrina, Rita, and Wilma.
    It was made clear during last week's testimony before this 
Committee that from a policy standpoint it will be difficult to change 
policies so that events as catastrophic as Katrina will not challenge 
the financial solvency of the NFIP. However, the lengths to which 
policy choices are made must be balanced by what shapes our perception 
of reality. For example, prior to 2004 Hurricane Andrew was seen as the 
outlier storm--one of such magnitude that it would not happen again for 
some time. But, Andrew was soon replaced by the four Florida Hurricanes 
in 2004, only to be replaced by Katrina, Rita, and Wilma in 2005. Now, 
reality is that Andrew was not necessarily an outlier event; rather, it 
was one storm that we now see as more normal as we head into a cycle of 
increased number and magnitude of storms. The point is that while 
smaller policy changes can and should be taken, larger, more meaningful 
policy changes should be taken as well which will require bold action 
by this Congress.
    Thank you for inviting us to offer our views on the solvency of the 
NFIP. The following testimony addresses:
A Reflection on the Relevance of the Early History of the NFIP to 
        Changes Needed
Now
Reforms to the National Flood Insurance Program
 Subsidy reduction and program changes.
 Program expansion.
 Mitigation improvements.
Broader Changes
 Catastrophic provisions.
 Coordination with and improvement of the Stafford Act.
 Development of a comprehensive and cohesive national levee 
    policy and inventory.
 FEMA and the Department of Homeland Security.
A Reflection on the Relevance of the Early History of the NFIP to 
        Changes
Needed Now
    When ASFPM provided testimony to this Committee last fall (our 
previous testimony can be found at www.floods.org), we included a 
lengthy discussion on the history of the NFIP. We indicated that the 
program was established as a ``quid-pro-quo'' program. Through it, 
relief from the impacts of flood damages in the form of federally 
backed flood insurance became available to citizens in participating 
communities contingent on flood loss reduction measures embodied in 
State and local floodplain management regulations. Occupants of 
existing structures in flood prone areas would benefit from subsidized 
flood insurance premiums, but occupants of new structures would have to 
pay actuarially based premiums. This was based on the concept that 
those already living in the floodplain did not understand, or know of 
the flood risk, but future occupants would through information provided 
by the NFIP--via flood studies and maps. The original program would be 
voluntary in terms of community participation and the purchase of flood 
insurance. Congress tasked the FIA to carry out studies to determine 
local flood hazard areas within which flood insurance provisions and 
appropriate land use regulations would be applied. The FIA adopted the 
1 percent annual chance as a minimum national standard for floodplain 
management, based upon a recommendation of a special review committee 
of national experts that met at the University of Chicago in December 
1968.
    What has history taught us since Katrina? First, we found out how 
much risk was NOT reflected on FEMA's flood maps. This validated the 
importance of FEMA's Flood Map Modernization Initiative to update and 
modernize maps which now are often 15-30 years old advisory maps being 
produced now for the storm affected areas show the true 100-year 
floodplain as much larger than the original maps showed due to 
development and other factors. Beyond the 100-year floodplain, areas of 
coastal surge that occurred miles inland were not shown on the FEMA 
flood maps (which are the most common tool used by Americans to 
determine flood risk) as coastal flood hazard areas. We also have 
learned that not as many people carry flood insurance as need to. 
Perhaps our geographical areas of mandatory purchase are not large 
enough, or within these, there are too many exceptions. Nationwide, 
about 25 percent of flood insurance claims come from areas outside of 
the 100-year floodplain. We also know, from a meteorological 
standpoint, that from the 1950's through the 1980's we experienced a 
relatively calm storm period when it comes to the frequency and 
magnitude of hurricanes and we are now in a cycle of increased 
storminess.
    In 1968, Congress took bold action. By creating the NFIP, they knew 
that property owners were impacted by floods, but did not know 
necessarily how many structures or how much land area was going to be 
included in the 1 percent chance floodplain since very few floodplains 
were even identified at that time. What they did know is that a 
mechanism such as flood insurance was a help, not a hindrance, that 
would help people recover more wholly than if flood insurance was not 
available or required. Even though we must now focus on the $23 billion 
cost that will now have to be paid by the U.S. Taxpayer--one might say 
a ``tax'' on those who choose not to live in hazard areas--the NFIP has 
been successful. It has covered over $15 billion in losses pre-Katrina. 
It now results in over $1.5 billion in annual avoided losses due to 
compliance with building and development standards. Along with FEMA's 
hazard mitigation programs which have invested over $4 billion, some 
$16 billion in avoided losses have resulted that would have otherwise 
been absorbed largely by the U.S. taxpayer. A recent independent study 
requested by the Congress and done by the National Institute of 
Building Sciences, has found that $4 of benefits result from every 
dollar invested in disaster mitigation.
Reforms to the National Flood Insurance Program
    There are many reforms that can be taken now to shore up the NFIP. 
Last week, FEMA Mitigation Director David Maurstad identified several 
reforms and ASFPM is supportive of a number of them.
Subsidy Reduction and Program Improvements
    Providing authority to eliminate subsidies over time for Pre-FIRM 
properties, particularly for other than primary residences. ASFPM 
understands the breadth of discussion and options available when it 
comes to the issue of subsidy (or discount) 
reduction. In keeping with the original intent of the NFIP to keep 
rates affordable, focusing subsidy reduction on structures other than 
primary residences would avoid impacting those with limited incomes.
    Strengthen the mandatory insurance purchase requirement for 
federally regulated lending institutions to require insurance to value 
as opposed to the outstanding balance of the loan, and for the life of 
the loan, to require more frequent portfolio reviews by lending 
regulators, and to increase the penalties for institutions that do not 
comply with mandatory purchase responsibilities. The strengthening of 
the mandatory purchase requirement has historically provided positive 
results. In 1973, when the mandatory purchase requirement was added 
(since it was not included in the original 1968 Act), the number of 
flood insurance policies jumped. In 1994, when lender penalties were 
created for noncompliance with the mandatory purchase requirement and 
forced placement of policies and escrow provisions were made, policies 
and policy retention again jumped.
    Other reforms that the ASFPM believes should be implemented 
include:
    Increasing coverage limits. ASFPM believes it is reasonable to 
increase coverage limits under the NFIP. With the increase in property 
values, it would be appropriate to increase residential coverage to 
$335,000 and commercial coverage to $670,000. These are the coverage 
levels provided in H.R. 4320, reported out of the House Financial 
Services Committee.
     Additional funding and time for FEMA's Map Modernization program. 
As we have testified in the past, ASFPM is fully supportive of the Map 
Modernization Initiative. Because of our interest in assuring that the 
effort and investment produce the quality undated maps we all need and 
Members of Congress expect, we strongly recommend that the program be 
extended beyond its current 5-year life at the same level of $200 
million/year.
    In order to meet the program metrics requiring that a certain 
percent of the population have ``new'' maps within a certain timeframe, 
we are concerned that the necessary, yet time-consuming restudies of 
hydrology and hydraulics are not being done. Once the program was 
launched and needs were surveyed, it became apparent that the mapping 
needs are more extensive than can be addressed in a 5-year period.
    Waiting period between purchase and policy effective date should 
remain 30 days. The waiting period was previously 15 days and was 
changed to avoid policy purchase with knowledge of weather forecasts 
and policy dropping after the danger has passed. There are proposals to 
reduce the waiting period, but ASFPM is concerned that this would open 
the program to more claims without the continuity of premium payment.
Program Expansion
    Mapping ``residual risk'' and the 500-year floodplain. ASFPM 
understands the need to better understand the additional areas subject 
to flood risk. A number of Senators expressed this concern during last 
week's hearing on flood insurance reform. While many of the FEMA flood 
maps show such areas, many do not. Areas that are flood hazards but are 
either sporadically found or not found at all on Flood Insurance Rate 
Maps (FIRM's) include: 500-year floodplain (2 percent annual risk of 
flooding), coastal storm surge zones including those from significant 
hurricanes, residual risk flood zones that include areas protected by 
levees or floodwalls but would be flooded in the event of failure or 
overtopping and dam failure zones.
    ASFPM strongly recommends that the Nation embark as soon as 
possible on a program to identify these risk areas. We support Senator 
Reed's bill, S. 2005, calling for mapping 500-year floodplain and 
incorporating U.S. Army Corps of Engineers coastal inundation maps, and 
NOAA storm surge and coastal erosion data, in addition to USGS 
streamgaging data onto FEMA Flood Insurance Rate Maps (FIRM's).
    Senator Reed's bill would also reactivate the Technical Mapping 
Advisory Council originally established in the Flood Insurance Reform 
Act of 1994 with a 5-year life. Its recommendations led to the 
development of the Map Modernization Initiative. This is a proven, 
effective mechanism for involving partners and stakeholders to ensure 
the quality and utility of the map product. The provisions of Senator 
Reed's bill would provide citizens, community planners, and Members of 
Congress with better information for individual, community, and policy 
decisions. It is also important to remember that the utility of the 1 
percent chance event was mandated by statute and therefore mapping 
these other flood risk areas is not incongruent with the intent of the 
NFIP.
    Last week, Senator Dole voiced concern about the State of North 
Carolina possibly being the first to be required to expand the 
mandatory purchase requirement because of its national leadership in 
updating its flood maps. Certainly an equitable system of implementing 
any expansion of required flood insurance would be important.
    Expansion of mandatory purchase requirements to those ``residual 
risk'' areas mapped as protected by levees or below dams. While these 
areas have a low probability of flooding, the hurricanes of 2005 have 
shown us that the losses in the event of flooding are likely to be 
catastrophic. Such policyholders would pay a low, preferred risk, 
premium rate reflecting the low probability of flooding.
    Expansion of the mandatory purchase requirement to the 500-year 
floodplain. ASFPM believes that is good policy to provide those in the 
500-year floodplain with flood insurance coverage so that they would be 
better protected in the event of other catastrophic or even major 
events. One of the lessons learned post-Katrina was that there were 
many flooded properties that did not have flood insurance and whose 
property did not fall into a 1 percent chance floodplain based on FEMA' 
s Flood Insurance Rate Maps (FIRM's). Such areas that are flood hazards 
but are either sporadically found or not found at all on FIRM's 
include: .2 percent or 500-year flood hazard areas, coastal storm surge 
zones including those from significant hurricanes, residual risk flood 
zones such as areas that are protected by levees or floodwalls but 
would be flooded in the event of failure or overtopping, and dam 
failure zones. All of these areas contain risk from flooding, and many 
of those areas could be catastrophically impacted. ASFPM maintains that 
extension of required coverage areas should be viewed as affording 
citizens important new protection.
    Concern was expressed at last week's hearing over the cost of such 
policies since so many additional property owners would be affected. It 
is our belief that the rates of flood insurance policies in these areas 
would be reflective of the lower probability that a flood would occur 
and would be in line with FEMA' s current preferred risk policy or 
those policies for existing .2 percent chance flood zones. Those 
policies range from $112 to $317/year.
    It is important to explain that extending the mandatory purchase of 
flood insurance requirement does not necessarily mean that the land use 
regulations that are part of NFIP in 1 percent chance floodplains have 
to be extended to these other areas. In fact, we would not recommend 
this at this time due to the lower probability of flooding in these 
areas. Recognizing the catastrophic nature of flooding there should it 
occur, however, means that flood insurance policyholders would be much 
better protected and costs to the taxpayer would be significantly less.
    Expansion of mandatory purchase within the 100-year floodplain. The 
other area where the mandatory purchase requirement may be ripe for 
adjusting is who it affects in the 1 percent chance floodplain. 
Currently, it only affects those with a federally backed mortgage or 
mortgages from Federally regulated lenders. This leaves out mortgages 
from non-federally regulated institutions and those structures without 
mortgages. Previous studies have indicated that perhaps as many as 40 
percent of mortgages come from non-federally regulated sources.
Risk Reduction Improvements
    Enforced use of advisory flood maps. FEMA has worked to make 
available new advisory flood maps for the hurricane damaged areas. 
These maps reflect changes since the old paper maps were produced and 
newly calculated Base Flood Elevations (BFE's).
    Advisory BFE's are being used somewhat successfully in the Gulf 
Coast as we transition into the recovery and rebuilding phase. 
According to testimony presented by Mr. Maurstad last week, 
approximately 30 percent of communities have adopted these elevations 
which were developed in the aftermath of the storm event, but have not 
gone through the official appeal and comment period, as required by 
rule, that accompanies the creation and adoption of updated FIRM's. 
Still, that leaves 70 percent of the communities in this area that have 
not adopted these elevations and who are rebuilding at a much higher 
risk of future flood damage. We have recommended before that the 
Committee urge FEMA to make the necessary rule changes to require these 
elevations be used. At the same time, we commend FEMA for tying the use 
of these advisory elevations to the availability of hazard mitigation 
funds to assist with rebuilding and urge the Committee to be supportive 
of FEMA' s position in the face of increased pressures to relax this 
standard as rebuilding gets underway in earnest.
    Urge other Federal agencies to require use of advisory flood maps. 
Executive Order 11988 requires Federal agency coordination of disaster 
mitigation policies and practices. In general, there has been 
insufficient coordination among Federal agencies with the result that 
one may inadvertently undercut another's programs or one may be 
unnecessarily duplicative of another's. A mechanism to ensure adherence 
to E.O. 11988 should be developed.
    Provide for additional Increased Cost of Compliance (ICC) 
coverage--money for NFIP policyholders to bring their structures up to 
existing flood-related building codes, in addition to available 
building limits. ASFPM has long supported the concept of ICC, but has 
been disappointed in its implementation. An ICC surcharge of up to $75 
is associated with flood insurance premiums and, historically, large 
amounts have been collected while very little has been paid out. To our 
knowledge, this has resulted in surplus ICC funds being used to balance 
the large flood insurance fund. Why? Because the current interpretation 
of coverage under ICC is too stringent. For example, the average ICC 
claim, when used in conjunction with a FEMA mitigation project such as 
acquisition/demolition, is well-below the ICC limits because it has 
been interpreted that ICC will only pay for some of the demolition 
costs. Yet, when completed, the total acquisition/demolition project 
will result in the removal of an at-risk structure that is often 
noncompliant with local floodplain management codes. This will be a 
significant issue during the rebuilding of the Gulf Coast, where in 
Mississippi and Louisiana it is estimated that there will be about $4 
billion in mitigation funds available under the Stafford Act. If ICC 
funds can be more flexibly utilized, they will be a significant source 
of non-federal matching funds and can facilitate use of the Stafford 
Act funds.
    ASFPM wholeheartedly supports increasing the current ICC cap from 
$30,000 to $50,000, but we would need more information about current 
uses of ICC funds and a FEMA commitment to utilize ICC funds only for 
their intended purpose before we could support raising the surcharge 
cap of $75 as was proposed by FEMA last week in testimony. We also 
point out that the authority for ICC provides for use of ICC funds at 
the discretion of the FEMA Director.
    We would suggest that the Committee either address the encumbrances 
to use ofICC legislatively or urge the FEMA Director to use the 
available discretionary authority to more effectively and appropriately 
utilize the ICC program that policy holders have paid for.
    Implement the Repetitive Flood Loss programs created in FIRA 2004. 
The Congress has spoken decisively twice about the need to stem an 
annual loss to the Flood Insurance Fund of $200 million by investing in 
mitigation of repetitive flood loss properties.
    This Committee and its counterpart House Committee developed 
legislation (in the Flood Insurance Reform Act of 2004) which created 
two new pilot programs and expanded the existing Flood Mitigation 
Assistance (FMA) program. FlRA 2004 provided for the transfer of $90 
million from the Fund to the FMA program. The President's fiscal year 
2006 budget requested only $28 million for this purpose, yet the 
Congress appropriated the full $90 million, clearly signaling that the 
program should be fully implemented. Apparently, FEMA has determined 
that it can only make $28 million available, because that is all that 
can be raised from the administrative fee income of the Flood Insurance 
Fund.
    The report accompanying H.R. 2360, H. Rpt. 109-79, specifically 
provides for transfer from the Flood Insurance Fund and in one 
instance, specifically refers to premium income. ASFPM urges the 
Committee to clarify that both fee and premium income of the Fund may 
be utilized to fund these mitigation programs since they are so clearly 
cost-effective to the Fund. The full $40 million for the existing FMA 
program should be transferred for use during this fiscal year. The need 
is dramatic. FEMA should be strongly encouraged to finalize regulations 
implementing the two new pilots as soon as possible given the urgent 
need for these programs.
    The existing FMA program includes per State caps on how much FMA 
money can be spent on repetitive flood losses. Naturally, those States 
with the most repetitive losses are at or near those caps. Since FlRA 
2004 doubled regular FMA from $20 million to $40 million, ASFPM 
strongly recommends that the per State caps either be doubled or 
removed.
Broader Changes
    The changes below are those that ASFPM suggests should be 
considered by the Congress but may need more study. Not all are 
directly within the jurisdiction of this Committee, but all have a 
direct bearing on the effectiveness of the National Flood Insurance 
Program.
    Catastrophic Provisions. While the NFIP has functioned well for the 
average loss year, the past season and predictions for the future raise 
the question of how to meet the claims needs of catastrophic losses. 
There have been a number of suggestions ranging from simple forgiveness 
of Treasury borrowing in such cases to creation of a catastrophic loss 
fund to providing for Federal reinsurance of some kind. ASFPM would 
support a Congressionally mandated study of these economic challenges 
and possible provisions for accommodating them. We believe that the 
NFIP, with modifications and improvements, can continue, in average 
loss years, to provide important protection for those at risk of 
flooding while fostering floodplain management to reduce losses. 
Creative thinking beyond our expertise is needed to address the 
challenges of catastrophic losses.
    Coordination with and improvement of the Stafford Act. The programs 
of the Robert T. Stafford Relief and Recovery Act are an important 
element of recovery from and mitigation against the devastation of 
flood events. Its assistance programs help communities replace 
infrastructure and mitigate against future damages, and its hazard 
mitigation programs help individuals and communities protect buildings 
from future flood damages. However, some changes need to be made to 
address truly catastrophic situations which lead to the inability to 
pay straight salaries for local officials. Local permit officials are 
an especially important part of the rebuilding process. Properly 
rebuilt and reconstructed structures will be far more resistant to 
future flood damages. When local communities must layoff these 
officials or are unable to hire additional officials, the Stafford 
Act's provisions allowing only payment of overtime for such officials 
and not their base pay, adversely affects the long-term recovery and 
mitigation against future disasters.
    So too, is the inability to use Stafford Act assistance for the 
express purpose of conducting substantial damage determinations which 
are required under the NFIP. Also, the availability of non-Federal 
matching sources of funding is extremely important because the Hazard 
Mitigation Grant Program (HMGP) is a formula program with a local match 
requirement. As mentioned earlier, ICC can be a form of non-Federal 
matching funds for Stafford Act mitigation programs.
    Development of a comprehensive and cohesive national levee policy 
and inventory. The development of a comprehensive and cohesive national 
levee policy is also important to the success of flood mitigation 
programs. It is evident that the level of structural protection agreed 
to for the City of New Orleans, for example, will impact building 
guidance in areas protected by those structures. Economic factors drive 
these decisions, often influenced by a community understanding that a 
FEMA flood map can be changed to show an area behind a levee to be 
designated as an area of ``minimal flood risk'' if a levee is 
constructed to a 1 percent chance standard (plus freeboard). Cost 
drives the design of levees, yet this approach can be shortsighted and 
result in a race to the lowest common denominator in terms of standard 
of protection. An important change would be requiring purchase of flood 
insurance in areas behind levees and requiring their being mapped as 
areas with flood risk. Currently, the State of California is 
considering such a measure due to liability faced by the State as a 
result of recent lawsuits against it. In addition, though, we must find 
out where these areas are. At this time there does not exist an 
accurate inventory of levees in this Nation. Only a few States have 
even attempted such an inventory. Worse, there has been no 
comprehensive evaluation of the composition of existing levees to 
determine if they are engineered structures or piles of materials from 
a bygone era. We should know where levees are and what they are made of 
to make accurate estimates of risk potential of the land which they 
ostensibly protect from flooding. Luckily, we have a framework for such 
a levee program in the National Dam Safety Program. A similarly 
designed program for levees and floodwalls would begin to address this 
problem.
    FEMA itself--and the Department of Homeland Security. As Congress 
performs its oversight functions, much effort is being made to 
determine how effective FEMA was in its role in responding to recent 
hurricanes. ASFPM has testified many times over the past few years that 
the primary reason FEMA's ability to respond to disaster events has 
diminished is its inclusion into the Department of Homeland Security.
    Prior to this reorganization, FEMA did quite well dealing with both 
natural disasters and man-made events. Since that time, events like 
Isabel and Katrina have shown FEMA's reduced capability. Furthermore, 
FEMA oversaw a system of comprehensive emergency management in this 
country--one that linked and incorporated preparedness, response, 
recovery, and mitigation into an overall approach to how we, as a 
Nation, address hazards and disasters. With its incorporation into the 
very large new Department of Homeland Security, FEMA lost the 
nimbleness and direct access to the President that it had as an 
independent agency.
    Because the central mission of the new department is, quite 
rightly, homeland security, FEMA and natural disaster programs were 
paid very little attention until the previous hurricane season. Efforts 
to build the new department have been challenging, certainly, but they 
have resulted in some of FEMA's programs being buried in other offices 
within DHS. A number of grants are administered from the DHS Office of 
State and Local Programs while their programs themselves are still 
within FEMA. Last year, Secretary Chertoff began further reorganization 
of FEMA and, as we understand, plans to continue with major changes 
expected shortly which could directly affect the NFIP and the 
relationship between its mitigation and insurance components. These 
reorganizations will continue to dilute the effectiveness of FEMA, our 
Nation's emergency management system and the NFIP.
    We urge the Committee to examine the effects on the NFIP and flood 
loss reduction of FEMA's inclusion in DHS. We hope this Committee and 
the Congress will take action and make FEMA an agency that once again 
can respond to all hazards, can have a direct relationship between the 
FEMA Director and the President, can again foster effective Federal, 
State, and local partnerships and will put all of the pieces of 
emergency management together again. Currently, there are several bills 
that have been introduced that would more or less accomplish this.
Conclusion
    As the Nation recovers from the impacts of the last 2 years, it is 
evident change is needed. It is has been often said that since 
September 11 we are a Nation changed. It appears that after Hurricane 
Katrina, we are again a Nation changed. This Congress faces challenges 
similar to those faced by the Congress in 1968. How do we make 
necessary changes to our framework of national policies and programs 
necessary to fulfill multiple missions: Protect the American public, 
protect taxpayers from excessive post-disaster costs, assist 
communities to recover from catastrophic events, and balance all of 
these costs? Luckily, we have a framework, through the NFIP, that we 
did not have in 1968. We too, have hazard mitigation programs that 
compliment the risk reduction measures of the NFIP. Although 
significant decisions need to be made, at least we have a basic program 
and policy to begin with.
    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.
         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 
                     FROM REGINA M. LOWRIE

Q.1. What more can be done to ensure communities are complying 
with NFIP's development requirements in flood hazard areas?

A.1. Although this issue is not specifically in our expertise, 
the Mortgage Bankers Association is concerned about any effort 
that might prohibit lending in nonparticipating communities or 
communities not complying with the NFIP development 
requirements. Although regulated lenders and Federal agencies 
such as HUD and FEMA are not permitted to make loans or offer 
insurance, to assist building in nonparticipating communities, 
other private lenders and private insurers are not so 
restricted. Should such a homeowner be barred from every form 
of financing available, the result might be unmarketable 
properties. In other words, it could mean a complete erosion of 
equity and value to the homeowner who purchased the home 
according to preexisting laws. If this is the end result, and 
the Federal Government effectively eliminates housing in 
specific areas, the Federal Government should invoke eminent 
domain and pay these homeowners fair market value.

Q.2. There are differing views regarding lender compliance with 
mandatory purchase requirements. If lenders are not complying, 
would MBA be opposed to the imposition of fines and civil money 
penalties that are meaningful?

A.2. MBA has looked at the issue of noncompliance and have 
found it is not generally a willful neglect of the law, but 
technical errors and problems with interpretation and overly 
broad policies that generally do not work in the market. While 
a higher penalty will increase revenue to the Treasury, such 
penalties will not likely cure nonperformance.
    For example, there is considerable confusion over the 
amount and timing of flood insurance on new construction. 
Varying policies require flood insurance at different times. 
The Federal statute requires that ``improved real estate'' be 
insured when it is in a Special Flood Hazard Area (SFHA) in a 
participating community and when it is secured by a loan from a 
federally regulated lender, when the loan is sold to Fannie Mae 
or Freddie Mac, or when it has been acquired with Federal 
funds. The flood insurance statute defines improved real estate 
as ``real estate upon which a building is located.'' NFIP and 
FEMA definitions of a building include a permanent foundation, 
walls and a roof, implying that insurance is not required until 
late in the construction process. FEMA's Flood Insurance Manual 
(FEMA 2005), the primary source of information on flood 
insurance for agents, specifies that insurance is available for 
buildings during the course of construction, but does not 
indicate when such coverage should or must commence. The 
Federal bank regulators state that insurance must be purchased 
at loan origination if the building will be in a SFHA in a 
participating community, but also state that that insurance 
must be purchased to keep pace with construction (as opposed to 
purchasing full coverage at the time of loan origination). 
However, insurance agents often will not write the insurance 
policy until after a slab is poured and an elevation can be 
obtained based on actual construction of the first floor.
    Another common problem is difficulties in reading the flood 
maps. There will always be a margin of error in reading the 
flood maps to determine whether the physical structure, and not 
just the land, is within the SFHA. Mortgage lenders are not 
trained to read flood maps and generally rely on third parties 
for their interpretations. An error by a third party or by the 
lender in reading the maps should not be considered willful 
neglect of the flood laws.
    Another problem is with insuring condominiums. Mortgage 
servicers are required to have sufficient insurance for each 
individual units. Unfortunately, calculating the right amount 
of insurance on an individual unit requires knowledge of the 
amount of coverage on the building because the building 
coverage often includes a portion of the unit structure. 
Condominium associations are not always helpful in giving 
lenders this information for individual condominium sales and 
thus in some cases individual units are underinsured.
    MBA is also aware of problems with land loans that have so-
called ``incidental or tear down structures.'' Once torn down 
the structure does not need insurance, however, these 
structures often remain on the property for 6 months or more as 
the property owner or builder gets the necessary permits. There 
is understandably much confusion over how to handle these 
structures since their values are not considered in 
underwriting the loan and demolition would be a welcomed event. 
In fact, bank agency rules permit the lender not to require 
flood insurance on a structure that does not serve as security 
for the loan. How you carve out the structure from the security 
has proven problematic and has caused some technical 
noncompliance. Regulations should make clear that tear down 
structures do not require flood insurance.
    MBA would oppose penalties for these types of 
interpretational issues, judgment calls, and clerical errors. 
Lenders have a financial incentive to protect their collateral 
and to have borrowers purchase flood insurance in SFHA's and 
they do so.

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 
                     FROM J. ROBERT HUNTER

Q.1. What more can be done to ensure communities are complying 
with NFIP's development requirements in flood hazard areas?

A.1. GAO should be tasked with a baseline study of the degree 
of compliance in the recent past. GAO sampling actual 
construction built in participating communities over the last 
few years can do this. I would start with a statistically 
significant random sample of building permits issued in several 
cities and counties with significant building in the 
floodplain. Make sure to test both coastal and riverine 
flooding. I would determine if each permit was for a location 
in the floodplain and, if so, go out and study that actual 
structure as built to determine if it was built in accordance 
with the then extant Flood Insurance Rate Map's requirements as 
to elevations and any other requirements.
    These results will test whether taxpayers are getting what 
they were promised, safer building in the Nation's high hazard 
floodplains or whether communities and/or developers are 
routinely ignoring such rules.
    Once we see the results of the study, we can determine next 
steps. It may be that a periodic sampling will be required to 
assure that some communities that have not done well in the 
past does better in the future.
    Of course, the first step FEMA must do is get rid of the 
antiquated maps and make sure the maps are kept updated in the 
future or compliance with the program's requirements will be to 
no avail.

Q.2. GAO reported, in 2002, that the extent to which lenders 
were enforcing the National Flood Insurance Program's (NFIP's) 
mandatory purchase requirement was unknown since the Federal 
bank regulators believed lenders were generally complying, 
while FEMA officials believed that many lenders were not 
complying with the requirements. Since the rate of compliance 
is an important component in the discussion to further expand 
mandatory purchase requirements, how do you propose we 
accurately measure compliance with this existing requirement 
and improve compliance?

A.2. FEMA can give you the number of policies written by zip 
code or census tract and perhaps even by where the policies are 
located within the floodplain, vis-a-vis the 100-year standard. 
Mortgage lenders should be able to give you numbers of 
mortgages they write by zip code or census tract. With these 
data in hand, you should be able to estimate compliance by 
lender, at least roughly.
    In this process, you should make sure you get these data 
from life insurers and State regulated lenders to see how they 
are doing to get flood insurance (albeit with no requirement on 
them) in place for their portfolios. There may be some safety 
and soundness issues related to these lenders, particularly if 
they are small with a concentration of mortgages in or around a 
high flood risk area. Further, such data will make clear if you 
should require these lenders to obtain flood insurance for 
their mortgages in floodplains.

        RESPONSE TO A WRITTEN QUESTION OF SENATOR REED 
                       FROM DAVID PRESSLY

Q.1. What more can be done to ensure communities are complying 
with NFIP's development requirements in flood hazard areas?

A.1. The NFIP is not simply about providing insurance, but 
rather is a partnership between the Federal Government and 
local communities. In exchange for the right to participate in 
the NFIP, local communities must establish and enforce policies 
and programs that minimize, mitigate, or offset the risk of 
building in areas at risk of flooding. As a result, homes 
constructed since the establishment of the NFIP are safer and 
sustain less flood damage.
    A key step in ensuring that communities are complying with 
the NFIP's requirements is assuring that the flood hazard areas 
are adequately and accurately mapped. Up-to-date maps allow 
communities to accurately determine where to enforce relevant 
siting and building requirements. Outreach and education are 
integral components of any program aimed at making use of the 
best, most up-to-date science. Communities must be made aware 
of their flood risk, understand what their options are, and be 
able to appropriately devise local plans, programs, and 
ordinances to enforce the terms of the NFIP. This is one area 
where implementation of the NFIP can be improved, especially 
given recent nationwide map modernization efforts.
    Once the flood hazard areas are determined, and appropriate 
flood insurance rate maps are adopted, it is up to the local 
communities, through their particular development approval 
process and on-site building inspectors, to work with builders 
to ensure that the appropriate building requirements are being 
met for new or substantially improved structures. For their 
part, builders and land developers engage in costly survey and 
engineering studies to ensure that new or substantially 
improved structures are built to the proper elevation and meet 
not only local building requirements, but also internationally 
standardized construction code requirements and State and 
Federal environmental protection standards, as well. When 
communities do not comply with the terms of the NFIP, such as 
not maintaining or enforcing proper development standards, the 
NFIP has clear penalties and procedures for revocation of 
insurance from offending communities (see 44 CFR Sec. 59.24). 
The threat of loss of availability of insurance is a very 
strong incentive to encourage compliance with all components of 
the NFIP, including a given community's particular development 
requirements. Consistently enforcing the existing provisions 
for punishing those communities who have chosen not to meet 
their obligations under the program is both an effective and 
appropriate manner to ensure that communities are complying 
with the NFIP's development requirements.
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