[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]

                      H.R. 920, THE MULTIPLE PERIL 

                         INSURANCE ACT OF 2007



                               BEFORE THE

                            SUBCOMMITTEE ON

                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION


                             JULY 17, 2007


       Printed for the use of the Committee on Financial Services

                           Serial No. 110-50

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                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio              JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
           Subcommittee on Housing and Community Opportunity

                 MAXINE WATERS, California, Chairwoman

NYDIA M. VELAZQUEZ, New York         JUDY BIGGERT, Illinois
JULIA CARSON, Indiana                STEVAN PEARCE, New Mexico
STEPHEN F. LYNCH, Massachusetts      PETER T. KING, New York
EMANUEL CLEAVER, Missouri            PAUL E. GILLMOR, Ohio
AL GREEN, Texas                      CHRISTOPHER SHAYS, Connecticut
WM. LACY CLAY, Missouri              GARY G. MILLER, California
GWEN MOORE, Wisconsin,                   Virginia
ALBIO SIRES, New Jersey              SCOTT GARRETT, New Jersey
KEITH ELLISON, Minnesota             RANDY NEUGEBAUER, Texas
CHARLES A. WILSON, Ohio              GEOFF DAVIS, Kentucky
JOE DONNELLY, Indiana                THADDEUS G. McCOTTER, Michigan
BARNEY FRANK, Massachusetts

                            C O N T E N T S

Hearing held on:
    July 17, 2007................................................     1
    July 17, 2007................................................    57

                         Tuesday, July 17, 2007

Baker, W. Anderson III, CPCU, ARM, President, Gillis, Ellis & 
  Baker, Inc.....................................................    37
Baker, Hon. Richard H., a Representative in Congress from the 
  State of Louisiana.............................................    10
Conrad, David R., Senior Water Resources Specialist, National 
  Wildlife Federation............................................    41
Hartwig, Robert P., Ph.D., CPCU, President and Chief Economist, 
  Insurance Information Institute................................    39
Jindal, Hon. Bobby, a Representative in Congress from the State 
  of Louisiana...................................................    13
Majewski, Ted A., Senior Vice President, Harleysville Insurance 
  Group, on behalf of the Property Casualty Insurers (PCI), the 
  American Insurance Association (AIA), and the National 
  Association of Mutual Insurance Companies (NAMIC)..............    34
Maurstad, David I., Federal Insurance Administrator, and 
  Assistant Administrator, Mitigation Directorate, Federal 
  Emergency Management Agency....................................    15
Melancon, Hon. Charlie, a Representative in Congress from the 
  State of Louisiana.............................................     8
Pogue, Pamela Mayer, Immediate Past Chair, Association of State 
  Floodplain Managers, Inc.......................................    30
Praeger, Sandy, Commissioner, State of Kansas Insurance 
  Department, and President-elect, National Association of 
  Insurance Commissioners........................................    32
Small, Cheryl A., Policy Advisor, National Flood Determination 
  Association....................................................    36
Swagel, Hon. Phillip, Assistant Secretary for Economic Policy, 
  U.S. Department of the Treasury................................    17
Taylor, Hon. Gene, a Representative in Congress from the State of 
  Mississippi....................................................     6


Prepared statements:
    Baker, W. Anderson III.......................................    58
    Conrad, David R..............................................    65
    Hartwig, Robert P., Ph.D., CPCU..............................    68
    Jindal, Hon. Bobby...........................................    79
    Majewski, Ted A..............................................    82
    Maurstad, David I............................................    86
    Pogue, Pamela Mayer..........................................    89
    Praeger, Sandy...............................................    95
    Small, Cheryl A..............................................   107
    Swagel, Hon. Phillip.........................................   113
    Taylor, Hon. Gene............................................   115

              Additional Material Submitted for the Record

Taylor, Hon. Gene:
    Letter from Allstate.........................................   125
    Letter from Governor Haley Barbour...........................   129
    Letter from Senator Trent Lott...............................   131
    Letter from Nationwide Insurance.............................   132
Baker, Hon. Richard:
    Copies of charts referred to in testimony....................   134
Pearce, Hon. Stevan:
    Statement of the Consumer Federation of America..............   136
    Letter from the American Insurance Association, the National 
      Association of Mutual Insurance Companies, the Property 
      Casualty Insurers Association of America, and The Financial 
      Services Roundtable........................................   146

                      H.R. 920, THE MULTIPLE PERIL

                         INSURANCE ACT OF 2007


                         Tuesday, July 17, 2007

             U.S. House of Representatives,
                        Subcommittee on Housing and
                             Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2128, Rayburn House Office Building, Hon. Maxine Waters 
[chairwoman of the subcommittee] presiding.
    Members present: Waters, Cleaver, Green; Biggert, Pearce, 
and Miller of California.
    Also present: Representatives Watt, Kanjorski, Hinojosa, 
Baker, Melancon, Taylor, and Jindal.
    Chairwoman Waters. Good afternoon. This hearing of the 
Subcommittee on Housing and Community Opportunity will come to 
    Good afternoon, ladies and gentlemen. I would like to thank 
the ranking member, Ms. Judy Biggert, and members of the 
Subcommittee on Housing and Community Opportunity for joining 
me for today's hearing on the Multiple Peril Insurance Act of 
2007, H.R. 920.
    I would like to start by noting that without objection, Mr. 
Paul Kanjorski, the chairman of the Subcommittee on Capital 
Markets, Insurance, and Government Sponsored Enterprises; Mr. 
Mel Watt, chairman of the Subcommittee on Oversight and 
Investigations; and Mr. Ruben Hinojosa will be considered 
members of the subcommittee for the duration of this hearing. 
Also without objection, all members' opening statements will be 
made a part of the record.
    I am looking forward to hearing from today's witnesses 
about H.R. 920, the Multiple Peril Insurance Act of 2007, 
introduced by Rep. Gene Taylor and co-sponsored by a number of 
Members, including me. As you know, last month, the 
Subcommittee on Housing and Community Opportunity held a 
hearing on H.R. 1682, the Flood Insurance and Reform 
Modernization Act of 2007, because of issues related to flood 
insurance reform and modernization, as well as funding, and the 
National Flood Insurance Program.
    Given the ongoing debate concerning wind and flood risk, I 
believe it is prudent for the subcommittee to address the 
policy implications of H.R. 920 related to the National Flood 
Insurance Program. H.R. 920, the Multiple Peril Insurance Act, 
would create a new program in the National Flood Insurance 
Program to enable the purchase of wind and flood risk in one 
policy. The bill requires premiums for the new optional 
coverage to be risk-based and actuarially sound, so that the 
program would be required to collect enough premiums to pay 
    Multiple peril policies would be available where local 
governments agree to adopt and enforce building codes and 
standards designed to minimize wind damage in addition to the 
existing flood program requirements for floodplain management. 
Any community participating in the flood insurance program 
could opt-in to the multiple peril option, but the greatest 
demand for the optional coverage product will be in coastal 
areas that face both flood and wind risk from hurricanes and 
tropical storms.
    Because insurance companies are withdrawing from coastal 
areas, State-sponsored insurers of last resort have been forced 
to take on much more disaster risk. The Multiple Peril 
Insurance Act would allow homeowners to buy insurance and know 
that their damage from both wind and water will be covered. 
This is primarily a concern after a hurricane, where the worst 
destruction is typically caused by a combination of wind and 
flooding. Homeowners would not have to hire lawyers, engineers, 
and adjustors to determine what damage was caused by wind, and 
what was caused by flooding.
    The bill would set residential policy limits at $500,000 
for the structure, and $150,000 for contents and loss of use. 
Non-residential properties could be covered up to $1 million 
for structures and 750,000 for contents and business 
interruption. Once the new optional coverage program is 
enacted, a private insurance market should develop to offer 
coverage above the limits. This would allow insurance companies 
to design policies that would have the equivalent of a $500,000 
deductible for residential properties or a $1 million for non-
residential properties.
    Again, I look forward to hearing the witnesses' testimony 
on H.R. 920, and now I would like to recognize the ranking 
member, Ms. Biggert, for her opening statement.
    Mrs. Biggert. Thank you, Chairwoman Waters, and thank you 
for holding today's hearing on H.R. 920, the Multiple Peril 
Insurance Act of 2007.
    I had the pleasure of spending time with Mr. Taylor at a 
field hearing in Mississippi earlier this year, and I 
appreciate his hospitality as well as his commitment to his 
community and the issue of insurance availability. I'd also 
like to thank both Congressman Baker and Congressman Jindal for 
their longstanding interest in natural disaster issues, and I 
look forward to their testimony today.
    In February, I did visit the Gulf Coast and saw the 
devastation that Hurricanes Katrina and Rita caused in both 
Louisiana and Mississippi. It has been almost 2 years since the 
hurricanes hit land, and entire neighborhoods still await 
rebuilding, in part because many homeowners face difficulties 
in securing insurance. Today we will hear from witnesses to 
help us determine if wind should be added to the National Flood 
Insurance Program, and I will admit that at this time, I do not 
support this idea, which is envisioned in Mr. Taylor's 
legislation. But at the same time, I do think that we need to 
more closely examine the insurance availability problems that 
exist in some areas of the country like the Gulf Coast.
    First, I am interested in hearing from today's witnesses 
about the ways that State regulatory systems influence 
insurance availability. Why are there availability problems in 
some States, but not others? Are insurers allowed to price for 
the true risk a particular property faces? In Illinois, free 
market pricing benefits consumers, ensuring that they will have 
choices, since insurers are encouraged to compete for their 
business. I'm also interested in discussing ways we might 
lessen the regulatory burden to spur the creation of a private 
market multiple peril policy at an affordable rate for 
    Second, I'm concerned that expanding the Flood Insurance 
Program to include wind could compromise efforts to enact much-
needed reform of it and FIP, which is the Nation's largest 
single-line property insurance provider. To help reform the 
Flood Insurance Program, I introduced H.R. 1682, the Flood 
Insurance Reform and Modernization Act, with Chairman Frank. I 
look forward to marking-up this legislation at the end of this 
    To put it simply, the NFIP is under water. To pay 2005 
hurricane claims, the Program was forced to borrow from the 
Treasury a substantial amount of money, over $17 billion, that 
it will likely not be able to repay. I'll admit that I'm a bit 
of a skeptic. It seems to me that before expanding a sinking 
Federal program, we should reform it. We need to reform the 
NFIP by updating the Nation's flood maps, improving private/
public sector coordination, and removing subsidies from 
properties that repeatedly flood.
    In January, the Government Accountability Office placed the 
Flood Insurance Program on its high-risk series list which 
recommends increased congressional oversight for troubled 
programs. So before expanding the NFIP to include wind, we 
should keep our commitment to reform the NFIP and to move H.R. 
    Third, H.R. 920 requires that wind coverage be offered at 
actuarial rates. I support actuarial insurance pricing, but I'm 
concerned that it is a concept that does not work in practice. 
Approximately one quarter of NFIP policies currently in place 
are subsidized. The Congressional Budget Office believes that 
even unsubsidized properties may not be charged at actuarial 
rates because outdated flood maps do not in many cases 
accurately identify risk. I'm concerned that wind coverage 
would be no different, further exposing taxpayers to large 
financial risks should an underfunded wind program face another 
    After such large events like the 2005 Gulf Coast 
hurricanes, the market must reevaluate its exposure and the 
regulatory environment in the wake of tremendous disasters, 
natural and otherwise.
    We often seek a silver bullet to make things run more 
smoothly next time or prevent the past from repeating itself; 
however, we must be careful not to move too quickly. After 
Enron and other accounting scandals, the committee worked 
diligently to enact reform legislation. While Sarbanes-Oxley 
represents an important step forward in safeguarding our 
Nation's financial markets, in the years since its enactment, 
we have learned that acting too quickly can lead to problems 
down the road.
    Instead of endorsing one legislative approach over another, 
at this point we should study and review ways to increase 
insurance availability and encourage the private sector to 
offer this coverage over the long term.
    I look forward to continuing to work on reforming flood 
insurance programs and setting ways to encourage a more robust 
market for catastrophic insurance.
    I yield back.
    Chairwoman Waters. Thank you very much, Ranking Member 
Biggert. I would now like to recognize Mr. Cleaver for 5 
    Mr. Cleaver. Thank you, Madam Chairwoman, and I take this 
opportunity to express appreciation to you and Ms. Biggert for 
leading the delegation down to the Gulf region earlier this 
year, and we had an opportunity to visit with our colleague, 
Congressman Gene Taylor, who was kind enough to spend a 
considerable amount of time with us, showing us around.
    This is a very important hearing. I think most of the 
hearings we have are important, but to me this is extremely 
significant because of the discussions that people are still 
having about what happened in the Gulf Coast region and, in 
many instances, the failures of the Federal Government. And I 
think we have an opportunity now to be proactive.
    I have a little different perspective with regard to the 
term ``acts of God,'' only because in the context that we are 
dealing with, it is something negative, and we are experiencing 
one of the ``acts of God'' right now. It's just called an 
avalanche of oxygen.
    That's theological. We don't have to get into it. We can 
exchange papers on the subject, but the final point I want to 
make here is that--and this may be somewhat provocative--in 
addition to flood and wind coverage, at some point, perhaps not 
today, but at some point, I think it is going to be important 
for us to explore other perils like earthquakes and tornadoes.
    Tornadoes, for example, are readily seen in my native State 
of Texas, and of course in Missouri, which I represent today, 
and all over the Midwest. And so I think at some point that 
needs to be dealt with. I am very proud to be a co-sponsor with 
my colleague, Gene Taylor, on the all peril insurance bill, 
H.R. 920. I look forward to hearing your comments and being 
directed in another way that would be better than the direction 
we're traveling.
    Thank you, Madam Chairwoman.
    Chairwoman Waters. You're welcome. And now, I would 
recognize the gentleman from North Carolina, Mr. Mel Watt, who 
is also the chairman of the Subcommittee on Oversight and 
    Mr. Watt. I thank the gentlelady for yielding me time, but 
I just came to listen, having developed an intense interest in 
this because of the oversight hearings that we are having 
regarding the failure of the insurance payment process in the 
aftermath of Hurricane Katrina. I'm disappointed that more of 
the members are not here to get actively engaged in this 
because it's an issue that we really, really must deal with and 
deal with more aggressively than we have.
    And like Representative Cleaver, one of the concerns I have 
is whether the proposal goes far enough in defining the range 
of perils that should be included under a policy that is 
written by the Federal Government as opposed to private 
    The difference, it seems to me, between the market being 
able to take care of insurance, as Ms. Biggert has indicated is 
a desirable and worthy objective for the market to be able to 
do, is that when you have catastrophic acts of God that can't 
be really anticipated or reserved for, those are the 
circumstances in which the risk should be spread throughout the 
Nation because that's what the whole idea of the Nation coming 
to the aid of people who have had catastrophic losses is all 
    So while private insurers can model and anticipate and 
reserve for and calculate on statistically the likelihood of 
fires in Chicago, or in Illinois, where the gentlelady is from, 
I don't think I remember Chicago having a flood of the 
magnitude of Katrina, or Illinois having a flood of the 
magnitude of Katrina. So you get into these situations where, 
if the private market has part of the coverage, and the Federal 
Government has part of the coverage, you are always going to 
have these finger-pointing episodes with people pointing the 
finger at each other and saying, you're responsible for that.
    And so there needs to be some threshold, I think, above 
which a Federal catastrophic policy, call it a multi-peril 
policy, kicks in because we recognize that as being beyond what 
can be reasonably anticipated by the private market and 
reasonably insured against by the private market. So this is a 
very difficult issue, and it's not that I have any opposition 
to the private sector doing this, but I think the gentlelady 
will find that even the private sector is in full accord with 
trying to get out of these guessing games when you have a 100-
year or 1,000-year flood.
    The private market simply can't model and insure against 
that, and the masses of the American people ought to be put at 
risk under those circumstances so that we can spread that risk 
appropriately across the entire Nation.
    Chairwoman Waters. Would the gentleman yield?
    Mr. Watt. I'm happy to yield to the gentlelady.
    Mrs. Biggert. Since the gentleman mentioned fire, I might 
just remind him that the whole City of Chicago burned down.
    Mr. Watt. And I'm not suggesting that fire is one of the 
perils that ought to be insured against. I guess there are 
occasions on which fires have been caused by acts of God where 
you have lightning striking somewhere, and it sets off a fire. 
But at least the insurance companies know the likelihood that a 
fire is going to break out, and it may be a theological debate, 
as Reverend Cleaver indicated. Few of us know the likelihood 
that an act of God is going to consume us, and I think that's 
kind of the threshold that the American people ought to be 
prepared to accept when they accept the fact that an act of God 
has intervened and you can't really anticipate that.
    I'm over my time. I appreciate the gentlelady yielding the 
time. I didn't really intend to take anywhere near that amount 
of time, but I appreciate the gentlelady having to yield.
    Chairwoman Waters. Thank you very much, Mr. Watt.
    At this time, I'd like to introduce our first panel of 
witnesses, including several of our distinguished colleagues in 
the House. Serving on this committee: Hon. Richard Baker, the 
author of the bill; the Hon. Gene Taylor; and also, 
representing Louisiana, Hon. Charlie Melancon and Hon. Bobby 
    Thank you all for coming. I don't know when we've had such 
a distinguished panel before my subcommittee. So with that, we 
will start with our first witness, Mr. Taylor.


    Mr. Taylor. Thank you, Madam Chairwoman.
    Madam Chairwoman, just as a quick reminder, on the day I 
was elected to Congress, coincidentally, the San Francisco 
earthquake occurred, and I remember some of the earlier votes 
that I cast were for the supplementals to help the people in 
that area. The people--people back home--said, ``Why are you 
doing that?'' And I distinctly remember saying that there will 
come a time when we're going to need the help of the people 
from California, and I want to thank you for being the face of 
that help. You have been of tremendous assistance, and I'm 
personally indebted to you. And when this is all said and done, 
the people of Mississippi, the people of our country, are going 
to be indebted to you as well.
    I want to thank all of you for being here and for your 
trips to Mississippi. Most of you have come to Mississippi only 
in the aftermath of the storms, but if you had been to the 
south coast of Mississippi prior to Hurricane Katrina, if you'd 
gone to my neighborhood, you would have seen a house like this 
    That's my buddy, Jody Bienvenutti. He lived about a hundred 
yards from me. He had a house that was about 180 years old, 
been through no telling how many hurricanes. He is in the 
supplemental health insurance business, so he had a lot of 
faith in the insurance industry. He bought a lot of insurance--
about $586,000 worth of insurance on that house.
    That's what it looked like the day before Katrina. This is 
what it looked like 2 days later when he could make his way 
back from Mobile to see what he had left. If he would have gone 
a little bit further down the block, you'd have seen the home 
of Corky and Molly Hadden. And Corky is a financial planner, 
MBA, built a hurricane-proof home. Look at it. It's up on 
stilts. It has a very shallow roof to minimize the wind 
exposure. It has shutters. He built a hurricane-proof home. 
He's a financial planner, a very smart guy financially.
    So he insured that home for $650,000. He was also out of 
town, smartly, on the day of the storm; he got out like the 
local authorities told him to. When he got back, this is what 
he found. Jody had $580,000 worth of insurance; Corky had 
$650,000; and 23 months after that storm, neither one of them 
has gotten a penny from their insurance company. To give you an 
idea of the magnitude of the storm, I really could have started 
in Slidell, Louisiana, about 30 miles to the west of where my 
house was, and I could have gone to Bayou la Batre, Alabama, 
which is probably 80 miles to the east of me.
    So I'll go a little bit further to the east to the town of 
Long Beach, Mississippi, which looking at is a fairly typical 
south Mississippi home owned by the Kissingers. They had 
$149,000 worth of insurance. This is what it looked like the 
day before the storm. This is what it looked like when they 
could make their way back to it. They had $149,000 worth of 
insurance. They were luckier than most. They were paid $21,000 
on a $149,000 policy.
    Now, if you go about another 15 miles to the east of 
Biloxi, Mississippi, and if you'd been there the day before the 
storm, you would have seen the Strawns' home and get a fairly 
typical south Mississippi home. They had $134,000 worth of 
insurance. They came home to that, and their insurance company 
paid them nothing.
    You could go east another 20 miles to Ocean Springs, 
Mississippi, to the home of the Openchofski family, again, 
another fairly typical south Mississippi home. This is what it 
looked like the day before Katrina. This is what it looked like 
the day after. They had a $143,000 policy, and they got paid 
    The point I'm trying to make is whether it is Slidell, 
Louisiana; Bay St. Louis, Mississippi; Ocean Springs, 
Pascagoula, Mississippi; or Bayou la Batre, Alabama, a natural 
event occurred where people built what they thought were safe 
houses, where they bought what they thought was an insurance 
policy that would be their good neighbor, or they'd be in good 
hands. They paid their premiums.
    And in the weeks after the storm, one by one they had an 
adjustor come to their house and say, we see no evidence of 
wind damage. We're not going to pay you a dime. Sometimes they 
stretched that out for days, sometimes for weeks, and sometimes 
for months. And the insurance will come to you and they'll say, 
but we settled all these claims. We settled 98 percent of them.
    The day they walked on my property, 2 weeks to the day of 
the storm and said--despite all the evidence to the contrary 
and despite that I walked them hundreds of yards from where my 
house was, showed them where my tin roof was--tin doesn't 
float; where the holes were where it ripped through the bolts 
that attached it to the roof--and they just, with bold face 
said, ``We see no evidence of wind damage.''
    So I know what happened. And so whether they told you 2 
weeks after the storm, 2 months after the storm, or 2 years 
after the storm, the fact of the matter is that people who 
played by the rules and expected their insurance company to 
play by those same rules got screwed by their insurance 
companies. It is the only way to describe it, as individuals.
    But it gets worse, you see, because when the insurance 
companies don't pay claims that they should, because we are a 
generous nation, our taxpayers do.
    Almost every homeowner's policy had cost-of-living 
expenses. If you lose your place, while you are out, we are 
going to pay for your apartment. We're going to pay for this. 
Well, if they deny your claim, you don't get the cost-of-
living. So in south Mississippi alone, at its peak, we had 
42,000 government-furnished FEMA trailers for people whose 
homes were either completely destroyed or substantially 
destroyed, where our Nation paid to put that $16,000 trailer on 
their property, paid another $16,000 just to deliver it to 
their property, where our Nation wrote them a FEMA check for 
their additional cost-of-living expenses because the insurance 
company didn't pay.
    Madam Chairwoman, it gets worse than that because not only 
did we get stuck with that expense, but under the Federal 
write-your-own policy, we allowed the insurance companies to 
determine whether the claim was for wind or for water. And so 
you're sending a 25-year-old claims adjustor out there who's 
thinking about his Christmas bonus, who's thinking about his 
next promotion. And you're putting him in the horrible position 
of saying, do I ask my company to pay and say the wind did it, 
or do I ask the taxpayers to pay and say the water did it all?
    Whenever given the chance, they blamed it on the water. 
They stuck the taxpayer with the bill and right now in the 
State of Louisiana, there is a multi-billion-dollar civil 
action suit for people who are trying to recover the money that 
the taxpayers were wrongfully billed.
    So, for a lot of reasons, I want to commend you for what 
you're doing, for looking into this. I'd like to submit for the 
record letters from Senator Lott and Governor Barbour, who are 
both in support of something along this line of addressing the 
    And again, thank you for your personal interest and your 
willingness to have what is now, I think, the fifth hearing on 
insurance reform since the Democrats took over.
    [The prepared statement of Representative Taylor can be 
found on page 115 of the appendix.]
    Chairwoman Waters. Thank you very much. And without 
objection, such is the order.
    Mr. Melancon?


    Mr. Melancon. Thank you, Madam Chairwoman.
    I appreciate you holding this hearing today and I 
appreciate Gene for working so hard and putting together a 
bill. No bills are perfect, but at least maybe we can get this 
thing and move it along to where we start remedying the 
problems, which may have started in Mississippi, Louisiana, 
Alabama, and Texas, but are obviously spreading and spreading 
quickly along all coastal areas of this country that are 
subject to storms, including the island of Manhattan.
    In August of 2005, America watched as Katrina destroyed 
over 200,000 homes in southeast Louisiana, and then saw even 
more destruction just a few weeks later as Hurricane Rita 
ripped apart southwest Louisiana and took almost another 25,000 
homes. After the Gulf Coast suffered through two of the worst 
natural disasters in the country, our people were forced 
through the indignity of another battle--that of fighting their 
insurance companies, as homeowners' insurance policies covered 
damage caused by wind, but not damage from flooding or storm 
    Because it can be difficult to prove whether wind or water 
from a hurricane caused a home's damage, many Katrina and Rita 
victims found that their insurance companies denied or low-
balled their claims, leaving some of them to rely solely on 
payouts from the National Flood Insurance Program, which in 
turn had to make outrageously high payments at taxpayers' 
    Thousands of homeowners took their insurance companies to 
court before they got the insurance payouts they were owed from 
years of faithfully paying their homeowners' premiums. Today, 
almost 2 years after the storm, some are still waiting for a 
check so they can rebuild their homes; family and friends and 
others that I know included.
    At the same time, insurance companies have been hastily 
pulling out of coastal areas like south Louisiana, canceling 
policies and refusing to write new ones. More and more people 
in south Louisiana are being forced to turn to Louisiana's 
State-sponsored insurer of last resort for their homeowners' 
insurance, paying premiums that are way above market rates.
    While Louisiana's strong consumer protection laws protected 
many homeowners who have had insurance policies for at least 3 
years from being dropped by their insurance companies, they are 
by no means the lucky ones. Even those who did not file claims 
after the 2005 hurricane are now being hit with skyrocketing 
premium increases, often as much as 2 or 3 times what they had 
paid before the storm.
    The district I represent in Louisiana is almost entirely in 
the hard-to-insure part of the State, and every day I get 
calls, e-mails and letters from constituents begging that the 
Congress do something about the insurance crisis in south 
Louisiana. I've brought some of those, and we can enter those 
into the record.
    One is a guy named Roy Barrios of South Lafourche who wrote 
me saying that Allstate recently canceled his homeowners' 
insurance policy and he now will have to pay 3 times as much 
for coverage from Louisiana's insurance of last resort. He was 
only 2 months shy of being covered by Louisiana's consumer 
protection laws that would have kept his policy from being 
canceled, although he noted that Allstate is still happy to 
renew his profitable automobile insurance policy.
    Similarly, Todd Ramirez of Thibodaux, Louisiana, told me 
his annual premium increased in one year from $1,188 to $4,165, 
almost 300 percent.
    Jeanette Tanguis of Houma, Louisiana, said her premium 
increased $200 per month. In a letter to me she wrote: ``Having 
spent most of my life living in Terrebonne Parish, it never 
occurred to me that I would be forced to move from the place I 
love and have called home for most of my life. Unfortunately, 
my family and I are being forced to make this sad decision.''
    These are only a few of the many stories I hear from people 
who are being forced to leave their homes and their 
    We in Congress must act quickly to solve this insurance 
crisis so that middle-class families, the backbone of our 
economy, can continue to afford to live in coastal communities.
    All-peril insurance, like the proposal Mr. Taylor has, 
would go a long way in addressing some of the insurance 
problems highlighted by Katrina and Rita. By bundling wind and 
water coverage into one plan, multi-peril insurance would cover 
home damage by hurricanes, regardless of whether winds or 
flooding caused the damage.
    Not only will this provide homeowners with peace of mind, 
it will indirectly save them money because they will be able to 
avoid costly and time-consuming legal battles like those waged 
after Katrina and Rita, when many homeowners had to hire 
lawyers and engineers to do independent assessments. A multi-
peril insurance policy will create more efficiency in adjusting 
claims, and homeowners will receive their payments much faster 
than under the two-policy system.
    Finally, a multi-peril homeowners' insurance program will 
rein in insurance premium costs because rates would be required 
to be actuarially sound. Also, a multi-peril NFIP can make 
premiums in coastal communities manageable by spreading risk 
among a much larger pool of policyholders. With over 50 percent 
of Americans living within 50 miles of the coast, a national 
multi-peril insurance program would have plenty of prospective 
customers. It is time to recognize that market failure exists.
    The Federal Government recognized this reality when it 
created crop insurance, which now supports a healthy, domestic 
agriculture industry that can feed American families. The 
inability of private insurance markets to handle catastrophic 
losses became evident after Katrina and Rita and the sharp 
decline in the availability of affordable homeowners insurance 
is crushing our rebuilding effort along the coast.
    I thank Mr. Taylor, and Ms. Waters, I thank you for your 
    Chairwoman Waters. Thank you very much.
    Now, we'll hear from Representative Baker.


    Mr. Baker. Thank you, Madam Chairwoman, Ranking Member 
Biggert, and members of the subcommittee.
    I appreciate the opportunity to be here, and I want to 
acknowledge the work of my colleagues as being helpful to 
bringing about a remedy. At least they have come together with 
a proposal and got it on the table. I, however, have slightly 
different suggestions to make to the committee, that I hope 
will be taken under consideration, and I'll jump right to it.
    Similar to the effect of H.R. 920, but without the taxpayer 
liability component, Congress can authorize the issuance of a 
national, multi-peril insurance policy. The Congress can 
determine what goes into that insurance box. We can include Mr. 
Cleaver's tornadoes; we can include western wildfires. We can 
describe the risk that would be covered by such a proposal and 
ensure that there would be no limits. One of the difficulties 
with the flood insurance program is a person's second home, a 
vacation home on the beach that's eliminated, or greatly pays a 
higher premium rate.
    We don't necessarily like it, but we have to constrain the 
commercial liability for which we expose ourselves to the 
marketplace, and that is driven because ultimately, taxpayers 
back up the National Flood Insurance Program, and all too 
often, the claims in recent days, are far larger than the 
premium flow, which leaves us in a $17 billion hole today. And 
may the Lord have mercy on us going through this next season 
that we don't have more because that deficit will only grow 
    Why would a company then write such a policy? It would 
necessitate preemption of State law with regard to pricing. I 
have noted with great interest, everyone is insisting on 
actuarial rates, not NFIP actuarial. NFIP actuarial only looks 
to historical loss data. It doesn't use the sophisticated risk 
modeling capabilities that any insurance company still in 
business today has to use to protect itself against future 
losses, so that if we had real actuarial, as I understand is 
the interest, the difference between a market-priced policy and 
NFIP-like price policy would be negligible because we'd both be 
pricing to the risk.
    Currently, it is the local rate control at the State level 
which precludes many from entering markets. It's an arbitrary 
ceiling against the company's product. And so I suggest that 
one way to go is to authorize the creation of such a product. I 
had hoped to have a document to lay before the committee today. 
We are engaged in working on it now, but it is not finished. I 
had indicated to Mr. Taylor that I would try to get it to him 
before the hearing, but it's not ready for prime-time and I 
will not bring it to the committee until I know it's a 
defensible product.
    However, there is another alternative. As we did in 
terrorism risk insurance, many commercial writers would not 
enter into the New York market without the absolute assurance 
that they know the finite amount of loss they would engage in.
    The same is true in the post-Katrina world below the 
interstate. People don't want to write because they don't know 
how much money they're actually going to be engaged in losing.
    If we were to create a Federal backstop with limits--and 
I'm quick to add ``with limits''--there is an enhancement that 
would come for people entering into the market. Couple that 
with the ability to build up the internal reserves. Today, the 
IRS does not look favorably upon people building up pots of 
money because they think you're attempting to tax evade, as 
well as other regulators don't allow financial entities to 
build up what they believe to be artificial reserves. And if we 
were to allow the reservings to build specifically for the 
purpose of paying all perils loss, while ratcheting down the 
Federal backstop, the two could cross. So at some point, the 
private market would have in its sock drawer somewhere 
sufficient money to have a likelihood of paying all claims made 
against such a multi-peril policy. That should also, however, 
be coupled with freedom to price the product according to the 
risk the company agrees to take, and that is a voluntary 
    If you really want to fix the problem, and this is not 
maybe quite so serious; it's my remedy but I don't expect you 
to take it. It would likely be very controversial, and that is 
in the insurance world, generally, to allow people to sell 
insurance product for the price they can sell it for. Allow 
them to take the risk they choose to take as long as the State 
advocacy for the consumer stays in place to ensure that 
obligations made are obligations kept.
    Now, that is a very dangerous precedent, and I have 6 years 
of hearings, 21 to be exact, with 150 witnesses and volumes of 
letters in my file to prove how wrong I am. But it is 
absolutely the right thing to do in the marketplace to make 
this system work in a responsible manner.
    Why is this important? When you look at the average rate of 
return in financial sectors, securities firms--they almost beat 
Fannie Mae and Freddie Mac. They have averaged, over the last 5 
years, a 19 percent rate of return on equity. Commercial banks 
have averaged 14 percent. The property and casualty insurance 
sector has barely made a 5 percent rate of return. Now, there's 
a reason why people don't get into the business of taking this 
risk. They're not just worried about an unprofitable year. 
They're worried about insolvency.
    And so we need to address the issues of why the underlying 
elements of the commercial insurance marketplace is not working 
the way the rest of the financial marketplace is apparently 
working. The end result of a flood insurance program, which I 
support, is that it has distorted the marketplace. We have 
created a program that takes one product, subsidizes it in a 
taxpayer way, and therefore has created this wind versus water 
litigation flood that we're all in the midst of.
    I agree with Mr. Taylor that something has to be done, but 
I think a remedy other than creating additional taxpayer 
liability is what makes the most sense.
    I will move ahead because I'm already out of time.
    There is a chart, Madam Chairwoman, that I think we have 
distributed. Anyway, it's just simply two pages. The first one 
is all storms of record that have come across the Gulf or 
Atlantic Coast. The more important and relevant chart for my 
discussion is the one that's entitled ``1990 to 2006.'' Those 
are the storms of record of the last 16 years.
    When one takes a look at the frequency of storms landing on 
the coastal United States--and you couple that with this piece 
of information--I called this morning to the Louisiana 
Insurance office in Baton Rouge and asked for this morning's 
average quote for an insurance policy in Orleans Parish for a 
$200,000 new construction brick home. The premium today, 
average, this is not a single company, is $2,100 per year; 80 
miles north in Baton Rouge, same house, same set of facts, that 
premium is $1,200, so there is a $1,000 difference by driving 
80 miles.
    What you really don't often think about, though, is if you 
had a $200,000 obligation sitting on this chart, and it was 
your money, would you take $2,100 a year on the chance that you 
might have to pay out $194,000 at some point in the future? 
That's $200,000 less the 5 percent deductible. In other words, 
we're asking the insurance industry to take $2,100 premium flow 
in today's market place, assume $190,000 responsibility, and 
bet that one of these lines isn't going to cross your back 
yard. That's the problem we face.
    And, Madam Chairwoman, I appreciate your time and courtesy. 
I really want to work with the committee in going forward and 
hope these ideas will have some relevance in your discussion.
    Chairwoman Waters. Thank you very much, Mr. Baker.
    Mr. Gene Taylor?


    Mr. Jindal. Thank you, Madam Chairwoman, Ranking Member 
Biggert, and members of the subcommittee, for allowing me to 
testify. Thank you, more importantly, for having this hearing.
    I also want to thank Gene for allowing me to work with him 
on this legislation, The Multiple Peril Insurance Act. As 
you've heard, and I think it's important to remember what this 
legislation will do.
    Chairwoman Waters. Excuse me, did I call you Gene Taylor? I 
have Gene Taylor in my head.
    Mr. Baker. Don't let that bother you. He's been called a 
lot worse than that.
    Mr. Jindal. That is true.
    Chairwoman Waters. Thank you very much, Bobby Jindal. 
Excuse me.
    Mr. Jindal. That's all right, Madam Chairwoman. Thank you. 
Unfortunately, I've been called a lot worse by my colleagues in 
the delegation.
    Mr. Jindal. I think it's important to remind ourselves what 
the bill would actually do. It actually enables individuals to 
purchase insurance covering losses resulting from flood and 
wind storms without requiring those policyholders to 
distinguish flood damage from wind damage. I've heard members 
suggest we consider expanding the scope. Certainly, in the 
future, other legislation will be open to doing that, but for 
these purposes, this has been a huge concern, especially when 
you have a hurricane like Katrina, or like Rita, where the 
worst destruction is caused by a combination of wind and 
    Under this legislation, homeowners wouldn't have to hire 
lawyers, engineers, and adjustors to determine in retrospect 
what damage was caused by wind, what damage was caused by 
flooding. It has been nearly 2 years since those hurricanes 
devastated the Gulf Coast of the United States, including large 
land areas in my home State of Louisiana. Many property owners 
in Louisiana and along the Gulf Coast continue to battle their 
insurance companies for unpaid wind damage claims that they 
claim should have been paid by their insurance companies, while 
others are discovering discrepancies in the way wind versus 
flood damages were paid out by their insurance companies.
    For example, take the case of Michael Holman, a resident of 
the mid-City section of New Orleans. He should have been able 
to repair his home. He had both flood and homeowners insurance. 
His home suffered damage from hurricane winds that caused it to 
lean substantially in one direction. His home also took on 3 
feet of water. He was an actual eyewitness to the destruction 
of his home. He can substantiate his claim that the hurricane 
event caused his home to shift. Despite that, his insurance 
company has refused to pay out damage claims to his home. 
Today, he is suing his company for not covering the wind damage 
that has made his home a complete loss.
    Consider the case of Chris Karpells, a prospective buyer of 
a townhouse in Slidell, Louisiana, who would be collecting 
insurance money as part of the real estate transaction. He 
discovered the insurance company had two ways of pricing the 
damage repair cost, depending, of course, on whether the damage 
was caused by wind or flooding.
    If the company attributed the damage to wind or rain, the 
price of replacing drywall, for instance, was estimated at $.76 
per square foot. If the damage was due to flooding, the 
estimate quadrupled to $3.31 per square foot. The homeowner 
noted other increases in his insurance adjustment and noted 
that they are frontloading all the money on the flood policy.
    More than half of our country's population lives along the 
coast in hundreds of counties or parishes. In areas such as 
these, many residents are required to purchase at least two 
insurance policies: required flood insurance; in addition to a 
regular homeowner insurance policy that offers wind coverage.
    We all know the limits, especially those of us living along 
the coastal areas. We all know about the exclusions as well, 
including, under the current law, any damages caused by wind or 
a wind storm. Under our current system, a single company can 
determine and apportion damages caused by the wind policy that 
it insures along those caused by flooding, which is insured by 
the NFIP and paid for by the Federal Treasury.
    In the aftermath of an event like Hurricanes Katrina or 
Rita, it sometimes is difficult to determine whether the source 
of damage was the wind that toppled the roof and allowed a 
property to flood, or if the damage was caused by rising flood 
waters caused by failed levies. That's especially important 
considering that U.S. taxpayers are responsible for paying 
flood claims.
    While we appreciate the fact that after Hurricanes Katrina 
and Rita, the NFIP approved expedited claims processing for 
approximately 240,000 anticipated claims, thus appropriately 
ensuring homeowners weren't prevented from rebuilding by red 
tape, that current process allows insurers to apportion damage 
that may inadvertently open the door to allow insurance 
companies to blame flood water when wind was the source of 
property damage.
    The proposed legislation could eliminate this problem by 
covering wind and flood damage under one program. Look, 
certainly many questions have been raised. Many questions 
should be answered about how exactly H.R. 920 should be 
implemented, what modifications can and ought to be made to 
make their proposed program even more effective. However, I 
believe this legislation is a positive solution, a positive 
step toward solving the problem of a lack of affordable and 
available insurance in Louisiana.
    Many of our constituents are still struggling with 
insurance companies over settlements and payments nearly 2 
years after the storms. These are normally problems typically 
resolved within 3 months after a natural disaster strikes.
    Since the 2005 hurricanes, many homeowners' policies in the 
greater New Orleans area have seen their premiums go up more 
than 50 percent. Insurance costs have gone up an average of 12 
percent statewide. Obtaining insurance is difficult because 
only a handful of companies are writing property insurance in 
the State; 10 of the top 25 property insurers don't do business 
currently in the State. Many of those companies that are 
remaining are working to eliminate or reduce hurricane coverage 
from their portfolio.
    In summary, Louisianans are paying more for less insurance, 
if they can get it, which is hampering my State's recovery from 
the storms. This legislation is a good proposal that will 
ensure the availability of property insurance which can allow 
recovery in this region to continue.
    Madam Chairwoman, I also want to thank you for your 
attention to the ideas of a Federal backstop and your general 
interest in the recovery of the Gulf Coast. We have noted your 
many trips down, your attention to the Road Home Program, and 
many of the challenges we face in Louisiana.
    Thank you very much.
    [The prepared statement of Representative Jindal can be 
found on page 79 of the appendix.]
    Chairwoman Waters. Thank you very much.
    And I'd like to say that all of the members of this 
committee, on both sides of the aisle, are very concerned about 
the recovery of all of the Gulf Coast, and we know how much 
time and energy all of you have put into trying to make that 
recovery happen. So we are going to do everything that we can, 
including dealing with this issue of wind versus water.
    And I'd like to invite all of you, if you would like, to 
stay and sit with us and ask questions. Without objection, it 
is so ordered. Thank you very much for having been here today.
    I'd like to bring our second panel to the table. Our first 
witness will be Mr. David Maurstad, Assistant Administrator for 
Mitigation, Federal Emergency Management Agency. And the second 
witness will be Mr. Phillip Swagel, Assistant Secretary for 
Economic Policy, U.S. Department of the Treasury.
    Thank you gentlemen for being here with us today. I will 
call on our first witness, Mr. Maurstad.


    Mr. Maurstad. Good afternoon, Chairwoman Waters, Ranking 
Member Biggert, and members of the subcommittee.
    I am David Maurstad, Federal Insurance Administrator and 
Assistant Administrator for FEMA's Mitigation Directorate. I 
appreciate the opportunity to appear to discuss H.R. 920 and 
the bill's proposal to add wind coverage to the National Flood 
Insurance Program, a program helping more than 20,300 
communities nationwide reduce their vulnerability to flooding, 
recover faster after floods, and protect their personal and 
community investments with a financial safety net.
    The NFIP's floodplain management and building code 
guidance, its mitigation base, saves an average of $1.2 billion 
annually in prevented damages, while structures built to the 
program's standards experience 80 percent less damage than 
structures not built to such standards. And we're committed to 
making the NFIP even better, a commitment requiring that we 
stay focused on the program's objectives, helping communities 
understand and address their flood risks, and making sure that 
more citizens are protected with the financial backstop that 
flood insurance provides.
    H.R. 920 does not foster these objectives, so FEMA opposes 
the bill for several reasons. First, the private marketplace 
already offers windstorm coverage. Traditionally, the Federal 
Government has provided insurance only when the marketplace 
cannot or will not offer coverage that the public must have. 
Private property and casualty companies provide wind insurance 
throughout the 50 States, and some States have wind pools to 
augment their market conditions.
    For the most part, the property and casualty industry is 
healthy, and although fiscal troubles may occasionally arise, 
the solution lies in making certain that rates are adjusted to 
reflect the true risk from wind damage and to build the 
reserves needed to pay claims after a disaster. As long as the 
industry and wind pools adequately address wind insurance 
matters, they and not the Federal Government should remain the 
market of last resort.
    Second, a multi-peril NFIP would be costly to the 
government and to taxpayers. Adding wind coverage to the 
Nation's largest, single peril insurance entity could make the 
NFIP one of the world's largest underwriters. Such a high-risk 
program would need reinsurance to protect the Treasury, and 
FEMA would have to reconfigure the NFIP's financial structure, 
a costly undertaking for a program already billions of dollars 
in debt.
    Also, the Act is concerned about the hurricane-related 
winds threatening parts of only a few States, while flooding 
occurs nationwide. If wind insurance were added to the NFIP, 
policyholders and taxpayers in all States would end up 
subsidizing the insurance costs of hurricane-prone States.
    Third, a multi-peril NFIP would derail State efforts to 
foster and sustain private markets that address wind risk. As 
insurance is a State-regulated industry, States address wind 
risk in a variety of ways.
    Florida, for instance, has tightened their regulations and 
expanded their State wind pools. Louisiana recently passed 
proposals to disband their insurance rating commission, 
allowing insurers to set hurricane deductibles based on risk, 
rather than requiring one deductible for all the State's 
policyholders. South Carolina is calling for market-based 
solutions to insuring coastal homes against windstorm damage, 
and they are thinking about imposing damage costs on builders 
who construct in high-risk areas.
    A multi-peril NFIP would displace such efforts, forcing all 
high wind risk insurance burdens onto the Federal Government. 
Clearly, the private industry, the States and communities are 
in the best position to address wind risk and related insurance 
matters. The NFIP is the result of an integrated approach aimed 
at a long-term systemic problem. Before the program was created 
in 1968, several academic and government studies recognized 
that the private insurance industry was unwilling to provide 
affordable flood insurance.
    The definitive study was the Johnson Administration's 
report, ``Insurance and Other Programs for Financial Assistance 
to Flood Victims,'' which concluded that a Federal flood 
insurance program is feasible and will promote the public 
interest. Furthermore, the natural hazard insurance arena has 
been thoroughly analyzed over the past 2 decades with reports 
clearly recognizing the commercial availability of wind 
insurance and remaining silent on the matter of government 
    Finally, the vulnerability of wind-prone communities will 
not be reduced by adding wind insurance to the NFIP. 
Communities must understand the risks that threaten them. They 
must take the initiative to manage and reduce their risks and 
their efforts must revolve around a comprehensive mitigation 
    I look forward to working with the subcommittee, our 
insurance companies and other stakeholders, to improve the 
National Flood Insurance Program, and I look forward to 
answering any questions that the subcommittee may have.
    Thank you.
    [The prepared statement of Mr. Maurstad can be found on 
page 86 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Phillip Swagel.


    Mr. Swagel. Thank you, Madam Chairwoman.
    Good afternoon, Chairwoman Waters, Ranking Member Biggert, 
and members of the subcommittee. I will very briefly summarize 
my statement and have provided the full written statement to be 
included in the record.
    The Administration supports leaving wind coverage to the 
well-developed, private market for such insurance and does not 
support creating a Federal program for wind losses. The private 
sector is effective at providing insurance for damage from wind 
events. Private market coverage can be expensive in areas 
facing substantial risk of wind events. This is a reflection of 
the risk, not a defect of the market.
    Federal involvement in wind insurance will displace private 
coverage, lead to costly inefficiencies, and retard innovation. 
A Federal program will face pressures to set aside risk-based 
pricing. By subsidizing insurance, a Federal program would 
undermine incentives to mitigate risk and encourage development 
in high-risk areas, potentially increasing future liabilities.
    A Federal role in bearing risk would have taxpayers 
nationwide subsidizing insurance rates for the benefit of a 
smaller population. Federal Government interference in the wind 
insurance market will displace markets, promote riskier 
behavior, be unfair to taxpayers, and be economically costly. 
For these reasons, the Administration opposes H.R. 920. The 
Administration looks forward to working with the committee as 
it considers other reforms of the National Flood Insurance 
    I appreciate very much the opportunity to appear before the 
subcommittee and will be happy to answer any questions.
    [The prepared statement of Assistant Secretary Swagel can 
be found on page 113 of the appendix.]
    Chairwoman Waters. Thank you very much.
    We have a vote on the Floor, so I'm going to have to ask 
all of you to remain with us until we return, so that we may 
ask questions. A am sorry to do that to you, but there's no 
other way to do it.
    Thank you very much. I appreciate your patience.
    Chairwoman Waters. I'd like to thank you very much for your 
patience. I expect other members will be joining us, and I will 
just move now to questions that I have of this panel.
    There is a motion suggested in the testimony received from 
both government witnesses that the private sector will be 
foreclosed from operating in the market if the National Flood 
Insurance Program is expanded to provide the coverage 
envisioned by the bill. It was also suggested that the States 
and the private sector are best positioned to address the 
availability and price of insurance in high-risk areas.
    On what evidence do you base this conclusion? Are the 
private insurers retreating from providing insurance in high-
risk areas, or is this just someone's imagination?
    Mr. Maurstad?
    Mr. Maurstad. Ma'am, I think that in the past, especially 
if you look at flood insurance as an example, when the program 
was started the affordability and availability of flood 
insurance, the lack of it, was already well-documented. And 
once the Federal program started, most of the industry then 
left the market. I think that it is safe to reason that if the 
National Flood Insurance Program were extended to include 
wind--as I believe one of the earlier witnesses indicated--that 
it would mostly be in the high-risk areas along the coastlines, 
and so that would just force further abandonment, I believe, by 
the insurance companies, because there is a government program. 
So the government program would end up insuring the riskiest of 
the risky and would then place the Federal Treasury at far 
greater jeopardy.
    Chairwoman Waters. Okay, so you have testified that you 
oppose H.R. 920, Mr. Maurstad. Can you think of any way that 
the NFIP can develop actuarially sound premiums? I heard what 
you just said about if the coverage is confined to high-risk 
areas, the private insurers would be assuming unusual risk, and 
they wouldn't have much to offset that with. So I guess what I 
want to know is, can the NFIP do it?
    Mr. Maurstad. Well, I think that certainly an actuarially 
rated program can be developed as long as one understands what 
actuarial rating is. It would be, in this case, if you would 
base it on the number of policies and the amount of premium 
that would be generated, the pool would be relatively small, as 
was indicated earlier. And as a result, the actuarial rates 
would be very high. They may be even higher than what are being 
characterized as unaffordable State wind pool rates that also 
have, although they're high, and people have indicated they are 
not affordable, also clearly are not adequate because most of 
the wind pools are in financial difficulties.
    So the actuarial rates would be very high. I'm not sure--in 
fact, I'm fairly certain they would not be very affordable, 
which would put pressure on Congress to discount those, similar 
to what was done in the Flood Insurance Program with the Pre-
Firm properties in the program there. But certainly an 
actuarially-rated program could be developed. But one also 
needs to understand that actuarial rates are generating premium 
this year and for a series of years to take care of the losses 
over that entire period of time.
    And so, in this Federal program, if you had a catastrophic 
loss in the early years, where you have not generated the 
premium, you have not capitalized the program, there is not a 
reserve available; then the Federal Treasury would be looked at 
to take care of that catastrophic event in the early years of 
any actuarially rated program.
    Chairwoman Waters. Thank you very much. I will now 
recognize Ms. Biggert for questioning for 5 minutes.
    Mrs. Biggert. Thank you, Madam Chairwoman.
    But both the Government Accountability Office and the DHS 
Inspector General testified for this committee that FEMA does 
not currently collect adequate information on write-your-own 
companies' wind claims to ensure that the NFIP only pays for 
flood damage and no wind damage.
    Does FEMA collect this information?
    Mr. Maurstad. No, we do not. What we do is, at the time of 
the loss, we go out and we look at and determine the liability 
for the National Flood Insurance Program and then work to pay 
that loss as quickly and as fairly as possible. So we go out; 
we determine what was damaged--what property was damaged by 
flood--and pay the loss accordingly. The write-your-own 
companies that administer the program on behalf of the Federal 
Government have the obligation to do that according to our 
policies, according to statute, and to follow the guidelines 
that we set out so that the policyholder is treated fairly and 
the Federal Treasury is protected.
    Mrs. Biggert. Well, I understand that after Katrina, many 
homeowners complained about a lack of coordination between the 
NFIP and insurance companies in adjusting claims. How is FEMA 
reviewing its policies to ensure that in the future there is 
adequate cooperation between the NFIP and wind insurers, or 
should there be?
    Mr. Maurstad. Well, I think that in some States, for 
example in Mississippi with the State wind pool, we had the 
single-adjuster program that worked on behalf of both the State 
wind pool and the National Flood Insurance Program to adjust 
the losses with the policyholders and to provide that customer 
service that you are talking about.
    If a write-your-own company both writes the homeowner 
policy and also administers the write-your-own standard flood 
insurance policy for the government, they also, under the 
arrangement that we have with the write-your-own companies, 
have the obligation to assign a single adjuster to that 
particular claimant to handle both of the claims.
    But we have a very good working relationship. It's a very 
strong public/private partnership with the nearly 90 write-
your-own companies that are a part of the program, and we 
certainly are always looking at ways to better coordinate the 
claims-handling process with the industry.
    Mrs. Biggert. Well, when the Flood Insurance Program was 
created in the late 1960's, coverage was generally unavailable 
in the private market from coast to coast. How does this differ 
with the state of wind coverage today?
    Mr. Maurstad. It is my understanding that there are 
certainly affordability--primarily affordability--issues. And 
in certain parts of certain States, there are availability 
issues for wind coverage and wind insurance. States have 
addressed those issues, where it has affected their market, by 
creating the wind pools, which we believe is the best way to 
deal with the circumstances within that particular 
    But in vast parts of the country, I would say in 40 of the 
50 States, there is certainly available and affordable wind 
coverage being provided.
    Mrs. Biggert. Do you think that this bill, H.R. 920, would 
discourage private insurers from continuing to offer wind 
    Mr. Maurstad. I believe that it would. I think, as 
indicated before, it would be similar to when the flood program 
started, most of the private insurance sector--fairly shortly 
after the program started, those private insurers that were 
involved in the flood program abandoned the flood program 
completely and let the Federal Government deal with the risk. I 
think that it only is common sense that if the Federal 
Government is going to provide this type of coverage in the 
riskiest of the risky areas, that the insurance industry will 
avoid those areas and go to other areas where they can price 
their product more fairly.
    Mrs. Biggert. Thank you.
    Then, Mr. Swagel, what could State regulators and officials 
do to allow for more competitive, market-based pricing for 
insurance, and attract more insurers to their States?
    Mr. Swagel. As Mr. Maurstad just said, in most States, wind 
coverage is generally available. The problems have typically 
been in States that have taken actions that have had unintended 
consequences of displacing the private coverage. Florida is one 
example. The symptom is the unavailability, and the problem is 
typically the unintended consequences of State regulators.
    Mrs. Biggert. I might just note that I'm from Illinois, and 
we certainly, you know, have a lot of market competition 
because we don't have the regulation that so many States have. 
Does that help?
    Mr. Swagel. That's right. You know, this is a case in which 
there's a lot of private sector capacity. There's capital both 
in the United States and worldwide that after a hurricane or a 
natural catastrophe does tend to withdraw, but then comes back 
in, and sometimes well-intended actions can interfere with that 
    Mrs. Biggert. Thank you.
    Thank you, Madam Chairwoman. I yield back.
    Chairwoman Waters. Thank you very much.
    Mr. Cleaver?
    Mr. Cleaver. Thank you, Madam Chairwoman.
    Mr. Maurstad, FEMA has a herculean responsibility. It's one 
of the most difficult jobs, probably, in the Federal 
Government, and that's why I've always tried to restrain my 
criticism, even after I was very disappointed in what happened 
in the Gulf region.
    My concern, however, at this point is that when I look at 
your opening statement, it appears as if FEMA is assessing 
economic trends. I won't criticize the failures in the Gulf 
region, but I have to tell you, I am really concerned about 
FEMA's expertise in assessing economic trends. You say that a 
Federal program would undermine economic incentives to mitigate 
risk because the program would like the historic rates from 
actuarial values.
    Did FEMA bring on some economists to help it reach this 
    This morning--this would have been an appropriate response 
from Dr. Friedman from Harvard. We had a committee hearing 
today dealing with monetary policies and the state of the 
economy, with Dr. Meltzer from Carnegie Mellon and John Kenneth 
Galbraith from the University of Texas. And so, I guess before 
I can go any further, I need to understand FEMA's expertise in 
exercising economic trends.
    Mr. Maurstad. Thank you, Mr. Cleaver.
    Certainly, we have actuaries on our staff who assess the 
trends, economic and otherwise, of the insurance industry. We 
also have many staff members who together have nearly 40 years 
of experience in administering and operating the National Flood 
Insurance Program, which, of course, this legislation is based 
upon. And so, I would say that we do have the expertise to 
provide the information that we did in our testimony.
    Mr. Cleaver. Well, do you have data available that would 
demonstrate or show that incentives were undermined as a result 
of the National Flood Insurance Program?
    Mr. Maurstad. I think that we can certainly provide you 
with information and data on mitigation activities and the 
extent that mitigation activities are pursued when required, 
versus when they're just voluntarily taken. I mean, part of 
that point that was attempted to be made there was that without 
incentives to mitigate one's property, most folks are not going 
to make that economic decision.
    We will have a discussion with you and try to provide you 
with the data you are looking for to back up that statement.
    Mr. Cleaver. But you do have it?
    Mr. Maurstad. I believe we either have it or will provide 
it for you. Again, I am not sure what the actuary who helped 
develop the testimony--and provided that advice as we were 
crafting our testimony--used as his basis. I will find that out 
and provide that to you.
    Mr. Cleaver. Okay, that was exactly where I was going, that 
if we don't have the data, then the statement would be at least 
baseless. Right? I mean, if the statement was developed without 
this data, then the statement is baseless.
    Mr. Maurstad. Sure.
    Mr. Swagel. Thank you, Mr. Cleaver. I apologize for jumping 
in, and thank you for--
    Mr. Cleaver. You are going to help FEMA out?
    Mr. Swagel. I was going to mention just the sense of the 
second half of your question about the incentives undermined by 
the NFIP--and obviously, I'm not blaming Mr. Maurstad here. You 
know, it is well-known that a portion of the properties covered 
by the Flood Insurance Program are done so at subsidized rates. 
This is intentional. Essentially, part of the properties were 
grandfathered in and a disproportionate part of the expenses of 
the program, the benefits they pay, relate to those properties. 
In a sense, it's a set of properties that have recurring 
losses, so they suffer damage and are built again and suffer 
damage again. That's the sort of incentives that the testimony 
has in mind.
    Mr. Cleaver. This is very interesting. I mean, who wrote 
the statement for FEMA, then?
    Mr. Maurstad. We wrote the statement, sir. Because he 
helped to answer the question, I don't think--
    Again, you're asking me to criticize my statement, which I 
am unwilling to do.
    Mr. Cleaver. I wouldn't do it either. Believe me, if I were 
over there, I would defend the statement, even if it was wrong.
    Mr. Maurstad. Thank you, sir.
    Mr. Cleaver. And it is wrong, but I mean--
    Because I don't understand. Describe the NFIP actuarial 
    Mr. Maurstad. The actuarial soundness of the NFIP?
    Mr. Cleaver. Yes, soundness.
    Mr. Maurstad. Currently, 75 percent of the policies--
    Chairwoman Waters. The gavel slipped.
    Mr. Maurstad. Okay. Currently, 75 percent of the policies 
are risk-based, actuarially rated as the discussion that we've 
had earlier; 25 percent of the policies are discounted as a 
result of the way that the legislation is written and the 
program was designed. So the program loses about $800 million a 
year in foregone premium if that 25 percent that is discounted 
were, in fact, charged risk-based, actuarially sound premiums.
    Mr. Cleaver. Thank you, Madam Chairwoman. Thank you, sir.
    Chairwoman Waters. Thank you very much.
    Mr. Green?
    Mr. Green. Thank you, Madam Chairwoman. And I thank the 
witnesses for their time. Unfortunately, we do have to vote 
from time to time, and thank you for staying over.
    A few questions, and I trust that you can provide some 
ocularity on something that is of great concern to me. The 
first question is, are you for the status quo? Yes or no.
    Mr. Maurstad. No.
    Mr. Green. Okay. If you are not for the status quo, what 
have you proposed to change?
    Mr. Maurstad. Relative to strengthening the National Flood 
Insurance Program, we've testified before on essentially, five 
guiding principles to strengthen the program: protect the NFIP 
integrity by covering existing commitments and liabilities; 
phase out discounted premiums; increase NFIP participation 
incentives; improve program enforcement; and increase community 
risk awareness by improving information quality and 
    Mr. Green. Let me intercede and ask this. How would that 
help a person who was situated as was the case with Mr. Taylor?
    Mr. Maurstad. Strengthening the NFIP--
    Mr. Green. What does that mean?
    Mr. Maurstad. That means providing a National Flood 
Insurance Program that better serves its designed purposes. 
Strengthening it is certainly not addressed.
    Mr. Green. I think that's what we are attempting to do.
    Terms without definition are sometimes meaningless; and to 
say ``strengthen,'' and not give real substance to what that 
means doesn't necessarily give Mr. Taylor a lot of comfort; 
Congressman Taylor, excuse me. And it seems to me that while 
you give words, I don't see the ocularity in them such that I 
can understand how Mr. Taylor or the persons who are similarly 
situated will benefit.
    Mr. Maurstad. Our position is that adding wind coverage to 
the NFIP is not the appropriate way to address the problem that 
Congressman Taylor has raised.
    Mr. Green. Do you agree that Mr. Taylor had wind coverage 
in his policy?
    Mr. Maurstad. I'm not sure what coverage Mr. Taylor had on 
his home. He indicated that he had a homeowner's policy, and 
most homeowners policies certainly have wind coverage, so there 
is no reason for me not to believe that he had wind coverage.
    Mr. Green. If we assume that he had wind coverage with his 
policy, and we assume that he did not get immediate 
satisfaction--in fact, he had the threat of litigation to get 
satisfaction, are you of the opinion that this is a good way 
for the consumer to have to do business? To have to threaten 
litigation, hire a lawyer, and pledge a portion of whatever 
return you might receive in terms of damages? Are you of the 
opinion that this is the way the consumer should have to do 
    Mr. Maurstad. I believe that litigation should always be a 
last resort.
    Mr. Green. So you would have this as a resort of first 
impression as opposed to last? Because that's what Mr. Taylor 
had to do, and that's what many people along the Gulf Coast had 
to do. They had to sue.
    Now, this new plan would propose to give people the 
opportunity to have coverage that's certain so that we take out 
the notion that they have to have some degree of consternation 
as to whether they're covered or not. And in so doing, they 
then can buy additional coverage.
    Would you agree that under the new plan, we, in essence, 
would have a $500,000 deductible for insurance companies? Would 
you agree with this under the new plan?
    Mr. Maurstad. As I understand the legislation is written, 
    Mr. Green. Okay, so an insurance company would have a 
$500,000 deductible. Why would a company oppose doing business 
in a State wherein they get that deductible and where they 
don't have any loss until there's a $500,000 loss. They have no 
loss. Why would they oppose that? Doing business in that State?
    Mr. Maurstad. Yes, Mr. Green, they certainly may provide 
the excess coverage over that.
    Mr. Green. But that's what this plan would propose. Excess 
coverage and a degree of certainty for consumers so that they 
don't find themselves in a position that the Congressman 
Taylors of the world were in, not knowing whether they would 
get coverage; having to hire lawyers, bring experts in, 
threatening to sue, having the Attorney General a part of the 
litigation process. This is not the way we want to treat 
American citizens, consumers, is it?
    Would you have Mr. Taylor go through this again?
    Mr. Maurstad. I would hope that no one would have to go 
through that scenario.
    Mr. Green. Okay, well, then if you wouldn't want him to go 
through this again, isn't it logical to provide a means by 
which we can be sure that persons who seek to have wind 
coverage will have in fact wind coverage without litigation. We 
have thousands of people who are now entangled in litigation 
when they should have had an opportunity to simply present the 
damages and go on.
    If they have the wind coverage and the flood coverage, then 
they have the coverage necessary to avoid litigation. Do you 
see this as a reasonable premise?
    Mr. Maurstad. Mr. Green, I certainly understand your 
support for the legislation.
    Mr. Green. No. No. Let's not talk about my support of 
legislation because my time is almost up.
    Do you agree that with this bill, consumers will be 
protected if the bill provides the $500,000 ceiling in coverage 
and then insurance companies can pick up excess damage?
    Mr. Maurstad. No. I'm not sure that would be the outcome.
    Mr. Green. Are you not sure that if Congress writes a bill 
to provide the coverage, that the coverage will be there? So 
you doubt the credibility of Congress to write the legislation?
    Mr. Maurstad. I don't believe that's what I did.
    Mr. Green. Okay, then, so you assume that Congress can do 
what it says it will do. Yes or no.
    Mr. Maurstad. Well, yes.
    Mr. Green. Okay, if Congress does what it says it will do, 
and then that only leaves excess coverage, do you agree that 
the person who benefits from the $500,000 worth of coverage 
will in fact have coverage?
    Mr. Maurstad. Sir, I don't mean any disrespect to you or 
the institution, but there are many cases where unintended 
consequences have occurred because of legislation that's 
    Mr. Green. I agree. Let's talk about intended consequences 
for a moment, however. Unintended consequences could cause a 
plane to land on this building right now. Hopefully, that won't 
happen. But the intended consequence, do you agree that if it 
occurs the consumer would have coverage?
    Mr. Maurstad. The consumer may have coverage at the expense 
of the Federal Treasury.
    Mr. Green. But the consumers are having coverage at the 
expense of the Federal Treasury right now based on claims that 
they filed that they can't have fulfilled without litigation. 
The consumer is put in a position where either he or she has 
the courage and the ability to sue or they don't get the 
coverage. They get nothing.
    So is that what you would have for consumers, an all-or-
nothing proposition?
    Mr. Maurstad. No, I don't think consumers should ever be 
placed in an all-or-nothing position.
    Mr. Green. I yield back. Thank you, Madam Chairwoman. You 
were quite generous.
    Chairwoman Waters. Thank you very much.
    The gentleman from California, Mr. Miller, for 5 minutes.
    Mr. Miller. This is a really complicated issue. I remember 
your testimony before. We heard from the Attorney General of 
one State that I believe should have been suing the insurance 
commissioner of his own State because he disagreed with what 
the insurance commissioner allowed. And it's kind of difficult 
when you get in a situation like that and for years, I have 
been saying that we perhaps need an optional Federal charter 
for insurance companies so we can forego the State requirements 
today and have a Federal charter that is somewhat all-
    But in your previous testimony, Mr. Maurstad, before the 
Oversight and Investigations Subcommittee, you said that FEMA 
did not find any pattern of abuse in write-your-own insurance 
companies. Would you give me an update?
    Mr. Maurstad. At this point, as we continue to review the 
circumstances, there has been no uncovering of a concerted 
conspiracy or attempt by the write-your-own companies to shift 
wind coverage onto the National Flood Insurance Program. As we 
continue to evaluate our claims, we go out and we assess and we 
do audits of those claims.
    Was the damage by flood and was the appropriate amount 
compensated to the policyholder for the damage by flood? And we 
are finding that is what occurred.
    Mr. Miller. When you were here last time, I think we had 
the facts that about 98-plus percent of the claims had been 
    Is it in excess of that today?
    Mr. Maurstad. I believe it's a little over 99 percent at 
this point.
    Mr. Miller. Does FEMA have a way to ensure that write-your-
own insurance companies don't have the ability to defraud the 
    Mr. Maurstad. Sure. There are a number of processes in the 
control system, the auditing process.
    Mr. Miller. So when wind and flood damage occurs, they have 
the ability to do that?
    Mr. Maurstad. Sure, the adjustor that's on the ground is 
the first individual who works with the policyholder to 
determine what caused the damage to what. Then there are, of 
course, ways that we go through by random inspection, by field 
audits, a number of other oversight responsibilities by the 
general adjustor of the program.
    If claims were brought to my attention, we review them. 
There are a number of ways in which appropriate oversight is 
provided for the handling of claims.
    Mr. Miller. Mr. Swagel, I think that currently there are 
probably $19 trillion worth of policies written from Texas to 
Maine for tornadoes and wind and those types of things. And 
currently the U.S. taxpayers are in debt for about $18 billion 
from the NFIP, currently today.
    Don't you believe adding this wind coverage to the National 
Flood Insurance Program exacerbates the problems and adds 
additional risk to the taxpayers that the private sector should 
be able, through a competitive marketplace, to deal with?
    Mr. Swagel. Thank you, Mr. Miller.
    Yes, that is really our view, that the private capacity as 
you say does exist, and the Federal taxpayer is already on the 
hook for such a large debt that it's hard to see the program 
paying off. And adding this new program to it would just make 
the situation worse.
    Mr. Miller. I do understand my good friend Mr. Taylor's 
situation, and he is my friend. We talk about a situation of 
rebuilding his home, and we joke sometimes. But it's joking in 
serious. I understand the situation he goes through. I haven't 
had it happen to me, but I can associate with what they're 
having to go through. But we're dealing with something here 
that we're looking at taking the market away from write-your-
owns and placing it on the Federal Government and the 
taxpayers, when the testimony we received in the last hearing 
clearly showed that there was a major disagreement between 
attorneys general in States with what the insurance 
commissioner with their own State did and approved in insurance 
    And that's very difficult for write-your-owns when they 
present a policy to the State and the State approves it through 
the insurance commissioner, then the AG comes back and wants to 
sue everybody to change it. How do you think changing this to 
the Federal Government would benefit anybody?
    Mr. Swagel. No. It's hard to see how a change to the 
Federal Government would do anything but put the Federal 
taxpayer at risk. And, there's a long tradition, of course, of 
State regulation of insurance markets. And when you have the 
disputes, like you said, that's a source of uncertainty in that 
insurance companies looking to provide new coverage will look 
at those disputes and want a certain regulatory environment 
before they--
    Mr. Miller. I'm not asking you to approve or agree that an 
optional Federal charter is good. Would not the concept of an 
optional Federal charter where we have a charter that's 
approved in statute by the Federal Government that the 
insurance companies have an option to go in. And if they want 
to be an optional Federal charter or not, would that not be 
better and more of a market approach than going to the 
government and providing insurance?
    Mr. Swagel. I think it would be. One of the strengths of 
the insurance system in the United States is the competition. 
It's what the ranking member had said existed in Illinois and 
we see that in the whole Nation, and giving the optional 
Federal charter would foster enhanced competition in many 
    Mr. Miller. The problem I had with expanding the flood 
insurance program, and Ms. Waters and I have suffered the same 
situation by expanding it to the 100-year historic plain or 
500-year historic plain--we don't even know what a 500-year 
historic plain is--would include the entire City of Los 
Angeles, and would include all of Orange County--people who are 
not currently at risk trying to create solvency in a Federal 
system that has lost a tremendous amount of money in a given 
    But by doing that, you're passing a burden onto a 
tremendous amount of people who aren't at risk, and I'm just 
concerned that, and I sympathize with my friends who had losses 
due to the catastrophe we faced. But by doing that, I believe 
we're spreading the burden to people who are not at risk 
requiring them to pay for policies that they would not benefit 
from to create solvency in high risk areas. And that is the 
opposite of a free market system and that's my main concern, 
that we get away from competition in the free market system 
where if you want to write a policy in the State and no matter 
what insurance company you are, you're taking a risk. You're 
rolling the dice.
    If you win, you make money. If you lose, you lose money. 
But placing the burden on the taxpayer is a risk that would be 
inappropriate, and I'm having a difficult time understanding 
it. But I thank you for your time and your input.
    I thank you for the time, Madam Chairwoman, and I yield 
    Chairwoman Waters. You're welcome.
    Mr. Taylor?
    Mr. Taylor. Thank you, Madam Chairwoman, and let me begin 
by asking for your consent to submit for the record a list of 
insurance companies that have pulled out of coastal American in 
the 2 years since Hurricane Katrina.
    Mr. Maurstad, what percentage--
    Chairwoman Waters. Without objection.
    Mr. Taylor. What percentage, according to the National 
Oceanographic and Atmospheric Administration, what percentage 
of Americans live in coastal America?
    Mr. Maurstad. If my memory serves me right, which usually 
fails me at times like this, I'd say 65 percent.
    Mr. Taylor. Okay, it was probably closer to 52 percent. So 
wind damage might be just a little bit more than as you said, 
something that effects some people in some places if it's more 
than half of all America. Would you agree to that?
    Mr. Maurstad. I think my comments were I think on the heels 
of your comments that you acknowledged that.
    Mr. Taylor. Your quote was that wind only affects a portion 
of some States.
    Mr. Maurstad. Yes, 52 percent of all Americans is a lot 
more than a portion of some States.
    Mr. Taylor. The second part is, you say that the private 
market already provides wind insurance. Those five people, and 
I could probably supply 8,000 more, if time would permit, who 
have not been paid in 2 years, would certainly disagree.
    The fact that after their company didn't pay them, that 
their company completely left the State and said, we're not 
even coming back, would certainly be contrary to what you said. 
But there are some things that you said that I'm really having 
trouble comprehending because listening to you would have me 
think that our Nation in no way ended up paying these wind 
bills, that you're afraid our Nation is going to get stuck with 
wind bills and that somehow we haven't.
    But I would remind you that according to a memo that you 
gave out on September 21, 2005, talking to the national write-
your-own insurance companies about what to do after Katrina, 
you said that FEMA will not seek reimbursement from the company 
when a subsequential review identifies overpayments resulting 
from the company's proper use of the FEMA depth data and a 
reasonable method of developing square foot value and 
concluding claims.
    Later on, when Ms. Waters, in the follow-up hearing on 
February 28th of this year, asked you a direct question, her 
question was, as I understand it, you could have damage that 
occurred from both; some by water, some by wind. Are you 
telling me you do the assessment, you have the information, and 
you just pay the water. You don't pay the wind or you don't 
take any of that into consideration. If you have some coverage 
there, you pay everything.
    Your answer, and I'm quoting: ``If there's damage that's 
caused by both flood and wind, we're obligated to pay for that 
damage.'' That means all the damage. So you send out a memo in 
effect giving the insurance companies a get-out-of-jail-free 
pass. You say before this committee that when there's both, 
we're going to pay. You argue that you don't want people to pay 
premiums for the coverage that they're apparently getting.
    But I think what interests me after hearing all this is 
that there were obviously tens of thousands of Katrina claims 
where we let the private sector go out and adjudicate that 
claim, adjust it, and decide which is wind and which is water. 
So I'm curious after those thousands of claims written by human 
beings that we know are imperfect, how many times since Katrina 
have you gone back and found fault with those claims?
    How many times have you said no, the government shouldn't 
have paid that? You should have paid that, Allstate or 
Nationwide or State Farm. Because I'm reading some really 
interesting stories in the New Orleans Times-Picayune, where 
they're naming street addresses. They are naming the people's 
names. They are giving instances of eyewitnesses who said, ``I 
didn't have any flood damage, and yet I got an $80,000 flood 
insurance check.'' So how many times have you sought 
    Mr. Maurstad. Well, we can institute an audit for cause at 
any time when any irregularities are brought up. We've gone 
back direct.
    Mr. Taylor. How many times, sir?
    Mr. Maurstad. I don't know the exact number.
    Mr. Taylor. Is there one?
    Mr. Maurstad. Sure, there have been a number of times we've 
gone back.
    Mr. Taylor. Is it ten?
    Mr. Maurstad. More than ten.
    Mr. Taylor. Is it more than a hundred?
    Mr. Maurstad. Probably.
    Mr. Taylor. Well, give me a rough idea.
    Mr. Maurstad. I'll get you that number.
    Mr. Taylor. Okay.
    Mr. Maurstad. I know that we reviewed 10 percent of the 
claims that were handled from the expedited claim-handling memo 
that you referred to, so that in itself was about 1,600 times 
we went back and reviewed claims.
    Mr. Taylor. So, how many times have you sought 
    Mr. Maurstad. Well, during those times we discovered that 
they paid $5 a square foot for something instead of $4.50, we 
go back and we recover that. We do that, but I don't have the 
exact number.
    Mr. Taylor. Okay, would you supply that for the record?
    Mr. Maurstad. I'll see if I can provide it for the record. 
We'll do our level best to provide you the answer.

    [The following information was provided for the record:]
        ``As a result of Hurricane Katrina, FEMA has conducted 
        5,294 re-inspections. We have discovered 148 cases of 
        overpayment, totaling $3,704,000. To date, we have 
        recovered approximately $1,826,000.''

    Mr. Taylor. So when you came before this committee and said 
that when there's both, we pay for both, did you misspeak?
    Mr. Maurstad. No, sir. I think that people are 
misinterpreting my comments. What I am indicating is that the 
standard flood insurance policy says that if there is property 
that is damaged by flood, we are obligated to pay that. If wind 
is a part of that damage also, that is not relevant in our 
determining what the flood insurance policy owes that 
    Mr. Taylor. Mr. Swagel, I'm curious in your concerns about 
this. Let's compare this to the founding of the original 
National Flood Insurance Program. At any time when the National 
Flood Insurance Program became law, was there ever a 
requirement that it pay for itself?
    Mr. Swagel. You know, I have to apologize. I don't know the 
entire history. So I don't know in 1968.
    Mr. Taylor. The correct answer, sir, is ``no.'' Okay, I'll 
let you go back and check.
    Mr. Swagel. Okay, yes. I am sorry. I know what the status 
is today.
    Mr. Taylor. Are the rates set by law? Is there a legal 
statute that says how much those rates can be raised in an 
individual year?
    Mr. Swagel. Well, Mr. Maurstad would probably know the 
details like that.
    Mr. Taylor. The correct answer is ``yes.'' Now, this 
contrast is with what we're trying to do, which under the Rules 
of the House can't even be brought to the Floor unless it pays 
for itself under the pay-go rules, number one.
    Is there a provision in that bill that limits the amount of 
increase in rates, should there be a short-fall? The answer is 
    Mr. Swagel. In your bill, no, there isn't.
    Mr. Taylor. So how can you wax eloquently about the beauty 
of one that has no provision that has to pay for itself; has no 
provision to catch up; but yet condemn the other one that is 
trying to establish itself in a fiscally responsible manner?
    Chairwoman Waters. Thank you very much. We're going to move 
on to the other panel.
    I thank you for being here today, and I thank you for your 
patience. Again, we know that you were terribly inconvenienced 
by the time that we took on the Floor, but I thank you for 
    All right, we will call our third panel now. Our first 
witness will be Ms. Pam Pogue, vice chair, Association of 
Floodplain Managers. Our second witness will be Ms. Sandy 
Praeger, commissioner, Kansas Insurance Department, on behalf 
of the National Association of Insurance Commissioners. Our 
third witness will be Mr. Ted Majewski, senior vice president, 
Harleysville Insurance, on behalf of the Property Casualty 
Insurers, the American Insurance Association, and the National 
Association of Mutual Insurance Companies.
    Our fourth witness will be Ms. Cheryl Small, policy 
advisor, National Flood Determination Association. Our fifth 
witness will be Mr. W. Anderson Baker, III, CPCU, Gillis, Ellis 
& Baker, Inc. Our sixth witness will be Mr. Robert Hartwig, 
Ph.D., CPCU, president and chief economist, Insurance 
Information Institute, and our final witness will be Mr. David 
Conrad, senior water resources specialist, National Wildlife 
    Without objection, your written statements will be made 
part of the record. You will now be recognized for a 5-minute 
summary of your testimony. Thank you.
    Ms. Pogue?


    Ms. Pogue. Thank you, Madam Chairwoman. My name is Pam 
Pogue and I am actually the immediate past chair of ASFPM, and 
I am also the State floodplain program manager in the State of 
Rhode Island.
    ASFPM is pleased to comment on the legislation proposed by 
Representative Gene Taylor and co-sponsored by a number of 
members of the committee, the Multiple Peril Insurance bill. 
The Association of State Floodplain Managers and its 26 
chapters represent over 12,000 members--State and local 
officials and other professionals who are engaged in all 
aspects of floodplain management, including mitigation 
management, mapping, engineering, planning, community 
development, hydrology forecasting, emergency response, water 
resources, and insurance.
    Many of our members worked with communities impacted by 
Hurricanes Katrina and Rita, or worked with organizations that 
continue to support these very important 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 we are working to achieve effectiveness 
and mitigate in meeting these shared objectives.
    Because we have been directly involved in aiding recovery 
from the hurricanes of 2005 that devastated the Gulf Coast, we 
are very much aware of the difficulties in resolving insurance 
claims differentiating between damage caused by flood waters 
and wind. We note the validity of the problem and respect 
Congressman Taylor's commitment to address the associated 
issues, which led to the introduction of H.R. 920. However, 
before enacting this legislation, it seems appropriate that 
Congress work with FEMA to seek administrative means to address 
these concerns.
    We would also like to note the problem of private insurance 
availability in coastal areas. Companies have been changing 
their policies on where to offer coverage, following major 
losses and in light of predictions of more intense storms that 
will frequent the Gulf and Eastern coasts of the United States. 
We suggest that this problem needs thoughtful analysis in the 
development of recommendations, perhaps in the context of 
overall provision for catastrophic losses.
    Offering Federal wind coverage without analysis of the 
effects on consumers, the insurance industry, and the National 
Flood Insurance Program can result in a significantly 
detrimental impact. At this time, the House Financial Services 
Committee is considering H.R. 1682, the National Flood 
Insurance Program Reform Act of 2007. That bill has a number of 
key provisions that we and others believe should be enacted 
    With regard to H.R. 920, we respectfully suggest that the 
committee act quickly on H.R. 1682 with the following 
additions: require that FEMA report on policies and procedures 
used to adjust claims when damage to insured property results 
from a combination of wind and flood water damage; and require 
a study of the premise and implications of the proposal in H.R. 
920, including all questions that will be needed to be answered 
before a new insurance program is undertaken. So, therefore, 
what we'd like to do is pose a number of questions related to 
H.R. 920 and the Multiple Peril Insurance bill.
    One: Congress created the NFIP to fill a gap. The private 
insurance industry declined to offer flood coverage. H.R. 920 
makes wind coverage available in all of the Nation's 
floodplains, not just coastal floodplains in direct competition 
with the private sector. Is that the appropriate role for the 
Federal Government?
    Two: how big is the potential market for wind and flood 
insurance; what is the potential new loss exposure? How high 
would premiums have to be to be actuarial? Is the new wind 
coverage supposed to cover wind damage, even if there is no 
associated flooding? If no flooding was involved, would a 
floodplain home and tornado--
    Mr. Cleaver. [presiding] Ms. Pogue, if you would like, you 
could just submit that to us.
    Ms. Pogue. I have a few more questions and I'm done.
    Mr. Jones. All right.
    Ms. Pogue. The point is, there are a lot of questions. 
Would the private insurance industry be likely to develop a 
homeowners' policy that excludes wind damage, or would the 
homeowners buy two policies: one homeowners' policy with wind 
included; and one for wind and flood. What insurance would 
there be that the combined coverage would be comprehensive?
    Under the NFIP, actuarial rates are charged on structures 
that are built after the adoption of a flood insurance rate 
map. To rate policies for these post-FIRM buildings, homeowners 
provide surveyed elevation data so that the insurance agent can 
write the policy based on the risk. Does the bill anticipate 
the owners of the older buildings will have to provide some 
form of certification that the home meets certain wind-
resistant construction methods in order to determine 
appropriate, actuarial rates for wind coverage? Would it cost a 
homeowner or business more to have such a certification 
prepared by a qualified engineer and architect?
    Finally, Section 5 calls for the director to determine 
appropriate land use, zoning, and wind damage prevention 
measures. This would seem to call for a new Federal building 
code. Would communities be required to adopt such a Federal 
building code to require construction to meet certain wind 
resistant standards? How would a community handle conflicts 
between a new Federal building code and currently adopted State 
or local building codes?
    We appreciate the opportunity to comment on H.R. 920 and 
look forward to continue the discussion on the ways the NFIP 
and the private insurance industry can improve adjusting 
practices, while also looking for ways to reduce future damage 
and flood damage to strengthen the NFIP.
    Thank you for this opportunity.
    [The prepared statement of Ms. Pogue can be found on page 
89 of the appendix.]
    Mr. Cleaver. Thank you.
    Ms. Praeger?


    Ms. Praeger. Thank you, Congressman Cleaver, Ranking Member 
Biggert, and members of the subcommittee. Thank you for the 
opportunity to testify here today on behalf of the National 
Association of Insurance Commissioners. My name is Sandy 
Praeger and I am the elected insurance commissioner for the 
State of Kansas. I also serve as the president-elect of the 
    As a citizen and public official of a State that has just 
suffered massive flooding and millions of dollars in losses, I 
applaud you for focusing attention on improving insurance 
coverage. The recent storms and flooding in Kansas pale in 
comparison to the devastation of Hurricane Katrina, but there 
are some alarming similarities as insurance claims come in.
    Private insurers have stepped in to pay millions in wind 
claims, but there are some flooded communities where the number 
of people with flood insurance can literally be counted on one 
hand. With regard to flood coverage, we have a national problem 
of the uninsured and underinsured. The current system of 
coverage is just not good enough. Congressman Taylor has first-
hand experience with that and we commend him for raising the 
issue of how comprehensive coverage is delivered to consumers.
    Consumers expect all perils insurance coverage and too 
often they wrongly assume they have it. The NAIC recently 
conducted a survey of homeowners and found that despite the 
extensive media coverage of Hurricane Katrina and the insurance 
problems that followed, 33 percent of households still 
incorrectly believe that flooding is covered by the standard 
homeowner's policy; and 35 percent incorrectly believe that 
earthquakes are covered. The results are alarming, but I would 
argue that they are really not surprising.
    A single policy for a single price should be available to 
those who want it. Congressman Taylor has proposed one approach 
that deserves consideration. His bill addresses two main perils 
affecting his constituents: wind and water. But the outcry over 
wind and water could just as easily be heard over earthquake 
and fire in another region of the country. As this subcommittee 
considers flood insurance reform, we believe it should do so 
with all natural catastrophes in mind, so that solutions to 
these problems are comprehensive in nature.
    Insuring one's home currently requires several policies 
that still may leave some residents underinsured. This approach 
has led to gaps in coverage and room for potential bad actors 
to shift their obligations from one policy to another. These 
gaps in coverage can result in costly litigation or taxpayer 
obligation if the Federal Government steps in following a 
natural disaster.
    The burden of managing the mechanics of multiple insurance 
policies has effectively been placed on the shoulders of 
consumers. Seamless, all perils insurance can and should be an 
option for those who want it. Providing this type of coverage 
may raise issues of affordability, but addressing affordability 
without first closing gaps in coverage is not in the best 
interest of consumers. With respect to H.R. 920, this approach 
does address the issue of wind and water, but moved the line of 
contention to other perils. Homeowners would still have to buy 
fire, theft, liability, and potentially excess wind coverage if 
their home value exceeds the NFIP coverage limits.
    The bill ultimately seeks to improve the quality of 
coverage for consumers; and we support that goal. But we think 
there are some alternatives to consider that place the private 
market as the first line of defense and close gaps in coverage 
while addressing concerns about affordability. For example, the 
NFIP could be restructured as a reinsurer to provide first 
dollar reinsurance to companies writing flood coverage into 
their standard homeowner's policy. This would allow companies 
to offer their customers a more attractive product, but it 
shifts any debate over the cause of loss to the insurer and the 
NFIP, leaving the consumer with a seamless product.
    In the event of a loss, the consumer receives only one 
check, only deals directly with one adjustor and one insurance 
company. While this approach does not address every peril, it 
is an alternative to H.R. 920 that keeps wind coverage in the 
private market. Another concept is to eliminate the flood 
program and have the private market offer all perils coverage 
directly in exchange for comprehensive coverage and as a way to 
manage affordability, the Federal Government could provide a 
backstop or a credit line over a certain magnitude of loss. 
This would cap catastrophic exposure for the insurers, but 
would leave the government out of the vast majority of insured 
    Such an approach would have to be structured to encourage 
participation by insurers of different sizes and would need to 
work in tandem with State-run catastrophe programs that have 
been designed to address the risk of a particular region. 
Insurers in States would be the first and second lines of 
defense, while the Federal Government would utilize its ability 
to spread risk over time.
    Federal involvement is inevitable when a major catastrophe 
strikes, but if better insurance is more widely held by 
consumers, that involvement would be less frequent and flow 
more as risk-based insurance dollars than as relief dollars. 
Insurers could also factor in this involvement to their pricing 
and spread their capacity more broadly.
    Congressman Taylor had shed light on the gaps in insurance 
coverage as it's offered today, and we commend him for that and 
hope our alternatives will be met with an open mind and 
recognized as an effort to move toward a common goal. Providing 
all perils insurance will require a collaborative effort. There 
are challenges of affordability that are serious considerations 
for public policymakers.
    Given the complexity and the scope of this issue, the NAIC 
continues to strongly endorse the concept of a national 
commission on catastrophe preparation to weigh all the options.
    Thank you for inviting me here today to testify and for 
considering our views. State insurance officials stand ready to 
assist Congress as you consider this important national issue.
    [The prepared statement of Ms. Praeger can be found on page 
95 of the appendix.]
    Mr. Cleaver. Thank you very much.
    Mr. Majewski.

                       COMPANIES (NAMIC)

    Mr. Majewski. Thank you, Mr. Chairman.
    My name is Ted Majewski, and I am senior vice president of 
Harleysville Insurance Group, a member of the Property Casualty 
Insurers. Harleysville writes homeowners', commercial property 
and other property, and casualty insurance, and is domiciled in 
Pennsylvania. Harleysville also participates in the National 
Flood Insurance Program's Write-Your-Own Program.
    Thank you for the opportunity to appear before you today on 
behalf of Harleysville, PCI, AIA, and NAMIC, to provide our 
comments to this important legislation.
    The Multiple Peril Insurance Act of 2007, H.R. 920, is an 
admirable effort to resolve issues related to property 
insurance coverage disputes that are currently being decided in 
our State and Federal courts. However, Harleysville and a 
significant portion of the property casualty insurance industry 
have concerns about the current provisions of this legislation, 
and therefore oppose their being added to the National Flood 
Insurance Reformation and Modernization Act of 2007, H.R. 1682, 
for the following reasons.
    H.R. 920 would dramatically increase the exposure of the 
NFIP and the Federal Government to catastrophic losses. The 
States along the Gulf Coast and Eastern seaboard contain more 
than $19 trillion in insured property values. The majority of 
these risks are currently insured in the private marketplace or 
in a State residual market program where the private insurance 
industry shares in the potential losses. Moving significant 
numbers of these properties from the private insurance 
marketplace to the NFIP would significantly increase the 
exposure of loss to the Federal Government and despite the 
provision that calls for actuarially sound rates for the 
windstorm portion of this coverage, increase the potential for 
a significant taxpayer subsidy.
    H.R. 920 would increase the potential losses of the NFIP at 
a time when the NFIP is already more $17.5 billion in debt. A 
recent Congressional Budget Office report states that the 
interest alone on this debt will run about $900 million a year. 
The bill purports to eliminate the need to determine whether 
hurricane loss is caused by wind or water; however, while the 
number of wind-water disputes that occurred after Katrina is 
significant, they are relatively rare when compared to the more 
than 3 million insurance claims from these events. When 
flooding does occur, it is rarely a massive tidal surge as 
happened in Katrina. The proposal seems to be adopting a one-
size fits all approach for all States, when the need for such a 
program is limited to coastal areas of coastal States.
    H.R. 920 would increase the amount of coverage available 
above the current NFIP limits, but even these higher limits 
would still be inadequate for many properties. Many property 
owners would still need to purchase additional coverage from 
the private market and integrate two different insurance 
policies. One provided by the NFIP and one regulated by State 
insurance departments. Policy integration issues would need to 
be property addressed in the bill to avoid numerous operational 
challenges and the same types of claim disputes that exist 
    Wind storm residual markets exist in many coastal States. 
These pools typically provide wind-only coverage to homeowners 
living in a designated coastal area who are unable to obtain 
their coverage in the voluntary market. Thus, a private market 
mechanism providing such coverage already exists in these 
markets. States have designed these residual markets to respond 
to their unique geographic and insurance market needs. The bill 
does not address how these programs would operate or if they 
would be replaced with a Federal program.
    As insurers, we understand the Katrina wind and water 
disputes that have arisen are a significant problem for 
homeowners who have suffered the loss of their home and 
belongings. Therefore, these issues are being resolved in 
courts based on contracts purchased by individual policyholders 
and the decisions that will be made by courts who will guide 
how future hurricane claims are handled and will reduce the 
number of disputes in the future.
    There are additional programs that could help address the 
sponsors' concerns and that address the various objections that 
are contained in this testimony. For example, it's possible to 
put a workable dispute mechanism in place. The current program 
can be amended to require the NFIP to participate in State-
sponsored mediations to determine the extent of the damage 
caused by wind versus flood as is currently proposed in 1682.
    In summary, passage of H.R. 920 would create a program that 
if not properly structured has the potential to incur enormous 
deficits following a hurricane of any significance. We would 
appreciate any opportunity to work with the sponsors of the 
bill and Congress on reforms to the NFIP as they are needed and 
other potential solutions to the issues raised by these events.
    Again, thank you for the opportunity to present our views.
    [The prepared statement of Mr. Majewski can be found on 
page 82 of the appendix.]
    Mr. Cleaver. Thank you very much.
    Ms. Small.


    Ms. Small. My name is Cheryl Small, I am the policy advisor 
for the National Flood Determination Association (NFDA), and I 
am pleased to comment on the Multiple Peril Insurance Act of 
2007, H.R. 920. The NFDA shares the concerns for the viability 
of the National Flood Insurance Program and for the homeowners 
in coastal regions who need reliable and affordable insurance 
coverage to protect against losses from windstorm and flood.
    We respect the fact that Congressman Taylor has introduced 
H.R. 920, which creates a Federal program that would make these 
coverages available to homeowners located in coastal 
communities. The NFDA is a professional association of 
companies that work with federally-regulated lenders to 
facilitate compliance with the NFIP's mandatory purchase 
requirements by helping to ensure that structures located in 
special flood hazard areas are covered by flood. Lending 
institutions provide the compliance mechanism for the NFIP. Our 
industry completes approximately 20 to 30 million flood risk 
determinations per year, and we respond to approximately 
1,250,000 telephone inquiries from lenders, insurance agents, 
and homeowners regarding the NFIP and flood compliance matters.
    The NFDA recognizes and appreciates the critical place the 
NFIP holds by bringing together floodplain management, hazard 
mitigation, mapping, and planning of flood insurance. We want 
to see the foundation of the NFIP supported and strengthened by 
thoughtful action.
    Mr. Cleaver. Ms. Small, can you pull the microphone up a 
little closer?
    Ms. Small. Sure.
    While we want to see the foundation of the NFIP supported 
and strengthened by thoughtful action, while we support the 
motives and spirit behind the bill, we strongly urge the 
committee to consider the implications associated with the 
creation of a Federal multi-peril insurance program and suggest 
that the committee require a study to include a comprehensive 
assessment of the loss exposure due to windstorm, the market 
for voluntary windstorm insurance, the effect on the NFIP in 
the private insurance industry, and the implications on flood 
compliance for federally-regulated lenders.
    The NFDA's concerns center around the financial and 
administrative impact this program may have on the National 
Flood Insurance Program, the potential impact of federally-
regulated lenders in the form of inconsistence compliance 
guidelines, gaps in coverage, and possible exposure to 
litigation. Although actuarial rates will be implemented, they 
may not produce sufficient premium income to bear 
administrative costs and losses in the event of a natural 
    To continue to articulate our concerns, currently the 
write-your-own companies provide a sales channel through 
insurance agent networks that conduct training, administer 
claims, and provide policyholder services, including policy 
    What mechanism will be used to provide these services 
within the multi-peril program?
    What would be the extent of the administrative burden to 
the NFIP?
    Will FEMA require additional staff expertise pertaining to 
underwriting actuarial science policy development claims 
program oversight and management?
    What will be the cost in time and money for FEMA to modify 
the NFIP databases and systems to include management reporting 
and requirements for statistical and financial reporting of 
policies, premiums, and claims?
    Would the Federal multi-peril wind and flood program be 
authorized to borrow from the U.S. Treasury to cover 
    What would be the flood compliance implications for lenders 
if a mortgagor, whose property is in a special flood hazard 
area, drops an optional windstorm and flood policy?
    Will gaps and coverage be created when lenders initiate the 
process to place flood insurance?
    Will there be a notification obligation for lenders to 
inform their borrowers of the availability of this higher limit 
    What additional exposure to liability will lenders face 
related to separate policies under the NFIP, standard flood 
versus multi-peril?
    We are in favor of prudent action which considers the 
impact of all the various stakeholder groups, and I hope the 
subcommittee continues a dialogue among these groups to develop 
a course of action which addresses the problems, but does not, 
inadvertently, create new ones.
    Thank you.
    [The prepared statement of Ms. Small can be found on page 
107 of the appendix.]
    Mr. Cleaver. Thank you, Ms. Small.
    Mr. Baker?

                  GILLIS, ELLIS & BAKER, INC.

    Mr. Baker. Congressman Cleaver and members of the 
subcommittee, I am Anderson Baker, president of Gillis, Ellis & 
Baker, Incorporated, one of Louisiana's largest independent 
insurance agencies.
    I appreciate the opportunity to appear before the 
subcommittee today on behalf of Greater New Orleans, Inc. (GNO, 
Inc.), a 10-parish economic development organization in 
southeast Louisiana.
    I would like to extend my personal appreciation to the 
chairwoman for the intense interest she has shown in New 
Orleans over the past 2 years, and also to acknowledge 
Congressman Taylor from our neighboring State of Mississippi 
for the leadership he has demonstrated after these intense 
hurricanes devastated the Gulf Coast and for his leadership on 
H.R. 920.
    GNO, Inc., has grappled with the maze of insurance 
challenges presented by the post-Katrina environment every day 
since Katrina. Our company has handled thousands of Katrina 
claims. We have as much experience with the insurance 
challenges facing New Orleans and the Gulf Coast as any other 
local organization, and have transferred that experience to 
advice to GNO, Inc., since Katrina. One of the biggest 
challenges to the recovery in New Orleans and along the Gulf 
Coast has been the placement of insurance. Prior to Hurricanes 
Katrina and Rita, the private insurance market would have 
readily provided wind coverage. Now, insurance companies are in 
most cases either significantly restricting wind coverage or 
are simply no longer providing it at all.
    As an insurance agent in New Orleans, I am forced to place 
the coverages in the surplus lines markets, place the coverages 
with Louisiana's residual market plan, or not provide the 
coverage at all. How can we expect homeowners and businesses to 
rebuild New Orleans when insurance is either unavailable or not 
affordable. It is essential that the Federal Government work 
closely with those of us on the ground facing the crisis on a 
daily basis to develop common sense solutions to this problem.
    The NFIP has been a valuable insurance program to date, but 
it must be modernized to reflect the current realities. 
Insurers typically do not wish to provide coverage for an event 
that can cause significant loss to numerous properties at the 
same time and in the same area. They tend to insure random yet 
predictable events; and as the hurricanes aptly demonstrated, 
there are times when the private industry simply does not have 
the capacity to adequately respond to a massive event.
    H.R. 920 will provide an incentive for insurers to continue 
writing policies in coastal areas by removing the burden of 
providing the initial levels of wind coverage. This will 
relieve much of the risk of uncertainty that exists in the 
current wind versus flood debate. The result will be more 
capacity in the private sector, which would hasten the 
rebuilding of my city or any other area similarly affected in 
the future. Under H.R. 920, insurers could structure their 
policies to eliminate the lower level of wind coverage that 
currently causes such difficulties in the event of a massive 
    If the revised NFIP program were actuarially priced as 
proposed by H.R. 920, it would allow for the build-up of 
capital in the program and diminish the likelihood of large 
losses incurred after Hurricanes Katrina and Rita. It is a 
reality that an increasing number of Americans are now living 
in coastal regions. In the event of major windstorms in the 
future, the Federal Government will certainly be called upon 
for financial assistance. H.R. 920 would allow more people to 
pay into a program that will build up reserves for future 
losses, and thereby reduce some portion of the Federal 
Government's exposure when the next major hurricane hits one of 
our coastlines.
    I am pleased to add the solid support of GNO, Inc., for 
H.R. 920. The economies of hundreds of counties, parishes, and 
cities are at stake. In this environment, it is essential that 
Congress act aggressively to provide appropriate relief to the 
thousands of homeowners and businesses hamstrung by the 
insurance crisis along the Gulf Coast. H.R. 920 takes a 
significant step in that direction.
    Thank you for the opportunity to appear before you today. 
GNO, Inc. and its insurance task force look forward to working 
with the Financial Services Committee on this important 
    I would be pleased to answer any questions that you may 
have or submit additional information that you may require.
    [The prepared statement of Mr. Baker can be found on page 
58 of the appendix.]
    Mr. Cleaver. Thank you very much, Mr. Baker.
    Dr. Hartwig?


    Mr. Hartwig. Good afternoon, Mr. Cleaver, Ranking Member 
Biggert, and members of the subcommittee.
    My name is Robert Hartwig, and I am president and chief 
economist for the Insurance Information Institute.
    Thank you for the opportunity to appear before the 
committee today to discuss the economic and fiscal 
ramifications associated with the expansion of the National 
Flood Insurance Program to cover windstorm losses as proposed 
under H.R. 920.
    My testimony today will address five major issues: the true 
scope of windstorm exposure in the United States; the 
historical difficulties that government-operated property 
insurers have encountered in implementing a rating system that 
is actuarially sound; the distortionary economic effects an 
expanded program could have should H.R. 20 fall short of its 
stated requirement that rates be actuarially based; recognizing 
that even if rates are actuarially sound, H.R. 920 does not 
address or correct the fundamental problem of low flood 
insurance penetration rates; and the fact that the ability of 
the NFIP to offer windstorm coverage at actuarially sound rates 
will be undermined by political decisions made by many State-
run insurers to subsidize windstorm coverage, thereby pricing 
the Federal coverage out of the market.
    In many parts of the United States, wind is the most costly 
and frequent cause of catastrophic loss, as you can see in 
Figure 1, on the easel to my right.
    As Figure 1 shows, wind plays a role in approximately 80 
percent of the catastrophe losses paid by insurers. Hurricanes 
and tropical storms accounted for nearly half of the $278 
billion in insured catastrophe losses over the past 20 years. 
Tornadoes accounted for another 25 percent. Severe winter 
storms and other strong wind events accounted for another $30 
billion or 11 percent in cap losses. It's important to point 
out that the vast majority of wind losses today are paid by 
private insurers, including those in coastal areas.
    There is no question that government-operated insurers play 
a vital and necessary role as insurers of last resort, but many 
operated deficits, even in years with light catastrophe losses. 
The reason: Government-run property insurers are highly 
susceptible to political pressure and frequently are not 
permitted to charge rates or to adopt underwriting criteria 
that are commensurate with the risk being assumed. While H.R. 
920 requires that rates be established on an actuarial basis, 
the financial consequences of not doing so historically in 
other plans have been nothing short of disastrous. The NFIP 
itself, as we have heard several times, has a current deficit 
of $17.5 billion. Of the 31 State-run Fair Access to Insurance 
Requirement Plans for which data are available, 26 have 
incurred at least one operating deficit since 1999, while all 
seven beach and windstorm plans have sustained at least one 
underwriting loss since that time.
    In the course of the last decade, the Fair Plans have also 
seen a more than 50-fold ballooning in their aggregate 
operating loss from $52 million in 1995 to $2.8 billion in 
2005. Given this real world experience, it is unclear what 
practical safeguards beyond the language in the bill itself 
could or would be implemented as part of H.R. 920 and would 
prevent deviations from actuarially-sound pricing practices. At 
the Federal and State level, legislators and regulators have 
almost universally chosen to sacrifice actuarially-sound rating 
and underwriting practices for political gain. Though popular 
with voters, the combination of artificially low rates and lax 
underwriting standards is financially lethal, enabling and 
encouraging rampant or substandard development in vulnerable 
    Should coastal dwellers be required to pay more to bring 
rates to an actuarially-sound basis? This is a politically 
unpopular question to ask, which is precisely the reason why it 
is seldom answered. Instead, legislatures tend to search for 
ways to spread the cost of financing deficits well beyond the 
policyholders who actually incur the losses, to include 
property owners who have never filed a claim, inland dwellers, 
and people who take every precaution to protect their homes 
against storm damage. Even auto insurance and commercial 
liability policyholders can be assessed.
    Practical experience has demonstrated repeatedly that 
government property insurers rarely operate on an actuarially 
sound basis. So a fundamental question to ask is whether 
expanding the NFIP to include optional windstorm coverage will 
solve the problem associated with discerning wind from water 
damage. There are several reasons to suspect that it will not.
    Low flood penetration rates, as I have already mentioned on 
Chart 2, that you will see up here in a moment--you will see 
that fewer than half of homes and even flood zones have 
coverage, and only 1 percent outside of those zones. Consumers 
generally skip optional coverages. For instance, we could take 
another example of California. Only 12 percent of homeowners 
have earthquake coverage in that State, and of course again the 
minority of homeowners have flood coverage.
    And again, the subsidies that I mentioned earlier price 
H.R. 920 windstorm coverage out of the market. To give you an 
example, Florida Citizens Property Insurance Corporation in 
2006 became the State's largest insurer of homes and is growing 
rapidly today in large part because the State has consciously 
decided to subsidize every single, new policy written. Despite 
having accrued deficits over the 2004-2005 hurricane seasons 
totaling some $2.3 billion, Governor Charlie Crist earlier this 
year ordered that Citizens' rates be rolled back and then 
frozen through 2008.
    So, in conclusion, the proposed expansion of the NFIP to 
provide windstorm coverage as specified under H.R. 920 is risky 
and potentially an enormous financial undertaking.
    Thank you very much for the opportunity to address the 
committee today. I would be happy to answer any questions that 
you have.
    [The prepared statement of Mr. Hartwig can be found on page 
68 of the appendix.]
    Mr. Cleaver. Thank you, Mr. Hartwig.
    Mr. Conrad.


    Mr. Conrad. Thank you, Congressman Cleaver, Ranking Member 
Biggert, and members of the subcommittee.
    The National Wildlife Federation is the Nation's largest 
conservation, education, and advocacy organization. We 
appreciate the opportunity to share our views on H.R. 920, the 
Multiple Peril Insurance Act of 2007. In general, while we 
understand there are substantial issues raised regarding the 
insurance adjustment process when there are both flood and 
wind-related damages, the National Wildlife Federation is 
deeply concerned that adding a wind peril dimension to the NFIP 
could substantially undermine the Program's already precarious 
financial position, would add greater risk and uncertainty, 
especially for the taxpayers and the public, and would 
distract, we believe unnecessarily, from the critical missions 
of the NFIP.
    We applaud Representative Taylor and other members 
especially for their continuing efforts to raise the Nation's 
awareness of the increasing risks associated with coastal 
storms. Current science is predicting that these storms could 
become more powerful and of longer duration, due especially to 
rising sea levels and warming of the climate. The 
Intergovernmental Panel on Climate Change and many prominent 
climate scientists are warning that such storms are likely 
results of global warming, due to buildup of greenhouse gases.
    It is clear also that Hurricanes Katrina, Rita, and Wilma 
in 2005, plus powerful hurricanes that struck Florida in 2004, 
have increased the public's concerns. At the same time, the 
rash of storms have driven the National Flood Insurance Program 
into the most dire financial condition in its history, now with 
a virtually insurmountable U.S. Treasury debt of approximately 
$18 billion. We are strongly urging Congress to make the 
critically necessary changes in the Nation's energy systems to 
directly address causes of global warming. Yet, we believe it 
would not be appropriate or wise to add to the current 
liabilities of the National Flood Insurance Program the 
potentially very large additional liabilities that would be 
associated with coverage of wind peril, especially given that 
the Nation has a long history of this peril being served by the 
private sector.
    Recent insurance industry estimates of major storms 
potentially striking a number of the more populated coastal 
areas show that the costs of storms like Hurricane Katrina that 
were in the $15- to $20 billion range for the NFIP today could 
be 3 to 5 times more, if wind perils were included. Such costs 
could potentially overwhelm the program and the costs to 
taxpayers could balloon to staggering levels. This could 
undermine the ability of the NFIP to accomplish its other 
established goals.
    The National Wildlife Federation has been concerned for 
years that the NFIP is having severe difficulties managing the 
growth of flood-related risk. We see a continual buildup of at-
risk development, with little to suggest that our programs are 
not in many ways increasing disasters. That was not how the 
NFIP was supposed to work. Nearly 10 years ago, the National 
Wildlife Federation released a report called, ``Higher 
Ground.'' On the problems of repetitive losses where in 
thousands of communities, buildings were experiencing repeated 
flood-related losses, only to be reconstructed again and again 
with little or no mitigation of risk, in part for lack of 
incentive to move out of harm's way.
    The lack of incentive for mitigation was driven by rates 
that are below, some of them far below, true actuarial rates, 
flood hazard maps that are inaccurate or out-of-date, and 
failure to consider changing conditions, and failure of 
communities and FEMA to enforce even minimum standards of the 
program, let alone set higher standards to reduce or avoid 
risk. Today, we still find that after Congress passed the 2004 
amendments and provided funding to address repetitive losses, 
the new program is still largely not implemented and has failed 
to spend much of the funds made available to reverse that 
    In the intervening decade since our report, the number of 
repetitive loss properties has grown from 74,500 to now over 
135,000 properties, and the cost to the NFIP of these buildings 
has more than tripled to over $8.5 billion. The NFIP continues 
to face enormous challenges, and the public's confidence is 
lacking in the program's ability to reduce risks, manage costs, 
and protect the environment. Given this context, if the NFIP 
were subject to the additional burden of wind perils, it could 
so tax the program's capabilities that many other functions 
would be slowed or lost.
    As the committee knows, the NFIP is engaged in a major 
effort to modernize maps that have fallen far out-of-date. 
Currently, staffing at the NFIP is straining to carry out these 
and other functions. Yet, we do not believe that the NFIP is 
equipped to analyze and rate wind-related risks as well, 
whereas the private sector has devoted substantial resources 
for decades to these issues--both rating and hazard mitigation 
    Even when the focus has been on managing risk in the more 
defined area of floodplains, it is clear that the NFIP has a 
long way to go. New standards must be developed to provide 
higher levels of protection. Flood risk mapping needs to be 
substantially expanded to support the varied goals of the NFIP, 
and the NFIP needs to be integrated much better with other 
flood-related programs of the government.
    The addition of the wind-related perils would expand the 
flood program's footprint far beyond the present level and 
greatly complicate the potential for success. For this reason, 
the National Wildlife Federation would oppose H.R. 920 as 
    Chairwoman Waters. Thank you very much.
    Mr. Conrad. Thank you.
    [The prepared statement of Mr. Conrad can be found on page 
65 of the appendix.]
    Chairwoman Waters. I thank the panelists for your 
participation, and I will recognize myself for 5 minutes for 
questions to this panel.
    To tell you the truth, I am a bit frustrated with the lack 
of solutions that have not been presented to us. I joined Mr. 
Taylor in support of his legislation because I thought that he 
came up with a solution that made good sense, particularly 
since we have learned that the private insurance companies have 
been trying every way that they possibly can not to pay, when 
clearly they should be paying.
    And it seems as if the Federal Government has been picking 
up the tab, the Flood Insurance Program, that perhaps should 
have been paid by some of the private insurers. Then, of 
course, we are constantly threatened by the private insurers 
that they are not going to insure anymore. They are going to 
pull out. They are not going to provide coverage. But when 
there is a solution developed based on some of the comments and 
unhappiness of the insurance company, then all of a sudden we 
hear from the private sector, private insurance companies that 
that's not the way to go.
    So what are we to do? Are we to say to the private 
insurance companies, we don't have any alternatives. Please 
don't pull out. Please pay the claims. Please don't abandon the 
areas that desperately need coverage. What is a compromise 
solution to this problem? And I'm sorry I didn't hear all of 
your testimony. One of you may have given a compromise 
solution. If you did, would you please just reiterate it a bit 
for me and the rest of the members who may be left?
    Ms. Praeger. Madam Chairwoman?
    Chairwoman Waters. Yes.
    Ms. Praeger. I did suggest on behalf of our national 
association that perhaps Congressman Taylor's proposal should 
be more inclusive. We recognized the conflict between wind and 
water, but we pointed out that you could have the same conflict 
between earthquake and fire, should there be a major earthquake 
in your home State.
    Our proposal was multi-faceted and certainly not thought 
out yet. We are putting on the table some suggestions, and one 
of them is to have homeowners' policies be all-perils policies, 
so that you don't have that dispute. And perhaps then cap the 
catastrophic loss with a Federal, first-dollar reinsurance 
coverage. We have had a major tornado hit in Kansas that 
literally wiped a small community off the face of the map. That 
was wind. Companies were quick to come in. People were paid 
policy limits, and we have had now major flooding in Kansas. 
And most of our homes did not have flood insurance. Many of 
them were in communities where they could participate, but 
chose not to, and mistakenly thought that their homeowners' 
policy covered floods.
    So I think moving to an all perils policy with Federal 
participation in some form, whether it be with bonds that 
companies buy, or with a reinsurance model, we think should be 
    Chairwoman Waters. Without knowing how much participation 
from the Federal Government or the ways in which the private 
sector and the Federal Government may interact, how many of you 
on this panel agree that we should have something that would be 
an all perils approach to dealing with these disasters?
    How many disagree?
    Would you tell me why you disagree? I can't see the name. 
Mr. Majewski?
    Mr. Majewski. Ted Majewski.
    One of the things that insurance is out there for is 
private enterprise to go out and write insurance. If you put 
the Federal Government out there doing all-perilall-peril being 
theft, fire; I mean all peril is everything--you have taken 
something out of the independent market, and I think that is 
bad for business.
    Chairwoman Waters. But my question was not all-perils 
solely as a government response. My question was, could it be a 
combination of private and government? But do you believe that 
the homeowners, the citizens of this country, should have a 
policy of some kind that covers all perils, whether it is wind, 
water, as was mentioned, tornado, or earthquake?
    Do you think there is something to that?
    Mr. Majewski. I think that is an admirable thing to do, to 
try and provide as much coverage as you possibly can provide, 
with the policy. But there would be costs involved with that. I 
mean, you could bring that also to terrorism. You are already 
working on a TRIA Act, currently, and you know the problems 
that are involved with that. So I mean there are a number of 
    Chairwoman Waters. I just want to deal with natural 
disasters right now.
    Mr. Majewski. Yes, I believe natural disasters could be 
covered. There would be a cost involved with it.
    Chairwoman Waters. Do you envision that there's some way 
that the government and the private sector could participate?
    Mr. Majewski. Absolutely.
    Chairwoman Waters. And what is that?
    Mr. Majewski. I believe that what Congressman Taylor has 
put together is a very good attempt to get started on this. I 
think that there are a number of things that were mentioned at 
this panel or on prior ones that if we started to take pieces 
of those and put them together, they would make a lot of sense.
    For example, one of the things that I've been thinking 
about was from a catastrophe standpoint. Instead of covering 
every dollar from a FEMA standpoint, and from a Federal 
Government standpoint, if you were to take a Category 3 storm 
and above, which rarely happens but is really what this whole 
thing started over, was major, major storms, not necessarily 
the small ones, but the largest storms that are out there, 
which from a probability standpoint will occur, but not as 
often as smaller storms, and starting a program that began with 
a category, say, 3 or 2 storm and above and have participation 
from a Federal Government standpoint there.
    If you could meld something like that into your bill, that 
would then eliminate the need to look at the smaller claims 
that are out there and the smaller storms, and then let the 
insurance companies handle those, you know, that would be one, 
I believe, compromise that would be certainly from my 
standpoint and my company's standpoint worth working on and 
worth solving.
    Chairwoman Waters. Thank you. I think Mr. Watt alluded to 
something like that.
    Mr. Majewski. Exactly, he did, and that's why I said it was 
mentioned earlier. And it makes a lot of sense to take that 
    Chairwoman Waters. All right, thank you very much.
    Ms. Biggert?
    Mrs. Biggert. Thank you, Madam Chairwoman.
    Could I ask you, before I ask a question, what your 
intentions are in moving this bill forward? We are scheduled to 
mark-up H.R. 1682 at the end of the month. Are you looking at 
Mr. Taylor's bill as being an amendment or do you plan to 
introduce a new bill?
    Chairwoman Waters. I am sorry. Would you repeat that?
    Mrs. Biggert. I just wondered what your intentions were 
with regard to moving this bill forward if we mark-up H.R. 1682 
at the end of this month. Are you planning on including this 
bill within that bill, are you going to introduce a new bill, 
or how does that fit in with this bill?
    Chairwoman Waters. I am not sure how we are going to do it. 
I am going to talk with Mr. Taylor, with Chairman Frank, and 
with you, and we are going to decide.
    Mrs. Biggert. Okay, thank you.
    Chairwoman Waters. Thank you.
    Mrs. Biggert. All right, then I have a question for each of 
the panel.
    Chairwoman Waters asked you about a multi-perils bill and I 
would just like a yes or no answer from each of you.
    Would you support the addition of wind coverage to the 
National Flood Insurance Program?
    Ms. Pogue?
    Ms. Pogue. No. One of the--
    Mrs. Biggert. Just yes or no.
    Ms. Pogue. No.
    Mrs. Biggert. Ms. Praeger?
    Ms. Praeger. No.
    Mrs. Biggert. Okay, Mr. Majewski?
    Mr. Majewski. No.
    Mrs. Biggert. Okay. Ms. Small?
    Ms. Small. No.
    Mrs. Biggert. Mr. Baker?
    Mr. Baker. Yes.
    Mrs. Biggert. Mr. Hartwig?
    Mr. Hartwig. No.
    Mrs. Biggert. Mr. Conway?
    Mr. Conway. No.
    Mrs. Biggert. Okay, thank you.
    And Ms. Pogue testified and she set forth several questions 
about H.R. 920 that I think at this point remain unanswered.
    Would you all consider, do you think? Would you support a 
GAO study to examine such questions, and I think you have all 
raised several questions, in order for Congress to proceed in a 
more informed manner before we would consider such legislation.
    Ms. Pogue, yes or no?
    Ms. Pogue. Yes.
    Mrs. Biggert. Okay, Ms. Praeger?
    Ms. Praeger. Yes.
    Mrs. Biggert. I'm not going to even try to pronounce your 
name again.
    Mr. Majewski. Yes.
    Mrs. Biggert. Ms. Small?
    Ms. Small. Yes.
    Mr. Baker. No, but I would love to elaborate.
    Mrs. Biggert. I don't have time. Dr. Hartwig?
    Mr. Hartwig. Yes.
    Mr. Conway. Yes.
    Mrs. Biggert. Okay, thank you, and I am sorry. I have 
another meeting, so that's why I have to hurry. I appreciate 
you all coming, and I yield back my time.
    Chairwoman Waters. Thank you very much. Mr. Green, for 5 
    Mr. Green. Thank you, Madam Chairwoman, and I thank the 
ranking member as well.
    Let me start by saying that this really, while it 
references Mr. Taylor, is not about him. He is symbolic of many 
other persons who are not here to represent themselves, and 
quite candidly, I thank God that he's here. I regret that it 
happened to him, but I am grateful that he was available to 
shed a lot of light on a situation that probably would not have 
received the attention that it has received if nor for the 
Taylors of the world who have the wherewithal to make the issue 
available for all of us to see.
    Having said this, let me continue the trend. We call this 
voir dire, or voir dire, depending on where you're from when we 
take you en banc and we ask questions. Voir dire is a French 
term that means to speak the truth, so this becomes the truth-
telling portion of this hearing for members of the venire. That 
would be you, the witnesses.
    Now, having said this, which is what we have been doing, 
let me ask in this way. If the private sector were taking care 
of this problem in its entirety, do you agree that there would 
be no need for involvement of the public sector. If your answer 
is yes, you need not say anything. Your silence will indicate 
    All right. Do you agree that if the private sector refuses 
to provide any wind coverage at all, the public sector should 
get involved in these coastal areas? If the private sector 
refuses to provide any wind coverage at all, zero, should the 
public sector get involved?
    If your answer is yes, you need not say anything. Your 
silence will be consent. Now because this is so critical, I 
would like to get your actual consent. Do you agree? We will 
start with the first lady to my left. And is your answer yes?
    Ms. Pogue. My answer is no.
    Mr. Green. If the private sector provides, refuses to 
provide, any wind coverage at all, you would not want the 
public sector involved?
    Ms. Pogue. Oh, I was answering your first question.
    Mr. Green. No, as to my second now.
    Ms. Pogue. Your second question?
    Mr. Green. Yes. Private sector, zero coverage; would you 
want the public sector involved in providing wind coverage? 
Would you?
    Ms. Pogue. My answer--
    Mr. Green. If the private sector is providing zero wind 
coverage, would, yes.
    Ms. Pogue. Yes. You have me thoroughly confused, yes.
    Mr. Green. All right, it's not going to be tricky.
    All right, let's go to the next lady. If the private sector 
provides zero wind coverage, would you want the public sector 
to step in?
    Ms. Praeger. At that point, I don't believe we'd have a 
private sector market, sir.
    Mr. Green. Okay, without explanation, would you want the 
public sector?
    Mr. Majewski. Yes.
    Mr. Green. Ma'am?
    Ms. Small. Yes.
    Mr. Green. Sir?
    Mr. Baker. Yes.
    Mr. Hartwig. Yes.
    Mr. Green. Sir, if the private sector refuses to provide 
zero coverage, any coverage, would you want the public sector 
to step in, or would you want people to simply be at the risk 
of the wind, at the risk of nature, and those who have their 
homes destroyed, that is just tough luck. Life is like that. 
It's unfortunate that it had to be you. Thank God it wasn't me.
    Is that your attitude, or would you want the public sector 
to step in?
    Mr. Conrad. I think the public sector would need to step 
    Mr. Green. Excuse, me. Sometimes, when people finish, I 
don't know whether they said yes or no. So I have to pressure 
you to say yes or no. If the private sector provides zero 
coverage, would you want the public sector to step in?
    Mr. Conrad. To step in, in some form, yes.
    Mr. Green. Okay, now, so the question becomes really how 
many companies will have to leave Louisiana and Texas or 
perhaps Mississippi, before we decide that we need to do 
something, that's really where we are, because if we know that 
if we have zero help from the private sector, then the public 
sector should do something. The question becomes, where is it 
between zero and 100 percent coverage. Where is it that we 
should be involved in this process?
    And the contention is that many of these insurance 
companies are leaving the Gulf Coast area or they are 
threatening to leave, one or the other. And at some point, we 
have to consider the people who are left behind, not only 
because of their homes, but also because of the economic 
infrastructure that's in place there.
    If we are not careful and we can continue to dilly-dally to 
the extent that we could impact the economic order, not only in 
the Gulf Coast area because it dominos and it impacts the 
entirety of the country, we have to consider the stability of 
the economic order as well and insurance is a part of the 
stabilizing process. So at some point we have a responsibility 
to do something to try to help.
    That appears to be what H.R. 920 proposes to do. Now, 
friends, I don't know the name of the phobia. Sorry that I 
don't, but there is this fear that some people have of leaving 
home. They ask themselves, if I go out of that door, will I 
trip and fall? And if I go out of that door, and I don't trip 
and fall, when I get outside, will a plane fall on me? And they 
continue to ask themselves questions, and they do this to the 
extent that they suffer from what's called a paralysis of 
    They engage in analysis to the extent that they never do 
anything and literally they are people who will stay at home 
because they are afraid. My point to you is that we don't have 
that luxury in Congress. I believe we have a duty to try to 
find a solution so that the economic order receives stability 
and so that citizens can know that they will be insured. And I 
don't think that we want to put it all on the Federal 
Government, nor do I want to put it all on the private sector. 
There has to be some balance. H.R. 920 seems to seek that 
balance, and I yield back the balance of my time.
    Chairwoman Waters. Mr. Miller?
    Mr. Miller. Thank you, Madam Chairwoman. I saw you smiling. 
It's good to see that we can have some fun once in a while.
    When I read the results of a poll, I always look to see how 
the question was asked too, you know, before I just accept the 
results of a poll. But Mr. Hartwig, why would the insurance 
industry in a free market system, and I quote, ``free market 
system,'' decide to pull out or refuse business in various 
    Mr. Hartwig. Well, to begin with, in none of the States at 
issue here do we have a free market system. The ranking member, 
Mrs. Biggert, actually hails from the only State that has 
complete and total flexibility in terms of rates in the entire 
United States.
    The reality is in States like Florida and other coastal 
States, you do have fairly strict rate regulation laws and laws 
that govern, of course, the forms that are used. To the extent 
that an insurer cannot generate a rate of return that is 
sufficient to cover its expected losses, that is the reason why 
you have seen most of the pullback that you have seen in 
coastal areas.
    In some States, in Florida in particular, there is a 
deliberate attempt to drive insurers out of the State for 
political reasons. Make no mistake about it, that is the reason 
why this is a very active issue for the current Governor and he 
is underpricing policies deliberately at this point. So 
insurers do want to participate in markets, even in risky 
areas. And, by the way, insurers do offer and participate in 
markets that are extremely risky all around the world in all 
sorts of ventures.
    But when you have a regulatory environment that prevents 
even the opportunity for earning a reasonable rate of return 
over extended periods of time, it is impossible to participate. 
So if I ask the question to all of you in a different way, if a 
free market system existed, do you believe any State would be 
without insurance for their people. The advantaged probably 
know they would all have it if the free market system existed.
    When the Flood Insurance Program was implemented in the 
late 1960's, the coverage generally was unavailable from coast-
to-coast, Mr. Hartwig, and how does this rationale for Federal 
flood insurance differ from the state of wind coverage today?
    Mr. Hartwig. Well, in wind coverage today, wind coverage is 
generally available all across the United States with the 
exception of some coastal areas where there are some 
difficulties that are a combination of both excessive risk and 
exposure that insurers do have that has caused them to back off 
some of these policies, combined with rate suppression issues 
and litigation issues in a number of States.
    Mr. Miller. So the rates are being mandated so low that the 
insurance companies will not accept the risk-based rate of 
    Mr. Hartwig. That's precisely it, particularly in States 
like Florida. Yes. If you are not given the opportunity to at 
least cover your costs and a reasonable rate of return, you 
simply can't operate in that environment. No business could 
    Mr. Miller. So you think it is probably appropriate for the 
Federal Government to be involved in some flood insurance, but 
not necessarily in wind insurance.
    Mr. Hartwig. The insurance industry has no problem with the 
National Flood Insurance Program and the insurance industry 
believes there is an appropriate role for government in every 
State, particularly a safety valve function, until markets 
    Mr. Miller. I guess a question for each of you would be, do 
most States operate a free market insurance system that allows 
the insurer to share a fair price based on their risk. Starting 
from left to right, what would your response be?
    Do you think the States allow or operate a free market 
system for insurance companies that allow the insurer to charge 
a fair price that accurately reflects the risk?
    Ms. Pogue. Congressman Miller, to be honest with you, I 
wouldn't have a basis for answering that question. It would be 
more the government's involvement in flood insurance.
    Mr. Miller. Sure.
    Ms. Praeger. I can speak for my State. In Kansas, if 
companies can demonstrate that the rates they are proposing are 
actuarially sound, I can't statutorily refuse to allow that 
rate increase.
    Mr. Miller. Okay.
    Mr. Majewski. I would say many States operate in a free 
market system. The exception would be on an assigned risk 
program, where you're taking like the auto insurance and you're 
setting a rate from a company standpoint and from a State 
standpoint. It's very difficult for even the State plans to 
stay solvent, much less the independent market side.
    Ms. Small. Congressman Miller, I don't have a basis from 
which to respond to that.
    Mr. Miller. Okay.
    Mr. Baker. Congressman Miller, in the State of Louisiana, I 
can say with almost certainty that I cannot obtain a new 
homeowners policy for you in the greater New Orleans area in an 
area that has been flooded.
    Now, it seems a bit counterintuitive, but because the area 
flooded, I can't provide wind insurance. But the controversy is 
such that the insurers will not go where there's a chance of 
flood if they have a chance of having a court enforce a wind 
ruling on that policy.
    Mr. Miller. Well, what you are saying is that if they're 
not willing to accept the responsibility of flood damage when 
they are only insuring for wind damage?
    Mr. Baker. The courts are imposing flood damage on them 
where they thought they were going to collect on wind.
    Mr. Miller. That was my answer. So the insurance companies 
are basically saying, we are only writing a policy for wind. We 
are not writing it for flood. So, why did we accept liability, 
when there's a flood, we're going to get assessed for wind 
damage at the same time.
    Mr. Baker. Well, what I am saying is they won't take the 
risk of the uncertainty.
    Mr. Miller. Yes, okay. Mr. Hartwig?
    Mr. Hartwig. The majority of the U.S. property casualty and 
insurance market operates in an environment that by traditional 
terms, at least in terms of rate flexibility, couldn't be 
deemed as anywhere near perfect competition.
    Mr. Miller. Okay.
    Mr. Conrad. And, Congressman, being from the National 
Wildlife Federation, I think I will defer to the insurance 
folks here.
    Mr. Miller. We will save the ducks. How's that?
    I am going to ask my last one because I know my time is up. 
But based on the testimony at the last hearing, it sounded like 
the largest problem we have is an Attorney General who 
disagrees with the insurance commissioner. And, Mr. Baker, that 
seems to be a problem in your State because the courts are 
enforcing policies or mandating things that the insurance 
companies didn't believe was their responsibility.
    I yield back. Thank you.
    Chairwoman Waters. Mr. Taylor?
    Mr. Taylor. Well, Mr. Majewski and Mr. Hartwig, you have 
certainly earned your paychecks today.
    I want you to know that your defense of the folks who told 
the Bienvenuttis, with their $600,000 policy, that they weren't 
going to pay, has been remarkable.
    They told the Haddens, with their $560,000 policy, that 
they weren't going to pay. Remarkable.
    Your defense of an industry that is exempt from the Sherman 
Antitrust Act and the McCarran-Ferguson Act where it is 
perfectly legal for State Farm to call Allstate to call 
Nationwide and say, we're not going to pay. Well, let's all 
raise our rates; or you take Alabama; you take Florida; you 
take Texas. No other industry in America can do that. Guys, you 
have earned your pay.
    You are coming before this committee and saying that it is 
available and we work to make it available from the private 
sector for the public. You have earned your pay. But you see, I 
have a really smart guy working with me. He does research. His 
name is Brian Martin.
    I am going to read a statement from your company, Mr. 
Majewski. This is from your annual report in 1997: ``Our 
decision to reduce property exposure along the Atlantic coast 
has had the desired effect of decreasing our coastal exposure 
by more than $2 billion during the past 2 years. And we have 
reduced or eliminated our exposure on 61 percent of the 
homeowners' policies we had in force in Atlantic coastal 
counties when the program began in January 1 of 1996.''
    Now, you just told us you weren't going to make it 
available and the Nation doesn't need to do this. But I am 
going to go on because the next statement is from your 
company's press release announcing their earnings for the third 
quarter of 2005, which incidentally is right after Hurricane 
Katrina. And this is the part of the statement by Michael 
Brown, the current president and CEO: ``Hurricanes Katrina and 
Rita had minimal impact on our financial results, in part due 
to our ongoing effort to effectively manage our catastrophe and 
windstorm exposures, which is a key component of our 
disciplined underwriting approach.'' It doesn't sound to me 
that you are going out of your way to write these policies. It 
sounds to me, based on quotes from your company publications, 
that you are going out of way not to write them. You don't want 
to do it. I have heard with great interest Mr. Hartwig's 
statements that, you know, they can't do this because you can't 
generate a rate of return.
    The company that told this guy they weren't going to pay on 
his $560,000 policy made $3.5 billion the year of Katrina. The 
company that told this insurance salesman that they weren't 
going to pay on his $600,000 policy made $3.5 billion. You see, 
they not only took them at their word that they were a good 
neighbor, they bought from their good neighbor who lived down 
the street. His wife is driving a Lexus convertible. This guy's 
living in a FEMA trailer.
    So, Mr. Hartwig is telling me they're a little worried 
about the rate of return, I would remind him that the insurance 
industry that is exempt from Karen Ferguson had a collective 
profit of $44 billion after Katrina. The insurance industry 
that you are so worried about having an effective rate of 
return had a $60 billion profit last year. The same insurance 
industry that told these folks, we're not going to pay, we're 
your good neighbor. We'll take your premium, but we're not 
going to pay.
    Well, Ed Rusk, Jr., who made that decision, he and his 
board doubled their own bonuses, which amounted to almost a $9 
million bonus for Ed Rusk, Jr., State Farm Insurance Company. 
Now I appreciate that you don't see the need for change. I 
would invite you to south Mississippi. I would invite you to 
Slidell, Louisiana. I would invite you to Bayou la Batre, and I 
would remind you that 52 percent of Americans live in coastal 
America and the odds of it happening to us again are pretty 
    And this, unlike efforts in the industry to paint it about 
being about me, it isn't. You see, I was one of those people 
who walked into a lawyers office and said, yes, I'll give you 
40 percent of what I get because they are not going to give me 
anything. So right now, I am getting 100 percent of nothing, 
and I am willing to take 60 percent of something because they 
are not going to give me anything. And, by the way, if they do 
that to a Congressman, what do you think they'd do to a school 
teacher or a football coach, or a retired Chief Petty Officer?
    You see, I wasn't always a Congressman, and I really did 
put myself in that. What if I had just been a corrugated box 
salesman that day, and what if guys like Dickie Scruggs don't 
take phone calls from corrugated box salesmen? I can't make 
everyone I represent a Congressman, but we ought to treat them 
like one so that they don't have to call a Dickie Scruggs or 
the Merlin Group or any of these other law firms.
    And so I want to tell each of you, you have earned your pay 
today. To defend this, to defend those profits, to defend the 
practice where they can call each other up and say, let's all 
raise our rates. You take this date; you take that one. Or, 
even better, let's all back out for a little while and then 
we'll come back in and we'll quadruple the rates and the people 
will be so desperate because they know hurricane season is 
right around the corner, they'll pay us anything.
    To say that that doesn't need to change; to say that it's 
okay, well, you have to live with yourself. And I'm sure, quite 
frankly, your financial portfolio probably looks a whole lot 
better than these guys. But the bottom line is, it does have to 
change. It's not a what-if, it has already happened. So the 
question is, when does it happen in North Carolina? When does 
it happen in New York? When does it happen in New Jersey? When 
does it happen in Connecticut? When does it happen in Georgia? 
When does it happen in South Carolina? Because it is going to 
happen. The Navy Oceanographic Lab tells us we are in for 10 
years of this, and I believe them. We've already had our 
licking. The rest of the country still hasn't had theirs.
    If you don't think it needs to change, fine; but I know 
better. And I very much appreciate the gentlewoman from 
California having this hearing so people could get a chance to 
say something. I very much appreciate Chairman Frank allowing 
her to have this hearing, and I very much appreciate that in 
the 15 months after the storm, the guys who used to run this 
committee didn't see fit to have one hearing on the kind of 
abuses that took place by the thousands in Mississippi.
    In the months since the Democrats have taken over, they 
have had five, and we have had a promise of a vote. I 
appreciate your thoughts on this, if there are some things we 
can do to tweak it to make it better. But to sit back and do 
nothing would be the greatest wrong of all.
    Thank you, Madam Chairwoman.
    Chairwoman Waters. Thank you very much.
    Mr. Taylor, would you like to submit those quotes for the 
    Mr. Taylor. Yes, Madam Chairwoman, I would like to submit 
that for the record. I would also like to submit letters from 
Nationwide Insurance Company and Allstate Insurance Company, as 
    Chairwoman Waters. Without objection, such is the order.
    We have been joined by Mr. Pearce. Would you like to have 5 
minutes for questions, Mr. Pearce?
    Mr. Pearce. Thank you, Madam Chairwoman, I would.
    First, for Mr. Conrad, one of the criticisms of the Flood 
Insurance Program is that it encourages coastal development by 
homeowners to purchase flood insurance at subsidized prices. I 
would like your observation on that. And again, keep in mind we 
have 5 minutes, and I have a couple more questions, so short 
observations are better. And then the second thing is, would 
adding wind coverage to the Flood Insurance Program do anything 
to alleviate that problem? So, first of all, if you would 
address those?
    Mr. Conrad. Yes, sir. I have spent probably 15 years 
looking at some of those questions attempting to from my 
vantage point at the National Wildlife Federation, we have done 
some statistical work on repetitive losses, which I mentioned 
in my testimony. There are a number of aspects of the National 
Flood Insurance Program that are providing substantial 
subsidies, not only in coastal areas, but also in some other 
areas that I think it is getting pretty clear have particularly 
managed to maintain high risk properties in those locations.
    There just has been not enough incentive to mitigate the 
risk, either by elevation or relocation. And, as a result, the 
Flood Insurance Program has been hurt financially by that. The 
other question, I'm sorry.
    Mr. Pearce. Just if we had wind, what's it going to do to 
alleviate that current situation that you are describing?
    Mr. Conrad. Okay, I don't believe that would have, if you 
added wind coverage; it would certainly not lessen the risk 
associated with those properties. And in fact I think it would 
probably increase the total exposure that ultimately the 
taxpayers have to the risks.
    Mr. Pearce. Mr. Hartwig, typically insurance companies are 
in areas where the market justifies being there. Since the 
Katrina catastrophe, tell me a little bit about what's 
happening to the market. Are companies staying in those three 
States or are they actually pulling out?
    If you would, in the principal States affected by Katrina, 
insurers have reduced their exposure, generally speaking, 
particularly on the homeowner side, less of a difference on the 
commercial lines. In other words, the business type of 
insurance, and the reason for that is that there tends to be 
less regulation on prices in terms of commercial property 
insurance policies.
    Is that reduction across the board, or are there some 
companies, is it some companies are saying we're going to get 
that market, let us have the profits there. You all move to 
another market. Or is it across the board?
    Mr. Hartwig. There are some insurers who reduce their 
exposure less than others. There are some who have simply said, 
we won't write any new policies, as opposed to outright 
reduction. So there are a variety of tolerances of risk within 
the insurance industry and a variety of abilities to assume 
risk and to distribute that risk across the world with 
    Mr. Pearce. If H.R. 920, which is again designed to improve 
availability and affordability of home ownership insurance in 
coastal States, if this bill goes through, can you give me an 
idea about what the market will be like, how the insurance 
market itself will respond to that presence, is it going to 
have an effect or no effect?
    Mr. Hartwig. Well, it is unclear what the effect would be. 
In fact, one of the major thrusts of my testimony wasn't so 
much with respect to what would happen in terms of private 
insurance. What we have as a problem is growing influence in 
terms of the State-run insurance. In Florida for example, 
Citizens Property Insurance Corporation is the largest 
insurance company in the State.
    We are talking more about not what is going to happen in 
the private sector, but what's going to happen to citizens, and 
thereby, that affects the private sector. Let me give you the 
dynamics of this. If you have a situation where you have 
actuarially sound rates, and under H.R. 920 in terms of a wind 
program you wind up with a situation where you have much, much 
lower rates for wind being offered through the State-run 
    Is the Governor of Florida going to say, I'm going to force 
all of you into this much more expensive program? I don't think 
that is going to be the case. You have a case of actually 
competition potentially between a Federal and a State entity 
with private insurers being caught somewhere in between. I will 
say that the long term objective of insurers is consistent with 
Mr. Taylor's goal of having actuarially sound rates. This is 
something insurers have been asking for, for decades, and have 
not yet been able to achieve.
    Mr. Pearce. Any reasons why they have not been able to 
achieve those actuarially sound rates?
    Mr. Hartwig. Well as I indicated in my testimony, in places 
like Florida and other coastal areas, it is simply not 
politically feasible to allow insurers to charge a rate that is 
commensurate with the risk. And even before Katrina, that is 
what has caused insurers to reduce their exposure to some 
coastal areas.
    Mr. Pearce. And so what we face is the evacuation of 
private insurance and the government will be left giving any 
insurance that's available in the extreme case. If we were to 
move to the extreme of what's happening right now, is there any 
risk that the private insurers would ever get completely out of 
the market?
    Mr. Hartwig. That's potentially a danger. It is not what 
insurers want to do, but when we see in Florida with the State-
run insurer adding 25,000 policies a week with $600,000 in 
exposure, 1.3 million policyholders. They expect to have 2 
million next year. You can see where that market is going.
    Mr. Pearce. Well, we will stay with Mr. Hartwig. On the 
long-term insurance companies nationwide have profitability and 
lack of profitability, if we take a look at 15 years and if you 
don't know the answer, I mean if anybody on the panel has the 
answer. If we take a 15-year look at the industry, what sort of 
profitability do we have year-by-year. What sort of losses have 
we seen roughly?
    Mr. Hartwig. I can answer that question. And mind you, 
property casualty insurance is regulated at State levels, so 
each State and each type of insurance needs to stand on its 
own. So the profits Mr. Taylor cited earlier in 2005 were 
earned entirely outside of his State on types of insurance like 
workers compensation insurance in Alaska, which I don't believe 
should have any relationship or should subsidize homeowners 
insurance in places like Mississippi.
    But it is the case that in fact for 19 consecutive years, 
the property casualty insurance industry has underperformed the 
Fortune 500 group for example. The average rate of return has 
been somewhere in the 6 to 7 percent range over the period in 
question, which is roughly half that generated by the Fortune 
500 group. It isn't much more than one could have generated 
risk free on a ten-year Treasury note.
    Mr. Pearce. So you are telling me that they could have put 
the money in the bank and earned as much as they are earning 
with their routing of insurance claims and paying of the claims 
and the business of insurance?
    Mr. Hartwig. That is on average across all their operations 
in some States like Florida or Mississippi or Louisiana. The 
money would have better invested by putting it under your bed. 
    Mr. Pearce. And what we risk if we keep on adding 
requirements is at some point, the insurance market itself will 
say, we would rather have no risk at 6 percent, than insure 
these risks at 6 percent.
    Mr. Hartwig. Insurance, like any business, needs to look at 
where it can earn a rate of return that is sufficient to 
basically cover its costs with a reasonable profit. In 
insurance, we have the added factor that insurers need to 
maintain a very significant financial cushion in order to avoid 
regulatory sanctions and insolvency. Insurers today have to 
basically keep in the bank roughly $1 for every dollar they 
earn in premium. And that's a very steep hurdle, and it's not 
one that any State-run entity has to face.
    Mr. Pearce. Thank you, Madam Chairwoman. I see my time has 
    Chairwoman Waters. Well, thank you very much.
    The Chair notes that some members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses, and to place their responses in the record. This 
panel is now dismissed and the hearing is adjourned.
    Thank you all, very much.
    Mr. Pearce. Madam Chairwoman?
    Chairwoman Waters. I'm sorry.
    Mr. Pearce. I was going to ask unanimous consent.
    Chairwoman Waters. That's right, I forgot. I was fairly 
warned. Please, Mr. Pearce.
    Mr. Pearce. If I could, we have a couple of letters here 
from the Consumer Federation of America and the joint letter 
from NAMIC and PCI and AIA under the Financial Services 
Roundtable. If we could get unanimous consent to put those in 
the record?
    Chairwoman Waters. Without objection, it is so ordered.
    Mr. Pearce. Thank you, Madam Chairwoman.
    Chairwoman Waters. You are welcome.
    The committee is adjourned.
    [Whereupon, at 5:49 p.m., the hearing was adjourned.]

                            A P P E N D I X

                             July 17, 2007