    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

                          APPROACHES TO MITIGATING AND
                       MANAGING NATURAL CATASTROPHE RISK:
                     H.R. 2555, THE HOMEOWNERS' DEFENSE ACT

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

                                 JOINT HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                                  HOUSING AND
                             COMMUNITY OPPORTUNITY

                                    AND THE

                                SUBCOMMITTEE ON
                        CAPITAL MARKETS, INSURANCE, AND
                        GOVERNMENT SPONSORED ENTERPRISES

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 MARCH 10, 2010

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 111-108

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     BARNEY FRANK, Massachusetts, Chairman

    PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
    MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
    CAROLYN B. MALONEY, New York         PETER T. KING, New York
    LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
    NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
    MELVIN L. WATT, North Carolina       RON PAUL, Texas
    GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
    BRAD SHERMAN, California             WALTER B. JONES, Jr., North
    GREGORY W. MEEKS, New York               Carolina
    DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
    MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
    RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West
    WM. LACY CLAY, Missouri                  Virginia
    CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
    JOE BACA, California                 SCOTT GARRETT, New Jersey
    STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
    BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
    DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
    AL GREEN, Texas                      TOM PRICE, Georgia
    EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
    MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
    GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
    PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
    KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
    RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
    CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
    ED PERLMUTTER, Colorado              BILL POSEY, Florida
    JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
    BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
    ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
    JACKIE SPEIER, California            LEONARD LANCE, New Jersey
    TRAVIS CHILDERS, Mississippi
    WALT MINNICK, Idaho
    JOHN ADLER, New Jersey
    MARY JO KILROY, Ohio
    STEVE DRIEHAUS, Ohio
    SUZANNE KOSMAS, Florida
    ALAN GRAYSON, Florida
    JIM HIMES, Connecticut
    GARY PETERS, Michigan
    DAN MAFFEI, New York

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

                     MAXINE WATERS, California, Chairwoman

    NYDIA M. VELAZQUEZ, New York         SHELLEY MOORE CAPITO, West
    STEPHEN F. LYNCH, Massachusetts          Virginia
    EMANUEL CLEAVER, Missouri            THADDEUS G. McCOTTER, Michigan
    AL GREEN, Texas                      JUDY BIGGERT, Illinois
    WM. LACY CLAY, Missouri              GARY G. MILLER, California
    KEITH ELLISON, Minnesota             RANDY NEUGEBAUER, Texas
    JOE DONNELLY, Indiana                WALTER B. JONES, Jr., North
    MICHAEL E. CAPUANO, Massachusetts        Carolina
    PAUL E. KANJORSKI, Pennsylvania      ADAM PUTNAM, Florida
    LUIS V. GUTIERREZ, Illinois          KENNY MARCHANT, Texas
    STEVE DRIEHAUS, Ohio                 LYNN JENKINS, Kansas
    MARY JO KILROY, Ohio                 CHRISTOPHER LEE, New York
    JIM HIMES, Connecticut
    DAN MAFFEI, New York
     Subcommittee on Capital Markets, Insurance, and Government Sponsored
                                  Enterprises

                   PAUL E. KANJORSKI, Pennsylvania, Chairman

    GARY L. ACKERMAN, New York           SCOTT GARRETT, New Jersey
    BRAD SHERMAN, California             TOM PRICE, Georgia
    MICHAEL E. CAPUANO, Massachusetts    MICHAEL N. CASTLE, Delaware
    RUBEN HINOJOSA, Texas                PETER T. KING, New York
    CAROLYN McCARTHY, New York           FRANK D. LUCAS, Oklahoma
    JOE BACA, California                 DONALD A. MANZULLO, Illinois
    STEPHEN F. LYNCH, Massachusetts      EDWARD R. ROYCE, California
    BRAD MILLER, North Carolina          JUDY BIGGERT, Illinois
    DAVID SCOTT, Georgia                 SHELLEY MOORE CAPITO, West
    NYDIA M. VELAZQUEZ, New York             Virginia
    CAROLYN B. MALONEY, New York         JEB HENSARLING, Texas
    MELISSA L. BEAN, Illinois            ADAM PUTNAM, Florida
    GWEN MOORE, Wisconsin                J. GRESHAM BARRETT, South Carolina
    PAUL W. HODES, New Hampshire         JIM GERLACH, Pennsylvania
    RON KLEIN, Florida                   JOHN CAMPBELL, California
    ED PERLMUTTER, Colorado              MICHELE BACHMANN, Minnesota
    JOE DONNELLY, Indiana                THADDEUS G. McCOTTER, Michigan
    ANDRE CARSON, Indiana                RANDY NEUGEBAUER, Texas
    JACKIE SPEIER, California            KEVIN McCARTHY, California
    TRAVIS CHILDERS, Mississippi         BILL POSEY, Florida
    CHARLES A. WILSON, Ohio              LYNN JENKINS, Kansas
    BILL FOSTER, Illinois
    WALT MINNICK, Idaho
    JOHN ADLER, New Jersey
    MARY JO KILROY, Ohio
    SUZANNE KOSMAS, Florida
    ALAN GRAYSON, Florida
    JIM HIMES, Connecticut
    GARY PETERS, Michigan

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        March 10, 2010...............................................     1
    Appendix:
        March 10, 2010...............................................    39

                                   WITNESSES
                           Wednesday, March 10, 2010

    Ellis, Steve, Vice President, Taxpayers for Common Sense.........    14
    McMillan, Charles, Coldwell Banker Residential Brokerage, Dallas-
      Fort Worth, and Immediate Past President, National Association
      of Realtors (NAR)..............................................    16
    Pomeroy, Glenn, Chief Executive Officer, California Earthquake
      Authority (CEA)................................................    12
    Witt, James Lee, former Director of the Federal Emergency
      Management Agency, on behalf of ProtectingAmerica.org..........    10

                                    APPENDIX

    Prepared statements:
        Kanjorski, Hon. Paul E.......................................    40
        Grayson, Hon. Alan...........................................    42
        Putnam, Hon. Adam H..........................................    44
        Ellis, Steve.................................................    46
        McMillan, Charles............................................    52
        Pomeroy, Glenn...............................................    60
        Witt, James Lee..............................................    73

                  Additional Material Submitted for the Record

    Biggert, Hon. Judy:
        Written statement of the American Insurance Association (AIA)    78
        Written statement of the Cincinnati Insurance Companies......    83
        Written statement of various environmental groups............    89
        Written statement of Americans for Tax Reform, et al.........    91
        Written statement of the National Association of Mutual
          Insurance Companies (NAMIC)................................    93
        Written statement of the National Wildlife Federation........   105
        Written statement of Nationwide Insurance....................   116
        Written statement of the Property Casualty Insurers
          Association of America (PCI)...............................   122
        Written statement of the Reinsurance Association of America
          (RAA)......................................................   125
        Written statement of SmarterSafer.org........................   127

                          APPROACHES TO MITIGATING AND
                       MANAGING NATURAL CATASTROPHE RISK:
                     H.R. 2555, THE HOMEOWNERS' DEFENSE ACT

                                  ----------

                           Wednesday, March 10, 2010

                 U.S. House of Representatives,
                            Subcommittee on Housing and
                             Community Opportunity, and
                       Subcommittee on Capital Markets,
                              Insurance, and Government
                                 Sponsored Enterprises,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittees met, pursuant to notice, at 2:23 p.m., in
    room 2128, Rayburn House Office Building, Hon. Paul E.
    Kanjorski [chairman of the Subcommittee on Capital Markets,
    Insurance, and Government Sponsored Enterprises] presiding.
        Members present: Representatives Kanjorski, Waters,
    Sherman, McCarthy of New York, Baca, Green, Cleaver, Klein,
    Foster, Carson, Adler; Bachus, Royce, Manzullo, Biggert,
    Capito, Hensarling, Garrett, Campbell, Putnam, Posey, and
    Jenkins.
        Chairman Kanjorski. This joint hearing of the Subcommittee
    on Capital Markets, Insurance, and Government Sponsored
    Enterprises and the Subcommittee on Housing and Community
    Opportunity will come to order. I yield myself 4 minutes for
    the purpose of making an opening statement.
        I would like to thank Chairwoman Waters, our ranking
    members, other members of our two subcommittees, and our
    invited witnesses for joining us today for this hearing to
    explore approaches to mitigating and managing natural
    catastrophe risk and to examine H.R. 2555, the Homeowners'
    Defense Act.
        Introduced by Congressman Klein of Florida, H.R. 2555
    tackles the complex issue of how to address the growing problem
    of the availability and affordability of homeowners' insurance
    around the country in the wake of ever-bigger natural
    catastrophes. This hearing represents the second time our
    subcommittees have met to consider a version of this bill. Last
    year, the Oversight Subcommittee also reviewed these matters.
        Natural catastrophes can produce devastating effects for
    the affected people and communities. Within our hemisphere, we
    most recently experienced considerable damage as a result of
    earthquakes in Haiti and Chile. We also know that such
    earthquakes could, at any time, strike the United States.
        In addition to earthquakes, hurricanes are another form of
    natural catastrophe that threatens American citizens and
    businesses, and which could lead to severe losses and sizeable
    rebuilding costs. In Northeastern Pennsylvania in 1972,
    Hurricane Agnes ruined more than 25,000 homes, damaged nearly
    3,000 businesses, and destroyed 5 major bridges. At the time,
    then-President Richard Nixon called the event, ``the greatest
    natural disaster in U.S. history.''
        Since then, Americans have experienced even greater natural
    catastrophes, which have cost the Federal Government billions
    of dollars. The Government Accountability Office estimates that
    the Federal Government, in response to the Gulf Coast storms of
    2005--Hurricanes Katrina, Rita, and Wilma--made about $26
    billion available to homeowners who lacked adequate insurance.
    Even with this aid, many of the affected communities are still
    struggling to rebuild.
        In constructing any program to mitigate the structural and
    financial damages that natural catastrophes can cause, we need
    to ensure that those who benefit bear the costs. The approach
    taken in Mr. Klein's bill aims to do just that.
        Specifically, the consortium proposed in the legislation
    would encourage States with insurance funds to voluntarily pool
    their exposures and cede the risk to the capital markets. I
    look forward to learning more about the increased role our
    capital markets can play in covering the insured losses of
    natural disasters. To the greatest extent possible, we should
    maximize the risk-bearing capacity of the private sector before
    calling on the government to assist.
        H.R. 2555 would also provide a Federal guarantee on the
    debt issued through the consortium. While the guarantee
    approach is slightly different than the loan program proposed
    in similar legislation 2 years ago, the U.S. Treasury is still
    entitled to recover any payments it makes. Thus, the bill aims
    to protect taxpayers.
        Mr. Klein's legislation also includes a Federal reinsurance
    fund structured to provide capacity above and beyond private
    market reinsurance. Lastly, but very importantly, the
    legislation includes a grant program to help develop, enhance,
    and maintain programs to prevent and mitigate losses from
    natural catastrophes. I view these mitigation reforms as a key
    part of the bill. The implementation of effective mitigation
    plans will help to lower long-term costs.
        In sum, proper planning--both structurally and
    financially--can help to lessen the devastation caused by
    natural catastrophes. It is in this spirit that Mr. Klein has
    put forth his important legislation. Questions have been raised
    about the need, cost, and potential success of these programs.
    I look forward to a productive debate on these matters.
        I would now like to recognize Ms. Capito of West Virginia
    for her opening statement.
        Mrs. Capito. Thank you, Mr. Chairman. And I would like to
    thank Chairwoman Waters and Chairman Kanjorski for holding this
    joint Housing Subcommittee and Capital Markets Subcommittee
    hearing.
        The legislation before us today is not new. This committee
    has debated this issue for the past two Congresses, and there
    is by no means a consensus that this is the best approach to
    address the availability and affordability of catastrophe
    insurance for residential property owners in Florida as well as
    in other States faced with risk management challenges presented
    by major hurricanes and other potentially catastrophic natural
    disaster threats.
        The Homeowners' Defense Act creates new Federal programs to
    guarantee the catastrophe--I am having trouble with that word--
    catastrophe debt obligations issued by eligible State
    catastrophe insurance programs, offer reinsurance coverage to
    eligible State catastrophe insurance programs, and provide for
    mitigation grants to State and local governments. These
    programs would be established by the Treasury and the
    Department of Housing and Urban Development.
        Before we obligate the United States to hundreds of
    billions of dollars of potential liabilities, we should first
    have a better understanding of the current marketplace and the
    need for this legislation. And the chairman alluded to this in
    his opening statement.
        Many States and private markets can already address the
    concerns brought forth by this legislation. For example, risks
    are already spread globally through the reinsurance
    marketplace, and States have struggled with how to balance
    risks more narrowly among a smaller number of participants.
        Furthermore, States already can and do purchase reinsurance
    and sell catastrophe bonds through their risk pools and funds.
    Finally, if there is an implicit Federal guarantee or
    assumption of risk, this legislation would create a massive
    potential exposure for the taxpayer.
        It is important to note that opposition to this legislation
    spans a wide spectrum, including private industry, taxpayer
    advocates, and environmental groups. These entities raise
    legitimate concerns about the effect this legislation will have
    on the ability of private markets to function efficiently, the
    environmental impact on coastal areas, and most important, the
    risk passed to the taxpayer.
        I look forward to hearing from our witnesses today. And
    again, I would like to thank Chairwoman Waters and Chairman
    Kanjorski for holding this hearing.
        Chairman Kanjorski. Thank you very much.
        We will now hear from Mr. Klein for 4 minutes.
        Mr. Klein. Thank you, Mr. Chairman. I thank the chairman,
    the ranking member, and all the others who have made this
    hearing possible today. This is a chance to hear from many
    people on this committee as well as the experts in the field,
    and the American people as well.
        Reducing the skyrocketing cost of homeowners' insurance is
    one of my top priorities, and I appreciate this committee's
    work to stand up for families and other owners of property who
    have to deal with what has become a major cost of
    homeownership.
        It has been more than 15 years since Hurricane Andrew
    crashed into south Florida, but homeowners are still feeling
    its impact, not only in Florida, but other places as well.
    Since that storm, my constituents have seen their insurance
    premiums increase dramatically every summer, storm or no storm.
        As too many Florida homeowners know firsthand, some
    insurance companies cherry-pick their customers and their risk,
    refusing to write policies or limiting the scope of coverage.
    That is simply wrong, and the time for change is now.
        Yet this issue clearly extends far beyond the borders of
    the State of Florida. An alarming number of families across the
    country have also had their homeowners' insurance coverage
    dropped or are currently slated for nonrenewal by their
    insurance company, including homeowners in Massachusetts, New
    York, North Carolina, South Carolina, Alabama, and Texas. In
    Delaware, New Jersey, and Connecticut, in some cases, property
    insurance companies have stopped writing new policies for
    residents.
        When families are priced out of the market, they face
    enormous risk. In earthquake-prone California, 88 percent--88
    percent--of homeowners have no earthquake insurance at all.
    Increasingly, insurance companies are treating homeowners
    across the country like they have been treating Floridians for
    years, canceling policies and doubling or tripling rates in the
    wake of a single claim.
        That is why I have worked with my colleagues, Democrats and
    Republicans alike, to address and craft a common-sense solution
    that works for Americans in every corner of the country.
    Through a lot of hard work, we have built a coalition that
    includes more than 70 cosponsoring Members representing over 30
    States, coming together to fight for a solution that works for
    families in each of our diverse districts.
        Our legislation, the Homeowners' Defense Act, harnesses the
    power of the private market to pool the risk of all kinds of
    natural disasters, from hurricanes to earthquakes, wildfires,
    winter storms, tornadoes, and more.
        For millions of Americans, the question of a natural
    disaster hitting their home is not a question of if, but when.
    By spreading the risk, we can make sure that insurance is
    working like it is supposed to do, to bring down costs for
    homeowners across the country and still allow insurance
    companies to have a reasonable return on their investment.
        With this legislation, we take a proactive approach that
    allows States to responsibly plan for disasters ahead of time--
    and I am sure our witnesses will talk about that--while
    encouraging strong mitigation, which I also believe is
    important, to minimize the cost of natural disasters. By
    planning ahead, States can reduce their losses and get
    homeowners back on their feet as quickly as possible following
    a disaster.
        It is also very important to note that our program is
    completely voluntary. Once we have set up the pool to spread
    the risk, States make the choice whether they want to
    participate or not. If you don't participate, no
    responsibility, no involvement in your insurance policy. States
    are free to join the pool or not depending on what is best for
    each of them individually.
        The reason our bill is so urgently needed and that it is so
    strongly supported by disaster experts, senior citizens, and
    families is that unfortunately, in many parts of the country,
    the system is broken. As things now stand, natural disasters,
    no matter where they happen, impact Americans in all 50 States.
    Ask taxpayers.
        Cleanup in the aftermath of Hurricane Katrina cost American
    taxpayers nationwide--every single one of us--a total of nearly
    $100 billion. These days, you can't pick up a newspaper or turn
    on the TV without seeing scenes from the most recent natural
    disaster.
        The current system is nothing more than a constant cycle of
    bailouts at taxpayers' expense. I won't personally--as I think
    many others won't--stand for it any more. I believe it is time
    to focus on local responsibility and let the private market do
    the heavy lifting rather than the taxpayers.
        I want to stress that this strategy is a private market
    solution. Although it has become clear in recent weeks that big
    offshore insurance companies who oppose this bill in many ways
    are saying lots of different things which are misleading the
    debate here, I am here to set the record straight. I believe
    strongly in the power of the free market, and we have no intent
    to eliminate or subvert the insurance industry.
        The fact of the matter is in many parts of the country, the
    homeowners' insurance market right now is not working. People
    have been paying premiums for 20 years; they make one claim,
    see their rates shoot up, or they are canceled. This is why
    this legislation is so important at this time.
        So in conclusion, I would just like to say, Mr. Chairman,
    that I think that this committee has come together at a crucial
    moment. This bill did pass in a similar form a year and a half
    ago, with overwhelming bipartisan support. At that time,
    President Bush did not support it. He felt that the market
    somehow would figure this out. It has not, as we expected. So
    we are now in the position of having the opportunity to bring
    smart minds together from all walks of life--and I certainly
    welcome everybody's perspectives--to make sure we have a bill
    that will accomplish this goal.
        A common-sense solution like the Homeowners' Defense Act
    will bring real relief to American families, provide structure
    to the insurance market, and be a key part of a broader
    economic recovery. And I thank the chairman.
        Chairman Kanjorski. Thank you very much, Mr. Klein.
        We will now hear from the gentleman from New Jersey, Mr.
    Garrett.
        Mr. Garrett. I thank the Chair, and I thank the sponsor of
    the bill for trying to address this important issue. But I must
    respectfully disagree with the approach.
        At first blush, I believe that the underlying legislation,
    quite candidly, will not solve the major problem of trying to
    manage natural catastrophic risk but, rather, really could
    exacerbate the problem that we face today.
        This legislation also potentially will create additional
    moral hazard for people to build and live in these catastrophe-
    prone areas, and subsidize risky homeowners by--well, how does
    it do that? Reallocating and spreading the risk to less risky
    taxpayers.
        When you think about it, we sort of see the same thing
    going on right now with the cross-subsidy in the National Flood
    Insurance Program. There you have people who are paying higher
    rates on flood insurance, basically to cover the losses
    sustained by those living in the high-risk area.
        I would also point out I am a little bit disappointed that
    Chairman Frank would endorse this legislation, considering the
    good bipartisan efforts we have made in the past in trying to
    phase out these types of subsidies within the Flood Insurance
    Program. But here we do the opposite.
        I know the coalition of supporters of this legislation have
    made a really good attempt to try to frame the debate as a
    nationwide debate. It is really a debate, basically, about
    Florida and, to a lesser extent, California. Florida citizens
    currently have an underfunded disaster insurance liability of
    around $20 billion. California needs about $5 billion for
    earthquake protection. And conveniently, the legislation before
    us allows for multi-peril coverage for $20 billion, and
    earthquake coverage for $5 billion. Coincidence? Maybe not.
        So it seems to me that every day--I know they wouldn't say
    this is a bailout, but every day, we seem to wake up in this
    country to someone else getting bailed out. First, it was the
    banks. Then, it was irresponsible homeowners. Then, it was
    Fannie Mae and Freddie Mac. Then, it was the unions. Then, it
    was the States. And just earlier this week, we heard reports
    that the entire European continent is now planning one massive
    bailout for European countries.
        I heard someone suggest that perhaps what is going on here
    is we are going to come to the day when the Federal Government
    is going to need a bailout. And when that happens, perhaps
    Chairman Frank will have to rethink his efforts and his
    opposition to the space program, as we may need some other
    planet to come back here and to help bail out this country and
    this Earth.
        But more to the point. The main reason that we are in this
    situation is because the governor and a number of elected
    officials in Florida have not had the political will to charge
    actuarial rates on residents living in these disaster-prone
    areas.
        Now, I have heard some make the argument that we need to do
    this because, well, the Federal Government is on the hook
    anyway, and we will wind up footing the bill when disasters
    inevitably come. But I respectfully disagree.
        In most cases, the Federal Government picks up the tab on
    infrastructure and other related costs, but not specifically on
    the homeowners' insurance policies. An example that Director
    Witt highlights in his testimony, the $10 billion that went to
    homeowners in Katrina, well, that really happened in large part
    because of the mistakes by the Federal Government with their
    own mitigation programs, not building the levees in the correct
    way.
        So this idea that the Federal Government needs to add this
    burden now to prevent it from more later is really a red
    herring. There are many other positive solutions to this
    problem, such as further increased mitigation efforts and
    additional regulatory reform. And I believe that Mr. Ellis is
    going to discuss the South Carolina and the Virginia way to
    handle this situation much better and more responsibly than
    perhaps Florida has.
        So in the end, I will conclude by saying I think it is a
    safe bet that we should be addressing these issues, and we can
    come up with solutions to the problems. And I do look forward
    to ways to try to tackle these problems of mitigation and
    managing natural disaster risk.
        With that, I yield back.
        Chairman Kanjorski. Thank you very much, Mr. Garrett.
        Now we will hear from the gentlelady from California, Ms.
    Waters.
        Chairwoman Waters. Thank you, Chairman Kanjorski, for
    joining me for this joint hearing on approaches to mitigating
    and managing natural catastrophe risk, H.R. 2555, the
    Homeowners' Defense Act. I am delighted to see all of our
    panelists here today.
        But I am especially pleased to see Mr. James Lee Witt,
    former Director of FEMA, who will be testifying here today. I
    had the opportunity to work with him on one of the biggest
    earthquakes we had in California. He did such a magnificent
    job, I am sure he is able to share with us a lot of information
    that will be helpful to us.
        In the wake of Hurricane Andrew almost 18 years ago, 11
    insurers became insolvent and another 63 announced plans to
    withdraw or limit their insurance-writing ability in the State.
    But the costs associated with Hurricane Andrew pale in
    comparison to those of the 2005 hurricanes, Katrina, Rita, and
    Wilma. Insured losses from those storms total over $56 billion.
        Although only one insurer became insolvent as a result of
    paying claims resulting from those storms, following Katrina,
    some insurers began pulling out of areas along the Gulf Coast.
    Those who haven't left yet have raised rates on homeowners,
    with some families seeing a 600 percent increase in their
    insurance premiums. In the meantime, the capacity of wind and
    earthquake insurance companies has declined by 61 percent and
    22 percent, respectively.
        As we all know, much work is still needed to rebuild the
    Gulf Coast. However, without affordable and available
    homeowners' insurance, many families will either never return
    to this region or will risk losing everything in another storm.
        The bill introduced by Mr. Klein seeks to address the
    reinsurance crisis facing the Nation's insurers by creating a
    consortium to encourage risk transfer into the capital markets,
    a new Federal reinsurance program for State catastrophe funds,
    and allowing the Federal Government to guarantee loans to State
    catastrophe insurance programs.
        I am especially interested in how this bill would increase
    the availability of earthquake insurance. The California
    Earthquake Authority, CEA, is the sole provider of earthquake
    insurance in the State of California. However, only 12 percent
    of Californians have earthquake insurance.
        Moreover, since its inception 11 years ago, CEA has been
    unable to accumulate the amount of capital it projects it will
    need in the event of catastrophic earthquake. I am looking
    forward to hearing Mr. Pomeroy's testimony on how this
    legislation will allow the CEA to reduce its claims-paying
    costs and accumulate more capital.
        Thank you, Mr. Chairman, and I yield back the balance of my
    time.
        Chairman Kanjorski. Thank you very much, Ms. Waters.
        And now, we will hear from the gentleman from Texas, Mr.
    Hensarling.
        Mr. Hensarling. Thank you, Mr. Chairman.
        By any honest accounting standards, the President's push on
    his health care agenda is going to cost the Nation $2 trillion.
    Already, the President has submitted to us a budget which will
    double the national debt in 5 years, and triple it in 10 years.
        According to the latest Congressional Budget Office
    baseline, at the end of the 10-year budget window, our Nation
    will be paying $916 billion a year, over $8,000 per household,
    in interest alone on the national debt. Half of our national
    debt is now owned by foreign interests, mainly China.
        When you look at our Nation's spending patterns, it has
    caused Congressional Budget Director Elmendorf to state, ``The
    outlook for the Federal budget is bleak. U.S. fiscal policy is
    on an unsustainable path.'' Economist Robert Samuelson says
    this spending could ``trigger an economic and political death
    spiral.''
        Former Comptroller General David Walker has said that our
    spending patterns represent a ``fiscal cancer that threatens
    catastrophic consequences for our country.'' And we recently
    read where Moody's has announced that America's bond offerings
    may soon lose their AAA rating.
        On top of that, we now have H.R. 2555, which creates new
    Federal guarantees, a new Federal reinsurance program, and a
    new Federal grant program: Title 1 authorizes $100 million for
    a national catastrophic risk consortium; Title 2, $25 billion
    for catastrophic obligation guarantees to the States; Title 3,
    up to $200 billion for reinsurance coverage to eligible State
    programs; and Title 4, $75 million for a mitigation grant
    program.
        I ask the question: How much more money are we going to
    borrow from the Chinese and send the bill to our children and
    our grandchildren?
        This bill simply represents a bad idea whose time has not
    come. Our Nation is currently on the road to bankruptcy. If we
    do not change our spending ways, then we are looking at a
    massive tax increase, up to 60 percent by the end of this
    decade, which will crush jobs, or massive inflation, which will
    make us look longingly and nostalgically upon the Carter era.
        I know there are those who maintain that the taxpayer has
    nothing to lose. But we heard these same voices about Fannie
    and Freddie. And now, over a trillion dollars of taxpayer
    exposure later, we know how wrong those opinions were.
        We have gone from bank bailouts to beach condo bailouts.
    What is next? And I haven't even mentioned the wisdom or the
    fairness of forcing my constituents in Dallas to subsidize
    someone else's constituents in Daytona.
        In a free society, how people choose to risk their money is
    their business. How they choose to risk the taxpayer money is
    my business. H.R. 2555 is unwise, unfair, and unaffordable.
        I yield back the balance of my time.
        Chairman Kanjorski. The gentleman from Texas, Mr. Green, is
    recognized.
        Mr. Green. Thank you, Mr. Chairman. I thank the chairwoman
    of the Subcommittee on Housing, Chairwoman Waters, and I also
    thank Ranking Member Capito.
        In response to something that was said about the chairman
    of the full committee, Chairman Frank, it is no secret that he
    is not shy when it comes to expressing his opinion. It is also
    equally as true that he will listen to others, and while he may
    not agree, he does allow differing opinions to be heard. And I
    salute the chairman for his willingness to hear from other
    persons.
        With reference to the statement about the amount of money,
    the $3 trillion, CBO seems to differ with the $3 trillion
    estimate that was called to our attention. There may be many
    who are reviewing these numbers, but CBO seems to be the gold
    standard that we all rely on and refer to. And their number is
    decidedly different from the $3 trillion number that was called
    to our attention.
        With reference to Title 1 of the Homeowners' Defense Act,
    it is voluntary. I think it is important to note that it is
    voluntary, that States may or may not participate. Usually,
    States will do what is in their best interest. If it does not
    benefit a given State, then the people of that State will not
    participate. If it does, then it bodes well for what we are
    trying to accomplish, and the people do participate.
        I think it is worth our consideration. I look forward to
    hearing from the witnesses. I believe that this consortium, a
    national catastrophic risk consortium, is something worthy of
    review. I look forward to hearing the witnesses, and I yield
    back the balance of my time.
        Chairman Kanjorski. Thank you very much, Mr. Green.
        We will now hear from the gentleman from California, Mr.
    Campbell.
        Mr. Campbell. Thank you, Mr. Chairman.
        As has been mentioned, after Katrina, the Federal taxpayer
    sent tens of billions of dollars to help reconstruct things in
    Louisiana. Whether it is a hurricane, an earthquake, a tsunami,
    as we have heard about recently, tornado, flood, land
    subsidence, whatever--if a similar natural disaster hit any of
    our States here, does any of us reasonably believe that we are
    not going to come here to the Federal Government and say, ``You
    helped out Louisiana; help us out, too.''
        Of course, we are. But that is not the best way to finance
    this stuff. That is not the best way to deal with this. And as
    has also been mentioned, only 12 percent of homeowners in
    California have earthquake insurance, and it is less than that
    for businesses. Why? In part, because everyone expects the
    Federal Government will come bail them out because, look, they
    did it over there.
        What this bill attempts to do is to replace that very
    broken, wrong way of dealing with natural disasters and enable
    a government-supported and assisted, yes, but private insurance
    market so that people can have private insurance for these
    things. We can build up insurance around the States.
        Now, I know some people have problems, as has been
    expressed, with the specific mechanisms used in this bill.
    Fine. Let's debate those. But we need something other than what
    we have because this is just not going to work, either for the
    taxpayer or for homeowners and residents.
        Thank you. I yield back.
        Chairman Kanjorski. Thank you very much, Mr. Campbell.
        We will now hear from Mr. Posey.
        Mr. Posey. Thank you, Mr. Chairman. I would like to echo
    the comments of my colleague from California and express my
    appreciation to my colleague from Florida for bringing forth
    this legislation.
        Whether people know it or not, or whether they like it or
    not, major parts of nearly every State are merely one natural
    disaster away from catastrophe. And you can sit around and do
    nothing and bury your head in the sand, and wait for that to
    happen, and then come crying to the Federal Government for
    help; or you can try and be a little bit forward-thinking, as
    the proponent of this bill has done, and explore ways to
    prepare better for the future.
        This concept has worked in many States, to the salvation of
    homeowners and some insurance companies. This is not perfect
    yet. It is not ripe. But we will never find the perfect
    solution if we don't take the time and give the necessary
    attention to exploring the various options that are out there.
        Sadly, a lot of people, based on the comments I have heard,
    do not understand the concept of reinsurance. And maybe when
    they find out a little bit more about it, they will be
    supportive.
        Thank you.
        Chairman Kanjorski. Thank you very much, Mr. Posey.
        Are there any other members of the committee who seek
    recognition for an opening statement? The Chair seeing none--
    oh, I am sorry, Mrs. Biggert.
        Mrs. Biggert. Mr. Chairman, I don't have an opening
    statement. But I would like to submit several statements from
    groups for inclusion in the hearing record: the National
    Wildlife Federation; an environmental groups joint letter;
    SmarterSafer; Cincinnati Insurance; RIAA; PCI/AIA; fiscal
    conservative groups joint letter; and NAMIC.
        Chairman Kanjorski. Without objection, it is so ordered.
        I am pleased to welcome our distinguished panel here today.
    We want to thank you all for appearing before the subcommittee.
    Without objection, your written statements will be made a part
    of the record.
        You will now each be recognized for a 5-minute summary of
    your testimony. Our first witness--I introduce him actually
    with pride because I had the experience of working with Mr.
    Witt on several occasions in several Administrations, and if
    all Federal leaders and managers were of his capacity, we would
    have a perfectly functioning government.
        So Mr. Witt, we welcome you here as a former Director of
    the Federal Emergency Management Agency and on behalf of
    ProtectingAmerica.org.
        Mr. Witt?

      STATEMENT OF JAMES LEE WITT, FORMER DIRECTOR OF THE FEDERAL
    EMERGENCY MANAGEMENT AGENCY, ON BEHALF OF PROTECTINGAMERICA.ORG

        Mr. Witt. Thank you, Mr. Chairman. Mr. Chairman and members
    of the subcommittees, I want to thank you for the opportunity
    to appear before you today to discuss ways to better prepare
    and protect American families from the devastation caused by
    natural disasters.
        Congressman Klein, I also want to thank you for your
    leadership on this very important issue.
        I was honored to serve as the Director of FEMA under the
    Clinton Administration from 1993 to 2001. Today, I will speak
    on these issues in my capacity as the co-chairman of
    ProtectingAmerica.org.
        ProtectingAmerica.org is an organization formed in 2005 to
    raise national awareness about the important responsibilities
    we all have to prepare and protect consumers, families, and
    communities from natural catastrophes. My fellow co-chairman is
    Admiral James Loy, former Deputy Secretary of Homeland Security
    and Commandant of the U.S. Coast Guard (Retired).
        Together, we have built a coalition and a campaign to
    create a comprehensive, integrated management solution that
    protects homes and property at a lower cost, improves
    preparedness, and reduces the financial burden on consumers and
    taxpayers, all in an effort to speed recovery, protect
    property, and save money and lives.
        There are over 300 organizations in our coalition,
    including the American Red Cross, the International Association
    of Fire Fighters, State Farm, Allstate, municipalities, small
    businesses, Fortune 100 companies, and more than 20,000
    individual members. The membership is truly broad, diverse, and
    representative of virtually every State in the union.
        We all believe that this hearing is timely. With headlines
    around the world relaying stories from recent tragedies in both
    Haiti and Chile, and on Monday in Turkey, many here at home are
    taking a harder look at whether or not we would be prepared if
    a similar catastrophic event were to happen in the United
    States.
        A catastrophic event, whether an earthquake striking one of
    our great American cities, a massive hurricane making landfall
    near any of the metropolitan areas from New York to Houston, a
    wildfire spreading quickly through the western States, or a
    twister tearing through Tornado Alley, would cause such damage
    that our economy would be stunned, private resources quickly
    depleted, and an immediate Federal bailout of hundreds of
    billions of dollars could potentially be required. As a result,
    they would be far better served by a program that uses private
    insurance dollars to pre-fund coverage for the eventuality of a
    catastrophic natural event.
        I believe that there are three key points critical to any
    comprehensive solution to a homeowners' insurance crisis.
        First, a national reinsurance program will generate
    additional capacity, bring more stability to the market, make
    higher-quality insurance more available, and ensure that
    consumers realize significant cost savings on their homeowners'
    insurance. The best way to accomplish this is to enable and
    encourage more States to create well-structured, actuarially
    sound catastrophe funds to supplement the protection offered by
    the current State catastrophe programs in California and
    Florida.
        Second, catastrophe obligation guarantees will provide
    helpful support to the debt issuance of State programs that
    could serve these programs well in distressed market
    conditions.
        Finally, we believe that a hybrid approach to the
    prevention and mitigation provisions is important. This
    approach would keep the program under the Department of Housing
    and Urban Development, but incorporate a privately financed
    national catastrophe fund that provides significant investment
    income to groups like the Red Cross and others.
        Stated simply, the status quo is not acceptable. A 2009
    report by Jonathan Orszag, an economist who formerly served on
    President Clinton's National Economic Council, found that the
    current system for post-catastrophe financial preparedness is
    riddled with inefficiencies, and there is a significant gap
    between the ability of the private insurance and reinsurance
    sectors to provide the protection that is required.
        Specifically, Mr. Orszag found that the current system is
    an ad hoc, backward-looking program that makes the government
    and the taxpayers essentially the insurers of last resort.
    Further, his report suggests that a better approach would be
    one that not only ensures that resources are available to fund
    recovery, but also funds prevention, mitigation, and
    preparedness.
        To that end, we support a comprehensive, integrated plan
    linking the national catastrophe fund with support to first
    responders, as well as strong education and mitigation
    provisions. A national catastrophe fund will create a privately
    financed, federally administered layer of reinsurance to
    complement and stabilize the private market reinsurance
    alternatives, and ensure greater availability and affordability
    for consumers of residential property insurance.
        And let me close with this. The 8 years that I was Director
    of FEMA, 1993 to 2001, based on a 5-year average less the
    Northridge Earthquake--at that time one of the costliest
    disasters we had--the average cost was $3 billion a year in
    disaster supplemental recovery efforts. And that cost has
    escalated tenfold from those 8 years.
        There are people for whom insurance is not available and
    not affordable, or who are underinsured. With these conditions,
    it will be a bailout every time one of these events happens. We
    have to make insurance available and affordable if we expect
    communities to recover and to replace the things that they
    worked all their lives for, and help their economies recover
    faster.
        So I thank you, and any questions you may have, I will be
    happy to answer.
        [The prepared statement of Mr. Witt can be found on page 73
    of the appendix.]
        Mr. Klein. [presiding] Thank you, Mr. Witt. We appreciate
    your leadership on behalf of FEMA, and you have been a great
    resource in the consideration of this issue, most particularly
    as understanding the before, the during, and the after, which
    is a comprehensive approach here.
        Our next witness: We would like to invite Mr. Glen Pomeroy,
    chief executive officer of the California Earthquake Authority,
    to share with us your thoughts.
        Mr. Pomeroy?

    STATEMENT OF GLENN POMEROY, CHIEF EXECUTIVE OFFICER, CALIFORNIA
                       EARTHQUAKE AUTHORITY (CEA)

        Mr. Pomeroy. Thank you very much, Congressman Klein, and
    subcommittee members.
        On a Monday morning in January 1994, the Northridge
    earthquake struck southern California. Many lives were lost,
    and homes and businesses were destroyed. It remains one of the
    most expensive natural disasters in our Nation's history.
        In its wake, most private insurers were desperate to shed
    their California earthquake exposure, but State law still
    required them to offer it as long as they were selecting
    homeowners' policies in the State. So most companies stopped
    writing homeowners' insurance altogether, and California had a
    crisis on its hands.
        That is when the State created the California Earthquake
    Authority, a publicly managed, privately financed, not-for-
    profit enterprise with the public purpose of making earthquake
    insurance broadly available.
        So, fast-forward 14 years. Today, the CEA insures over
    800,000 homes. We are the largest earthquake writer in the
    United States, and one of the largest in the world. But even
    though we know another Northridge-sized event will strike
    within 30 years, only about 12 percent of California homes have
    earthquake insurance.
        Some may be hoping that the next ``Big One'' will miss
    their home, or that the Federal Government will help them
    rebuild and recover following a disaster. We know that there
    are many others who believe they simply cannot afford
    earthquake insurance, especially given its high cost and high-
    deductible structure.
        After almost 14 years in this business, and knowing that
    seven out of eight California homes have no quake insurance, it
    is in the interest of everyone--the homeowners in harm's way
    and the taxpayers of our State and our Nation--to find a way
    for more Californians to be able to insure their homes.
    Otherwise, families and communities will not recover when the
    ``Big One'' happens.
        Government aid can't be the only solution, and no one
    should have to surrender their home to foreclosure. The reality
    is this: We are hitting a brick wall in insuring more people
    because we depend too much on expensive reinsurance.
        Reinsurance makes up only one-third of our claim-paying
    capacity, but it is two-thirds of our overall expenses. Forty
    percent of every premium dollar we collect goes right out the
    door as reinsurance premium, paid to reinsurers in Europe and
    London and Bermuda. Since 1996, we have paid $2.6 billion for
    reinsurance, and we have made reinsurance claims of $250,000.
    And despite that history, our reinsurance rates shot up 15
    percent last year.
        It is time for CEA financing to become more efficient, and
    in the process, less dependent on expensive reinsurance. Title
    2 of H.R. 2555 is an innovative tool that will allow us to do
    just that, and we are grateful to Congressman Klein for
    including this provision in the bill.
        It is not a bailout. It is not a giveaway. It is not an
    expensive government program. It is none of those. In fact,
    Title 2 simply provides a limited Federal guarantee so
    qualified, creditworthy State programs like the CEA have
    guaranteed access to private debt markets.
        This year, CEA will spend $224 million on reinsurance. With
    the Title 2 guarantee, we could save about $150 million each
    year, and we would pass these savings directly to our
    policyholders by cutting rates and slashing deductibles. We
    will still use reinsurance in the structure, just less of it.
        And we will maintain our financial strength to handle
    anything Mother Nature may throw in our way. Lower prices,
    better products, more choices--with those ingredients, we think
    we can double our policyholder count in 5 years.
        We are not seeking to push off our risk on others. Just the
    opposite: We want to manage our capacity better and more
    efficiently, continue to rate the risks appropriately, and ask
    Californians to bear the risk of loss from California
    earthquakes.
        There is a less than 1 percent chance we will need to
    borrow using the guarantee. But in an event such a magnitude
    happens and we do need to borrow money in the private debt
    markets, we will repay that debt from premium income going
    forward.
        We believe, based on discussions between CBO staff and a
    Senate sponsor of a similar measure, that the CBO score of this
    approach will be minimal, perhaps as low as $25 million over 10
    years.
        And so the bottom line is this. Today, we ask the CEA
    policyholders every year to pay in full for huge events that
    almost never happen. There is a better way. Finance a structure
    using our capital and financial tools like reinsurance in
    reasonable amounts for the ready funds to pay for all the more
    expected events, and use the powerful certainty that if that
    huge and unlikely event occurs, we would have guaranteed access
    to the private debt markets to ensure that we could pay all
    policyholder claims.
        Ending our overdependence on expenditure reinsurance means
    that more Californians can get the protection they need. And
    they won't have to pay in advance over and over again for that
    mega-catastrophe California has never experienced.
        Title 2 of this bill is a new approach. It will be
    effective, and it can be a real game-changer. But we need your
    help, and we thank you for your consideration.
        [The prepared statement of Mr. Pomeroy can be found on page
    60 of the appendix.]
        Mr. Klein. Thank you very much, Mr. Pomeroy. I appreciate
    your involvement today, and your experience in this.
        Our third witness is Mr. Steve Ellis, vice president of
    Taxpayers for Common Sense.
        Mr. Ellis, please proceed.

    STATEMENT OF STEVE ELLIS, VICE PRESIDENT, TAXPAYERS FOR COMMON
                                 SENSE

        Mr. Ellis. Thank you very much. Good afternoon, Congressman
    Klein, Ranking Member Garrett, and members of the
    subcommittees. Thank you for inviting me to testify. I am Steve
    Ellis, vice president of Taxpayers for Common Sense, a
    national, nonpartisan budget watchdog.
        Unfortunately, Taxpayers for Common Sense believes H.R.
    2555 is fundamentally flawed, and strongly opposes the
    legislation. The bill would actually end up putting taxpayers
    at risk, and subsidizing people to live in harm's way.
    Americans across the country would be forced to pay for a
    narrow bailout that primarily helps the well-off. It doesn't
    make sense.
        We are joined in our opposition by SmarterSafer.org; Allied
    Groups, which run the gamut from American Rivers to Americans
    for Prosperity; the National Association of Professional
    Insurance Agents; and the National Wildlife Federation.
        The breadth and depth of the taxpayer, environmental, and
    industry groups opposed underscores the broad-based concerns
    with H.R. 2555. Much of the argument for the programs under the
    bill relies on a ``pay me now or pay me later'' approach.
    Essentially, by providing reinsurance and debt guarantees,
    taxpayers will avoid fiscally messy and expensive bailouts of
    State programs in the aftermath of large disasters.
        Unfortunately, we have heard that seductive siren song
    before with the National Flood Insurance Program. Cheap Federal
    flood insurance helped fuel the coastal development boom.
    Although intended to provide only limited, short-term subsidies
    and encourage responsible construction, it actually served to
    increase subsidies.
        Today, a program that takes in roughly $2 billion in
    premiums annually is $20 billion in debt to the taxpayer. It is
    extremely likely that most, if not all, of that debt will be
    forgiven.
        We walked down that primrose path decades ago, and we are
    now stuck with Federal flood insurance. But today, staring into
    a budgetary abyss, with predicted average deficits of $1
    trillion a year over the next 10 years, we cannot afford to
    make that costly mistake again.
        Let's be clear about a few points. This bill does not pre-
    fund response. In any major disaster like Katrina, taxpayers
    will still have to pay for infrastructure repair, debris
    removal, emergency relief, and services. Furthermore, nothing
    in this legislation forces States to use the subsidies to help
    lower-income homeowners obtain insurance.
        The three major components of H.R. 2555 are all directed at
    accomplishing the same thing: shifting the cost and risk from
    bad decisions by a few to the rest of the country. And in so
    doing, they would enable continued subsidized insurance rates,
    which promotes unwise development and increased risk.
        The bill creates a Federal reinsurance program for eligible
    State programs. Currently, only Florida and California qualify,
    although others could join. Curiously, the bill stipulates that
    the program not compete with private markets, and that prices
    be actuarially sound.
        First, reinsurance is available, so it will compete. And
    second, at actuarial rates, the program would be more expensive
    because it would be forced to sell reinsurance to a very narrow
    pool of high-risk States, whereas the private market could
    distribute the risk worldwide.
        The debt guarantee program would put taxpayers on the hook
    to back State programs that insure earthquake losses at $5
    billion or other perils at $20 billion. The $20 billion figure
    fits fairly closely with the gap between the total liabilities
    faced by the Florida Hurricane Catastrophe Fund, the State
    reinsurance program, and the fund's available hard assets.
        Beware of Federal guarantee programs. They are presented as
    having little or no cost to taxpayers. But if the Federal
    Government picks up the tab for enormous State losses,
    particularly those of politically powerful States such as
    Florida and California, much of that amount could be forgiven.
        H.R. 2555 creates a National Catastrophe Risk Consortium
    chaired by the Secretary of the Treasury. Although the
    legislation stipulates that the consortium is not part of the
    U.S. Government, it is pretty clear that with board membership
    and a Federal charter, it will be viewed as such. And its
    financial actions will be viewed as activities with the backing
    of the Federal Government, similar to what occurred with Fannie
    Mae and Freddie Mac.
        H.R. 2555 notes that natural disasters are going to
    continue to damage and destroy homes, and that the United
    States needs to be better prepared for and better protected
    against catastrophes. We agree. We have long supported efforts
    to mitigate or eliminate impacts associated with natural
    disasters. A few ideas:
        Eliminate the parochial earmarks that have littered FEMA's
    pre-disaster mitigation program in recent years. Separately,
    little of the $5 billion in stimulus funds that was given to
    States for weatherization has been spent. Some of these funds
    should be redirected to catastrophe mitigation efforts.
        Florida should look slightly north to South Carolina and
    Virginia for examples of good policy. South Carolina's programs
    have let risk, not politics, determine rates in coastal areas,
    and the State has helped residents mitigate their homes. In
    Virginia, the FAIR plan provides a true last-resort coverage
    for those who can't get coverage elsewhere, and the State has
    private reinsurance to cover claims.
        The major provisions in H.R. 2555 would actually serve as
    an impediment to a better way forward, expanding subsidies to
    high-risk development and removing market incentives to
    mitigate future storm damages and move people out of harm's
    way.
        Higher insurance premiums are never popular, and
    politicians are in the business of being popular. This is a key
    reason why government-run insurance programs are fraught with
    fiscal peril.
        Taxpayers for Common Sense's mission is about making
    government work. Sometimes, the best way for government to work
    is to not make matters worse. H.R. 2555 would pile subsidy on
    top of subsidy to preserve an insurance house of cards. In
    these difficult budgetary times, we cannot afford to bail out
    one State for politically expedient decisions of the past.
    Thank you very much.
        [The prepared statement of Mr. Ellis can be found on page
    46 of the appendix.]
        Mr. Klein. Thank you.
        And our final witness will be Mr. Charles McMillan from
    Coldwell Banker Residential Brokerage, Dallas-Fort Worth, and
    immediate past president of the National Association of
    Realtors. Congratulations on your leadership on the Board of
    Realtors, which is a very important organization in all of our
    communities. And we appreciate your testimony today. Mr.
    McMillan?

      STATEMENT OF CHARLES McMILLAN, COLDWELL BANKER RESIDENTIAL
      BROKERAGE, DALLAS-FORT WORTH, AND IMMEDIATE PAST PRESIDENT,
                 NATIONAL ASSOCIATION OF REALTORS (NAR)

        Mr. McMillan. Thank you, Congressman Klein. I also want to
    thank Chairwoman Waters, Chairman Kanjorski, Ranking Members
    Capito and Garrett, and the members of the subcommittees for
    inviting me to present the views of the more than 1.2 million
    members of the National Association of Realtors on approaches
    to managing natural catastrophic risk.
        Recent earthquakes in Chile and Haiti should remind all of
    us of the need for a comprehensive, forward-looking national
    natural disaster policy. However, as it stands today, U.S.
    policy toward natural catastrophic risk is largely reactive
    rather than proactive.
        For example, when Hurricane Katrina struck, the Federal
    Government paid for much of the cleanup, all with taxpayer
    dollars. Of the total provided, $26 billion went directly to
    underinsured property owners, according to the Government
    Accountability Office. That money would not have been paid to
    taxpayers had a proactive Federal policy been in place to make
    property insurance more widely available as well as affordable.
        NAR believes that a comprehensive natural disaster policy
    should include property owners, the insurance companies, and
    each of the different levels of government in preparing and
    paying for future catastrophic events. My testimony today
    offers suggestions for what Realtors believe must be a
    comprehensive approach to addressing future catastrophic
    natural disasters.
        Specifically, we support the creation of a Federal policy
    to address catastrophic natural disasters that: ensures the
    insurance coverage is available and affordable; acknowledges
    the personal responsibility of those living in high-risk areas
    to mitigate, which includes adequate incentives; acknowledges
    the importance of building codes and smart land use decisions;
    recognizes the role of States as the appropriate regulators of
    property insurance markets, while identifying the proper role
    of Federal Government intervention in cases of mega-
    catastrophes; and reinforces the proper role of all levels of
    government for investing in critical infrastructure, including
    levees, dams, and bridges.
        Several pieces of legislation that would accomplish many of
    these goals are currently pending before you. Your bill,
    Congressman Klein, H.R. 2555, which has been mentioned several
    times during the testimony, the Homeowners' Defense Act, would
    offer the most comprehensive solution, in our opinion, by
    providing access to Federal reinsurance and a guarantee for
    State loans.
        It provides stable funding sources so there is more
    consistency in insurance availability, as well as
    affordability. Key components of the bill have also been
    introduced as stand-alone measures by Representatives Ginny
    Brown-Waite and Loretta Sanchez.
        Others have introduced legislation which provides tax
    incentives, including H.R. 308 by Representative Gus Bilirakis
    for property mitigation, and H.R. 998 by Representative Tom
    Rooney for insurance company reserve funds to pay claims
    arising from catastrophic events.
        All of these ideas could work together as critical elements
    of a comprehensive solution. Not only would such measures
    protect the private market from collapse, but they also ensure
    that resources are available to rebuild after the next mega-
    catastrophe.
        Simply stated, these ideas would create a national policy
    to proactively address the inevitable rather than waiting for
    the next crisis to occur and rely upon taxpayer-funded
    bailouts.
        Realtors thank Representative Klein for your efforts, sir,
    and we urge the committee to hold a markup at the earliest
    opportunity. NAR believes that all reasonable proposals should
    be considered as a part of a comprehensive solution to address
    future catastrophes, and we look forward to working with you on
    such measures in the months ahead.
        Thank you again for inviting me to present the views of the
    National Association of Realtors, and I will be happy to answer
    any questions that you or other members of the subcommittees
    may have.
        [The prepared statement of Mr. McMillan can be found on
    page 52 of the appendix.]
        Mr. Klein. Thank you very much, Mr. McMillan. And I would
    like to thank all of you for coming today and being part of
    this discussion. This is something I think all four of you
    understand, although some of you had some different opinions on
    how to approach this, it is not if, it is when.
        And we understand that whether it is maybe 50 States, maybe
    45 States, maybe 30 States, but there will be natural disasters
    over the next number of years. We have had an ad hoc approach
    for a long time.
        So I think what we will do is, I would like to thank you. I
    am going to just reserve 5 minutes for myself for asking some
    questions, and then we will move it along to other members.
        First of all, as I said, I know the question is: How do you
    manage the risk? And what I have been most intrigued by in
    working on this for the last number of months, and with a lot
    of input from people who like some of the ideas, we really
    molded something that ended up being a good bipartisan
    consensus.
        But I think the most important thing, and Mr. Witt, maybe
    you mentioned this, and I think Mr. McMillan as well: It is the
    view of a comprehensive approach. Before understanding, there
    is planning, whether it is mitigation, whether it is building
    codes, all the things that take place before, and the
    management of insurance in a way that will help homeowners
    manage one of the most expensive pieces of homeownership.
        Secondly, it is how you deal with an event during and then
    after. We also know that there are a lot of expenses that occur
    right after major natural disasters. And those can even be
    mitigated with proper State planning.
        And again, we are not here to say to each State, you have
    to do it a particular way, because each State will be dealing
    with it differently. But the eligibility for participation in
    this does require a great amount of mitigation, a great amount
    of responsibility for planning properly.
        Mr. Witt, you were FEMA Director for a number of years, and
    I think you handled, in my notes here, over 360 disasters,
    which is extraordinary. If you could just discuss with us how
    this notion of a prefunded system created by the bill--how that
    is better than a system on the back end, in which we are just
    cutting a check after the fact.
        Mr. Witt. Thank you, Congressman Klein, for the question.
    First, let me just say that when I was Director of FEMA, we
    created what we will call a public/private partnership with the
    private sector. We had over 2,500 core business partners in a
    program called Project Impact.
        It worked. The funds were leveraged to mitigate the risk in
    these communities, 250 communities across the United States.
    This program is a pre-funded catastrophe fund. And if a State
    wants to join, pass, and create the fund, it is a partnership
    from the private sector industry. By creating this fund, the
    Federal Government then would be the backstop if it was so
    catastrophic that the fund was depleted.
        But the idea of trying to create a cost-effective insurance
    homeowners' premium in today's world is difficult. We have to
    do better. This is not a bailout. If you look at every event,
    the 360 disasters I responded to, who funded that? The
    taxpayers, in every single event; and not only the response,
    but also in the longer-term recovery.
        If you were a homeowner and your home got destroyed, or it
    was minimally damaged and you were underinsured, that family,
    if they could make it habitable, was eligible for up to a
    $10,000 FEMA grant to make it liveable, or 18 months of
    temporary housing, all funded by the taxpayer.
        Now, I think that a pre-funded, private sector catastrophic
    fund at the national level, with funding from each State as
    they come on board, is a smarter way to go.
        And you talked about mitigation and prevention. We did a
    cost/benefit analysis on mitigation and prevention after the
    Midwest floods in 1993, and we found that every dollar spent
    saved $4 to $5 in future losses.
        The mitigation, prevention, public awareness, and education
    is a really important part of this because we can continue to
    minimize the risk and the loss, and continue to drive down the
    premiums so more people can afford to buy them.
        Mr. Klein. Thank you. And if I can ask Mr. McMillan: You
    and your colleagues are in the business of selling homes. Can
    you tell me how, in many places around the United States, the
    lack of available or affordable homeowners' insurance is
    affecting the overall recovery and our general economy?
        Mr. McMillan. Absolutely. I would be delighted to. One of
    the myths that is often fueling the divisiveness in this debate
    is that this is about a bailout for luxury homeowners in
    Florida and California. And the final exhibit, I have from 2005
    to 2008, a number of instances within which a tornado took a
    turn from Florida and went into Indiana and Illinois and what
    have you, tornadoes and hurricanes and things of that nature.
        The bottom line is, whereas there is a statistical
    probability that there are areas that might be more affected,
    we have found in the past 5 years, that the entire Nation is at
    risk at some point or another for things that are happening
    that statistically haven't happened in the last 100 years.
        So I am in agreement that we must have a comprehensive
    policy. And past discussion was to leave it on those homeowners
    so affected. The result of that is that the homeowners in the
    entire infrastructure of the Nation have been left ill-prepared
    because of the lack of availability of homeowners' insurance
    when these catastrophes occur.
        Mr. Klein. Okay. Thank you very much. I will turn it over
    to Mr. Garrett for 5 minutes.
        Mr. Garrett. Thank you.
        First, a question to the panel, and anyone can answer. In
    Florida, you have a couple of programs right now. Right? You
    have the Florida Hurricane Catastrophe Fund, which provides
    reinsurance to insurers on hurricane losses. And you have the
    Florida Citizens Property Insurance fund as well. Both, to my
    understanding, are underfunded in terms of being able to meet
    their potential claims to going forward.
        So before we were to implement this legislation, before we
    set up a Federal backstop for any State catastrophe fund,
    shouldn't we make sure that those funds are already properly
    capitalized and funded? Mr. Ellis, it seems like you are
    grabbing the microphone.
        Mr. Ellis. Yes. Thank you very much, Ranking Member
    Garrett.
        You are correct that--well, one is that the Citizens
    Insurance, the State insurance fund in Florida is the largest
    insurer, and the rates are artificially low. They buy
    reinsurance from the State reinsurance fund.
        The State reinsurance fund, and it is hard to tease out
    exactly what the numbers are, but when you look at it through
    both some other documents and then you look out from their
    annual report or their audit, it looks like there is about a
    $20 billion gap between assets and total liabilities.
        Total liabilities, basically there is about $4 billion in
    assets, and then plus $20 billion gets to the total
    liabilities. Obviously, it is unlikely that the full $20
    billion would be called upon at any one moment. But certainly,
    you are looking at--potentially, if there was a large natural
    disaster, an enormous bond issue would have to come out from
    the State of Florida to actually try to fill that gap.
        So certainly Florida--and they are taking steps. They are
    looking at--Citizens has agreed to--or the State legislature
    has indicated that they want to have a 10 percent increase in
    homeowner insurance rates each year for the next several years.
        And so they are doing work to close that gap. And I think
    that is certainly something that Florida needs to be looking at
    as one of our concerns about this overall program, stepping in,
    that it will actually be a disincentive to trying to do those
    measures.
        Mr. Garrett. Okay. Mr. Witt, it looks like you were--were
    you going to grab the microphone?
        Mr. Witt. Yes. Thank you.
        Mr. Garrett. Sure.
        Mr. Witt. Really, the problems with the Florida CAT fund
    are actually an indication of the need for a national backstop.
    The Florida CAT fund actually worked in 2004 and 2005. It paid
    out $37 billion that the taxpayers across the country didn't
    have to pay out. So it actually worked.
        Also, I think that a few comments made earlier about this
    was a bailout for property on the coast or helping to build up
    the coast--let me tell you something. If you can afford to
    build a house on the coast, on the oceanfront, you probably
    don't need to worry about insurance. You probably can afford
    it. So I don't think this is going to enhance that.
        But the Florida CAT fund actually worked. And it paid out
    almost $10 billion in hurricane funds in 15 years.
        Mr. Garrett. But the rates on these funds, to date, have
    not been actuarially sound. Is that correct?
        Mr. Witt. They are actuarially sound in Florida on the CAT
    fund that they have.
        Mr. Ellis. I don't know how exactly they could be if it is
    tremendously underfunded compared to the liabilities. But--
        Mr. Garrett. Yes. I have never heard anybody make that
    assertion before, that they are actuarially sound rates. I have
    always heard that they have not been soundly set, that they
    have been set too low that it is basically that they have not
    been able to get the wherewithal to change that.
        Mr. Ellis. But even beyond that, Ranking Member Garrett, I
    would just point out that in 2007, there was a change done by
    the State of Florida under Governor Crist that actually
    expanded Citizens Insurance.
        So even though the CAT fund responded well in 2004 and
    2005, in 2007, under Governor Crist, they expanded the ability
    to get coverage under the Citizens Insurance, which then
    dramatically increased the risk. And that is also what
    catapulted Citizens to being the largest home insurance company
    in the State.
        Mr. Garrett. And it looks like I only have 1 minute left,
    so I will throw this out quickly. I wanted to get to Mr.
    McMillan's comment with regard to mitigation and enforcement of
    State laws. And I think you said it should be done on the State
    level, that is a really good way to make sure of building codes
    and what have you.
        I don't have time to get to that, but I think that is a
    good point that you made in your testimony. That is the way to
    get it done, and unfortunately that is not being done. And I
    think that is to the chagrin and to the detriment of both the
    municipalities, the counties, and the States, and also the
    homeowners there.
        Would you just agree with that, in short?
        Mr. McMillan. I would agree with that.
        Mr. Garrett. I thank you, and I think that is a point that
    we need to make. I appreciate that.
        If I have 30 seconds left, one major point that was made,
    and maybe it is conflicted on, is whether or not--what the
    Federal Government actually pays out. The Federal Government
    right now pays our temporary assistance and infrastructure
    assistance in these cases when you have these things.
        Katrina was a little bit different because, hey, the
    Federal Government messed up there--oh, there is a light on
    this one--and does anybody want to just quickly say whether or
    not we are--are we really subsidizing the insurance in these
    situations, or will that be an added subsidy once these plans
    go into place? Mr. McMillan, do you want to respond?
        Mr. McMillan. If I might, briefly, I think this is one of
    the areas where we talk about reinsurance. Without this
    government backstop, we have to depend on the open market. And
    one of the things that is making this reinsurance--and
    subsequently the insurance to the homeowner--unaffordable is
    that they have to work with extremely fluctuating market rates.
    With this backdrop, there would be much more stability. And I
    would dare say, in California and Florida and throughout, we
    would have many more participants in that pool.
        Mr. Klein. Ms. Waters, for 5 minutes.
        Chairwoman Waters. Thank you very much.
        Mr. Pomeroy, even though Mr. Klein started this work and
    has worked diligently because of the hurricanes and floods, you
    and I are a little bit more focused on earthquakes because of
    where I come from and where you come from.
        I would like to just take a moment to explore, given that
    you have been insurance commissioner of North Dakota and you
    are now head of the largest provider of earthquake insurance in
    California, can you explain in greater detail how the
    mechanisms in this bill make good risk management sense to
    States like California and North Dakota, that are exposed to
    such very different natural catastrophe risk? What can this do
    for us?
        Mr. Pomeroy. Thank you. Thank you very much, Congresswoman
    Waters. Actually, my strong opinions as to why this is
    absolutely the direction we need to be heading to in terms of
    risk management were formed by my time as an insurance
    commissioner in North Dakota from 1992 to the year 2000,
    commissioner during a time, during 1997, when we had a horrible
    disaster in Grand Forks, North Dakota.
        The City entirely evacuated, entirely flooded. A horrible
    disaster. And fortunately, James Lee Witt was the FEMA Director
    at that time, and marshaled an incredibly impressive Federal
    response to come into that community, help it recover, help it
    get back on its feet. And North Dakotans forever are grateful
    for not only Mr. Witt's leadership, but for the response of the
    United States Government.
        Well, now we are talking about California, and California
    earthquakes. If there is a similar but different natural
    disaster in our State, and you have a massive earthquake with
    massive destruction, most of which is uninsured, of course,
    there will be a similar Federal relief effort, as Californians
    will then look to North Dakotans and others for the kind of
    help that they have been providing other States during their
    times of disaster.
        It just makes more sense to get more people to take the
    steps to privately insure their own homes so they can quickly
    recover, and get their families back in their homes, and get
    their communities moving again without having to go stand in
    line to try to seek assistance from various agencies.
        It is better for folks to take the responsibility up-front,
    and insure their properties. The problem is, it is hard to do
    right now because it is expensive. So what we are trying to do
    is make it more affordable, thereby making it more available.
        Chairwoman Waters. In your testimony, you mentioned the
    goal of the California Earthquake Authority through this
    legislation is to double the percentage of Californians who
    have earthquake insurance from 12 percent to 25 percent in 5
    years, as I understand your position. The CEA believes that
    this goal can be achieved with the $5 billion debt guarantee
    provided in Title 2 of the bill.
        Please explain how the $5 billion debt guarantee in this
    bill can double the number of Californians with access to
    earthquake insurance following the next inevitable California
    earthquake.
        Mr. Pomeroy. Thank you, Congresswoman. Yes. We are
    currently limited today by the fact that we are dealing with a
    risk that the private sector basically walked away from. And
    yet we need to figure out a way to manage it and provide
    coverage for Californians who wish to obtain it.
        Yet the financing that is available to us makes it tough
    because we really have no choice today other than to acquire a
    tremendous amount of our claims-paying capacity from the global
    reinsurance markets. It is very expensive, and prices do
    fluctuate.
        And so 40 percent of everything we collect from our
    policyholders goes right out the door by way of reinsurance
    premium. Almost zero dollars have been paid back to us over
    time, despite the fact that we have paid $2.6 billion for that
    coverage since we opened our doors.
        And so by moving into this new and innovative approach that
    is called for in this bill, we will be able to lower our costs
    substantially. We will still obtain reinsurance. We will still
    have claims-paying capacity. We will still have our financial
    strength. But we will make our coverage more affordable, so we
    will get more people covered. We will grow our capital base
    during the process, lower premiums, we will lower our
    deductibles, and therefore have a policy that is going to be
    more meaningful as earthquakes actually do occur because we are
    going to be able to pay for claims.
        By creating a better value proposition for consumers, we
    are going to get more homes insured.
        Chairwoman Waters. That makes good sense. Thank you very
    much. I yield back the balance of my time.
        Mr. Klein. The gentlelady yields back.
        Mrs. Biggert?
        Mrs. Biggert. Thank you, Mr. Chairman. I would ask
    unanimous consent to submit the testimony of Nationwide
    Insurance to the hearing record.
        Mr. Klein. Without objection, it is so ordered.
        Mrs. Biggert. Thank you. It really is a shame that our
    environmental groups and the reinsurance industry and any
    regulator, State regulator, are not represented here today. And
    Mr. Chairman, I think it is important that we have, with such a
    bill, which could cost many of our constituents, taxpayers who
    are not residents of Florida or California--that we hear from
    all sides of this debate. And so I would request of the
    committee that we hold another hearing on this bill so we can
    hear from these other stakeholders.
        And then my question to the panel is: Do Florida and
    California allow insurance businesses to charge actuarially
    sound risk-based rates? And I guess, Mr. Pomeroy, maybe you
    could answer that for me.
        Mr. Pomeroy. Yes. Thank you, Congresswoman. The answer is
    absolutely, yes. And in fact, the California Earthquake
    Authority is required by law to charge actuarially sound rates
    for the coverage that we write.
        Mrs. Biggert. Are there price controls and caps?
        Mr. Pomeroy. There is State regulation of insurance,
    obviously, and the California Earthquake Authority is a
    regulated entity. We submit our rates to the department for
    their review. There are not price caps; however, there is the
    appropriate State oversight, as there is throughout the
    country.
        Mrs. Biggert. Do you think that there--it seems like in
    some of these States that competition--it really drives out
    competition and leaves the consumer with fewer choices and
    higher rates. If Florida and California--and that happens in
    Florida and California. Is that true?
        Mr. Pomeroy. If I may, Congresswoman, what drove companies
    out of California in terms of earthquake coverage was the
    Northridge earthquake. Companies were devastated by the losses
    that far outstripped premiums that they had collected or sought
    to collect. And companies really wanted nothing more to do with
    that risk.
        And so the State was left with having to have homeowners go
    it alone and shoulder their own risk, or put together some
    creative solution, which has been in existence and operating
    successfully for 14 years. It is just that we want to take it
    to the next level and make coverage more affordable, and
    therefore get more homes within the program.
        Mrs. Biggert. And do you think that, for example, my
    constituents in Illinois should provide a subsidy for the State
    of Florida and California or the consumers of those States?
        Mr. Pomeroy. Congresswoman, I think that is an excellent
    question. And we are not here seeking any subsidy. We don't
    believe a subsidy is necessary. The California Earthquake
    Authority stands on its own. It is just that as we seek to put
    our financing structure in place, we have the ability to borrow
    money currently; it is just that after a huge and devastating
    event, we don't currently have the certainty that the private
    debt markets would be responsive.
        We can pay the debt back. We just have to make sure that we
    have access to the debt in the first place. And so our request
    is give us this little assistance in the form of the Federal
    guarantee. Allow us to get more homes properly protected. We
    will pay the claims when they occur so that the State will be
    less in a position of having to come out to you all after a
    devastating event, when we have all this uninsured loss.
        Mrs. Biggert. I guess I just have to put in a plug for
    Illinois, which has been kind of a model State for insurance.
    And one of the reasons is because there are no price controls
    or rate control, and that we get more competition because more
    insurance companies are willing to come to the State.
        Mr. Ellis. Congresswoman Biggert?
        Mrs. Biggert. Yes, Mr. Ellis?
        Mr. Ellis. There are, in Florida, some challenges there as
    far as--it is part of the reason why many of the companies have
    left the State. The State is trying to force more companies to
    come back in through a variety of means.
        And then I would just point out that in the testimony of
    the California Earthquake Authority, there was a lot made about
    how there is no State money that is going into the California
    Earthquake Authority. It is under the auspices of the State
    government.
        But essentially, what we are asking here is that the
    Federal taxpayer back the bonds there for the California
    Earthquake Authority, and actually to then make it so that they
    are less reliant on reinsurance.
        And I would just point out that, unfortunately, I have not
    made a claim on my car insurance for many, many years, but I
    have paid my car insurance every single year. That is
    unfortunately the way insurance works--or fortunately that's
    the way it works.
        And so the idea that they have paid a lot of money to
    reinsurance and haven't gotten any return, well, thankfully.
    That means that there hasn't been an earthquake. They haven't
    actually had to tap it. That is part of what insurance is
    about.
        Mrs. Biggert. Well, what about--let's turn to Florida. And
    Florida doesn't allow risk-based pricing. Right?
        Mr. Ellis. I am not--I have never lived in Florida. I would
    have to look exactly to get to that level of detail. But my
    understanding is is that there is not--that they are not able
    to charge commensurate with risk such that--and are actually
    undercut. And it is probably more that they are undercut by low
    prices from Citizens.
        Mrs. Biggert. Okay. Just one other quick question. And I
    understand that the--
        Mr. Klein. You are out of time.
        Mrs. Biggert. I yield back.
        Mr. Klein. Okay. Let's see. I now recognize Mrs. McCarthy
    from New York for 5 minutes.
        Mrs. McCarthy of New York. Thank you.
        Mr. Ellis, I think that you just made a case on why we need
    to have some sort of catastrophe insurance, basically saying
    the insurance companies wouldn't come into the States. I know
    we are hearing about California and I know we are hearing about
    Florida.
        But I just want to ask the experts out there, like New
    York, most of our insurance companies have moved out even
    though we haven't had a major hurricane since maybe the 1960's.
    I'm not sure. But they have all pulled out, mainly because they
    think we are going to get a hurricane soon.
        But I guess the question I really want to ask is: How many
    States do you think will actually partake in this? Because,
    obviously, the more States that would take it, the better.
        But the other thing is, too, the government right now
    doesn't--I need to know exactly why the government should back
    the States on these issues because we don't do anything on
    guaranteed municipal bonds now for local areas. And during this
    time of recession and our States, our cities, are having a hard
    time just paying their bills, how do we know that they will be
    able to pay us back, the Federal taxpayer back?
        I guess those are the concerns I have. And I will just pick
    up one thing that Mrs. Biggert had said, too. If we are going
    to rebuild in areas that have hurricanes, earthquakes--I know
    California, they have their codes. But some States are still
    building on hurricane areas along the coastline and not taking
    the proper precautions of putting the correct piles, I guess,
    the house on the piles and things like that.
        If we are going to do something like this, shouldn't we
    have language in there that, to be covered, that you have to
    have the best technology out there? Anyone can answer that.
        Mr. Witt. Let me first answer part of it, and I know that
    Mr. McMillan wants to say a few words.
        First of all, it is not--this is not just about California
    and Florida. This is about the whole country. This is about
    those high-risk States where we have events frequently and more
    often than others.
        New York, in 1938, was hit with a very large nor'easter
    hurricane. New York has an earthquake fault. And when you get
    in the middle United States, you start out from Tennessee,
    Arkansas, Indiana, Illinois, all with the New Madrid earthquake
    fault, which had an 8.0 earthquake in 1811, 1812; had two of
    them that rang the church bells in Boston. It just wasn't
    inhabited at that time as much as it is today.
        So the risk that we face today is nationwide, not just
    Florida and California. And I think the most important--I was
    the CEO of the International Code Council for 3 years in
    building codes, building standards, electrical, plumbing. And
    the State of Florida at that time, when Governor Jeb Bush was
    down there, they did not have statewide building codes in all
    of Florida. But they do now.
        After Katrina, the State of Louisiana did not have
    statewide building codes, and it was just along the coast. But
    Governor Blanco and the legislators passed a statewide building
    code.
        So it is really important that part of this, and the
    funding from this, goes for the support of statewide building
    codes, the enforcement of them, and the mitigation and
    prevention side of it. It is very important because we can
    mitigate a lot of these losses.
        Mr. Ellis. Congresswoman, I would just point out that in my
    testimony, I talked about South Carolina and how South Carolina
    has allowed prices of insurance to be commensurate with risk
    along the coast. And they have actually seen insurance
    companies coming into the State.
        And so certainly that is one of the things, that you can
    move insurance out of the State by having more restriction or
    underpricing them, like Citizens has done; or you can do things
    that will try to encourage that.
        And then secondly, absolutely other regulatory measures and
    other means and building codes and everything else along those
    lines are critically important. I don't think anybody here has
    indicated that we don't need to be doing something more. We are
    just saying, not this.
        Mrs. McCarthy of New York. Just to follow up on that, it
    just so happened my brother-in-law was talking to me about this
    the other day. He does live in North Carolina on the coast. He
    bought the property and built a house probably 15 or 20 years
    ago.
        His insurance for that area was close to $8,000 a year.
    North Carolina just came in with their own fund, and I think he
    is paying $3,000 a year now. That is quite a big difference.
    And I think, knowing my brother-in-law, if there was another
    insurance company around that would have given him a cheaper
    price, believe me, he would have.
        So I think that we still have a problem with people. And I
    am one of those who believed if you were going to take an FHA
    loan out for a house, and if you were anywhere near--whether it
    is a flood coast or an earthquake, that you had to have the
    right insurance behind that. I still believe in that.
        I think this is a debate, but I think it is a debate that
    we need to have because I think the Federal Government ends up
    paying an awful lot of money for any of the national--we call
    emergency funding around here. But it still comes out to a lot
    of money.
        Thank you.
        Mr. Klein. Thank you. And just to reserve myself 1 minute
    here, just to clarify. On Florida's issue, for example, Florida
    by law has to be actuarially sound. I am not here to tell you
    what risk-based pricing is, Mr. Ellis. Maybe you can define it.
    What is risk-based pricing?
        Mr. Ellis. Well, certainly. For instance, the Flood
    Insurance Program is supposed to be actuarially sound. It is
    stipulated in law. But it never took into account catastrophic
    losses, which is why, even though it was dipping along and
    basically being able to pay out its losses, borrowing from the
    government and paying it back, we ended up with a program that
    takes in $2 billion a year and is $20 billion in debt.
        Mr. Klein. Well, I understand that. What is risk-based
    pricing? How do you--
        Mr. Ellis. Well, risk-based pricing is going to be about
    characterizing the actual risks to that property, that area,
    and then being able to pay out that price over a long term in a
    macro sense.
        Mr. Klein. How is that different from being actuarially
    sound?
        Mr. Ellis. It is not necessarily different than being
    actuarially sound.
        Mr. Klein. All right. And just also to clarify, I think the
    gentlelady from New York was talking about the fact that we
    talk about property on the coast, not on the coast, as it
    relates hurricanes.
        I will just tell you from our experience, in the four
    hurricanes that did hit Florida after not having any hurricanes
    in my area for 50 years, people paying their premiums in every
    year, the four hurricanes, although people on the coast were
    paying more--and should pay more; I am all for the recognition
    that people who live in high-risk areas should pay more, and
    that is appropriate--most of the damage took place inland
    because the hurricanes came from the west inland.
        So it was very interesting. I used to call it the I-95
    mountain range. That was how they used to charge one price on
    one side of--I-95 is a road; I know you know that. It has
    nothing to do with any topography, no mountains, no nothing. It
    is just sort of an arbitrary point, which was a little
    interesting the way it was handled.
        I will now recognize Mr. Campbell from California for 5
    minutes.
        Mr. Campbell. Thank you, Mr. Chairman. And I first want to
    thank Mr. Witt for mentioning that this isn't just a Florida
    and California thing. In fact, but for circumstances that
    didn't quite turn out, we could have been talking about a
    tsunami in Hawaii and Oregon today, from last week, perhaps.
        And another thing: We talk about big disasters, but just
    another little thing that can happen. In my district about 6 or
    7 years ago or so, there was a landslide that was just caused
    by a lot of rain. A hillside gave way. Twelve houses were
    destroyed. Not hundreds, not thousands; 12 houses were
    destroyed.
        But in checking into it, I found no one was insured. And
    the reason no one was insured is there is no insurance for that
    available, period, anywhere. And these people not only lost
    their homes, they lost the land because the land disappeared.
    So these 12 families were destroyed, absolutely devastated.
    There was no insurance available, and it was not a big enough
    disaster to get any attention for anything here.
        So I think part of what we are talking about here is that
    there are disasters of one sort or another that can occur--I
    think Pennsylvania has insurance for this, by the way, because
    I think it is required because they have land subsidence issues
    there frequently.
        But there are natural disasters like this that can occur in
    small groups or big groups all over the country, in all kinds
    of different places. Some are insurable. Some are not. Some
    have expensive insurance. What we are talking about is trying
    to figure out a way to provide something for all of those
    people in all 50 States.
        I would like to spend the rest of the time talking about
    California and earthquakes, because I am from California, and
    because Mr. Pomeroy is here. But I actually want to address the
    questions to the other 3 of you because we have talked about
    the fact that only 12 percent of homes in California have
    earthquake insurance.
        A few other facts you may or may not know. California law
    requires that everyone who is shopping for or who is offered
    homeowners' insurance be offered earthquake insurance. So
    everyone has to be offered it.
        Someone earlier said the California Earthquake Authority is
    the only insurer of earthquake insurance. That is not true. I
    am insured in my house with earthquake insurance not from the
    CEA. And there are various other insurance companies that offer
    earthquake insurance in California. But 12 percent is the
    total, not just the CEA.
        Now, Mr. Pomeroy has said that given one of the proposals
    in this bill, he thinks perhaps we could double it to 25
    percent of total. That is still not enough.
        Let me ask the rest of the three of you because there is
    all this talk about high risk and so forth. Earthquakes in
    California, unless you want to eliminate San Francisco, Los
    Angeles, and just about everything in between, this isn't about
    people building in high-risk areas. This isn't about only
    expensive homes or whatever. This is about everybody,
    ``everybody'' representing 1 out of every 12 people in the
    United States, just in California.
        So what can we do? What else can we do? What other ways are
    there to get this thing up? You heard Mr. Pomeroy say some
    people just say, oh, the Federal Government will bail me out.
    I'm not going to buy this insurance because they'll come in and
    take care of me. And we have to break that cycle, certainly.
    And as Mr. Pomeroy suggested, right now it's relatively
    expensive. The deductibles are high. And so there is that as
    well.
        Ideas from the rest of you, please, because I think it
    could--it is not just about California. This sort of thing, it
    is so broad and so diverse that it is a lesson for the whole
    country, I think.
        Mr. McMillan?
        Mr. McMillan. I would like to make a quick comment,
    Congressman Campbell, and that is the next thing that we can do
    is to have a national comprehensive disaster preparedness plan.
    As I see the balking in the discussion about whether to approve
    or jump on certain sections of H.R. 2555, it is that the
    taxpayer will pay for this.
        The taxpayer is paying for it now, without a plan. And I
    think it is so important, as we have suggested in our
    testimony, that we be proactive as opposed to reactive. Now a
    disaster happens, it is declared a Federal disaster, and the
    taxpayers pay it without any discussion about repaying it. At
    least that will be in the discussion with the comprehensive
    Federal plan.
        Thank you for the privilege of sharing that.
        Mr. Campbell. Other thoughts? Mr. Ellis?
        Mr. Ellis. Yes, sir. Certainly, we certainly agree with
    preparedness. And actually, there has been some stuff on
    wildfires in the last decade or so that has dealt with
    preparedness and trying to figure out communities to have
    wildfire plans and figure out what is going to burn, how they
    are going to deal with this, and all these type of issues. And
    certainly that is important.
        I will just point out that unfortunately, no matter what we
    do, the taxpayer is going to pay after a natural disaster. It
    has done that. It will do that. There is critical
    infrastructure that is going to be rebuilt that is either going
    to be paid for by the State taxpayer or, even more likely, the
    Federal taxpayer.
        But beyond that, unfortunately we are talking about human
    nature here that we are trying to adjust. And there are people
    who don't buy health insurance. There are people who don't buy
    flood insurance who live in the flood plain, who are in the
    100-year flood plain. And so these are issues that we have to
    deal with.
        Some of it is education. Some of it is trying to do--in
    building codes to make communities less resistant. And some of
    it is about the fact that we have to have some tough love
    sometimes when people don't actually--don't pay, and how much
    we are willing to bail them out.
        Mr. Campbell. Mr. Witt?
        Mr. Witt. Thank you, Mr. Chairman. It is interesting. I
    don't know how many people in this chamber have ever been
    through an event of any magnitude. But I have. I lost our home
    and everything in it when I was 12 years old with a fire. A
    tornado blew our house off of the foundation when I was 6. My
    wife says I am a disaster.
        [laughter]
        Mr. Witt. But let me just say, when you talked about the
    mudslides in California--and I remember them really, really
    well, several of them, particularly after the Laguna Beach fire
    and the Malibu fire and others--those 12 homes, that was a
    catastrophic event to those 12 families. Whether it is 1 home
    or 5,000, it is a catastrophic event to that family.
        I think that we can do more, and we can do it better, and
    we can put less burden on the taxpayers by supporting the
    private funded catastrophic fund and have more people insured.
    This is really, really critical in this day and age, with the
    economy the way it is right now. And it just really frustrates
    me to no end when I see these type of losses.
        I was just in Haiti. I made three trips to Haiti with
    President Clinton. Those people there make $2 max a day in
    labor. They don't have anything. We are blessed with
    everything. And it is time to make the change in giving people
    an opportunity to not only protect themselves, but to protect
    the things that they have worked so hard for all their life.
    And a lot of these people don't have that ability because they
    can't afford it and it is not available.
        California has probably done more than any State in the
    country in seismic building codes, retrofit, particularly of
    critical care facilities, schools, nursing homes, and
    hospitals. Every country around the world looks at California's
    seismic building codes as a model for their own country. Japan
    does. Everybody does.
        So the mitigation, preparedness, and a public/private
    partnership in developing a catastrophe fund is really critical
    in this time of our lives. And I just hope that everyone
    listens to this and everybody looks at it this way: it is not
    about any one. It is about everyone. And we need to make a
    difference here.
        Mr. Campbell. I thank the gentleman. Thank you. I yield
    back.
        Mr. Klein. Thank you, Mr. Campbell.
        Mr. Cleaver, for 5 minutes.
        Mr. Cleaver. Thank you, Mr. Chairman.
        Mr. Ellis, thank you for being here, first. Thank all of
    your for the generosity of your time.
        Mr. Ellis, in your prepared remarks, you mention that the
    FEMA pre-disaster mitigation program has been littered with
    earmarks. What earmarks?
        Mr. Ellis. What earmarks? I think, the last time I looked,
    out of the $100 million program, about a quarter of that was
    earmarked. I would have to get you the exact numbers, sir,
    but--
        Mr. Cleaver. No. I'm not asking for numbers. What--and
    maybe the disconnect is the definition of an earmark. So, I am
    not sure--
        Mr. Ellis. Congressionally defined earmarks, sir. It is--in
    the DHS bill, under FEMA's pre-disaster mitigation program, in
    the last couple years there has been a growth of earmarks in
    that particular program to individual projects.
        It is not completely earmarks, but it is one of the areas
    that we are concerned about because it is a competitively
    awarded program, and it has earmarks scattered through it.
        Mr. Cleaver. So members are designating money to that
    area--
        Mr. Ellis. To some project in their particular district.
        Mr. Cleaver. --because, if they don't, badly needed
    mitigation won't occur. Is that--
        Mr. Ellis. I don't know if that is necessarily the case,
    sir. What I am saying, Congressman Cleaver, is that this is a
    merit-based program. There are parameters that are established
    by FEMA to try to award the funding under the pre-disaster
    mitigation program.
        But in some cases, lawmakers are earmarking funding. They
    are jumping the line. And so, essentially, some other community
    that also has critical--
        Mr. Cleaver. Jumping the line?
        Mr. Ellis. Jumping the line, meaning that FEMA gets a pot
    of money to assign out to various things. They have a bunch of
    parameters that communities need to meet to qualify.
        Mr. Cleaver. Yes, sir.
        Mr. Ellis. They award the funding to these various
    entities.
        Mr. Cleaver. Yes, sir.
        Mr. Ellis. Some of these, Congressman, are now, because
    lawmakers are getting earmarks, are going ahead of other
    communities that don't have as powerful of a lawmaker to get
    the earmark into that program and designate it to go to their
    particular project.
        Mr. Cleaver. So they should wait on a bureaucrat to do it?
        Mr. Ellis. No, sir. Essentially, this comes down to the
    whole issue of earmarks. But, Congress should bring the
    bureaucrats in front of them and work with them to develop the
    program to make sure that it is done correctly. And if they
    don't do it right, haul them back the next year and hold them
    accountable, sir.
        Mr. Cleaver. Okay. I wish you were a Member of Congress. I
    hate to say that is completely unrealistic. It sounds good on
    the evening news or something like that. But it is not real.
    And I think even my colleagues on the other side will tell you
    the same thing.
        Congress has only a few responsibilities, and one of them
    is spending the money.
        Mr. Ellis. Absolutely, Congressman.
        Mr. Cleaver. And so, I hate to give that responsibility to
    some guy in the basement of some building--I live in Kansas
    City, Missouri--who has never crossed the Mississippi and
    wouldn't know Kansas City, Missouri, from Milwaukee, Wisconsin.
        But the other point here is that you suggested that our
    money should be used to do this, on page 5. You say, under the
    American Recovery and Reinvestment Act--
        Mr. Ellis. Correct. Yes, sir.
        Mr. Cleaver. --the stimulus, nearly $5 billion has been
    given to States. And you go on to say, ``Maybe this money
    should be taken.''
        Mr. Ellis. Not taken, sir. I am suggesting that
    essentially--just recently the Inspector General came out with
    a report saying that an alarming amount of money--I think it is
    like $4.7 billion out of the $5 billion that has gone out for
    weatherization--has not actually been spent by the States,
    mostly because the States' weatherization programs are
    incredibly overwhelmed. I think Connecticut got 16 times what
    it had in the past.
        And so all I am saying is here is a place where we could
    redirect some of that funding, still as stimulus still going
    out in this--I am not trying to reclaim it--and still saying
    the States should use that money, but allow it to be used in
    mitigation efforts as well as weatherization.
        Mr. Cleaver. Okay. Two points and I am through, Mr.
    Chairman.
        The first point is--well, I am assuming you supported the
    statement?
        Mr. Ellis. We did not come out one way or another. We were
    mostly for making sure the money was spent accountably and
    transparently.
        Mr. Cleaver. So you were neutral on the stimulus?
        Mr. Ellis. We did not take a position one way or another,
    no, sir.
        Mr. Cleaver. So you were neutral on the stimulus?
        Mr. Ellis. Correct.
        Mr. Cleaver. Okay. The last part of it is, I agree with the
    slowness with which the money has gone out, but that is a
    statement about running that program more effectively. And one
    of the things that we are elected to do is to try to deal with
    problems in the districts from which we come. And that is why
    they have been using any pot of money that they can in order to
    address problems.
        That is what we are supposed to do. And I would not
    criticize a Republican or a Democrat or an independent or an
    Oakland Raider for--I am from Kansas City--
        Mr. Ellis. I know, sir. So is my dad.
        Mr. Cleaver. --to remind you--but to try to deal with
    problems. I wish a Republican, could get as much money as there
    might be needed to deal with problems in New Orleans. And so I
    guess we may have a philosophical difference about what Members
    of Congress are supposed to do.
        But I do agree with you that the money has gone out slowly,
    and it means we have to do a better job of getting that money
    out, not necessarily transferring it to another agency.
        Mr. Ellis. I certainly agree that it needs to be dealt with
    better. Yes, sir.
        Mr. Klein. Okay. I thank the gentleman from Missouri.
        And now the gentleman from Florida, Mr. Posey, for 5
    minutes.
        Mr. Posey. Thank you, Mr. Chairman.
        I am a free market guy. But experience has shown me that
    unregulated insurance markets do not mean they are free markets
    as people are taught in academia. They are manipulated. You can
    talk about all the availability of reinsurance. I know, in
    Florida, every single reinsurance company had the exact,
    identical, same rate. That is a free market. What a
    coincidence. Just what a coincidence.
        Comparing South Carolina's exposure to Florida's exposure
    doesn't pass the straight-face test in front of anyone that
    knows the difference between the Florida coastline and the
    South Carolina coastline.
        And I think it ought to be stated for the record that when
    Florida did expand its catastrophe fund, much to the chagrin of
    many insurance companies, big insurance companies, it brought
    in--it was responsible for bringing in--the only new business
    that we had.
        The big insurance companies were allowed at one time to
    have pup companies in Florida, so that means your home office
    in Bloomington or wherever was no longer responsible for paying
    claims in Florida. It would be the new company that was founded
    with no more than the minimal amount of capital. And if it blew
    away in the next storm, it was just too bad for all the
    policyholders. And the CAT fund was to guard against that.
        And because we have an expanded CAT fund, we have new
    business, new companies coming into Florida, hopefully that
    will stay there and will continue to invest there and not just
    reap the year's profits and cry when the storms come later.
        I have been an accountability wonk for many years. I am a
    former ALEC, National Legislator of the Year, for passing
    accountability legislation ALEC called the best to come out of
    any capital in over a decade. But I have never heard of
    Taxpayers for Common Sense.
        And I wonder--you keep referring to ``we.'' Who is that?
    Who is ``we?''
        Mr. Ellis. Taxpayers for Common Sense? We are happy to
    celebrate our 15th anniversary. We are a national, nonpartisan
    budget watchdog. We are based here in D.C. I have been with the
    organization for 10 years. I would be glad to answer any other
    questions.
        My colleague is the person who dubbed the ``Bridge to
    Nowhere'' the ``Bridge to Nowhere.'' I don't know exactly what
    you are--we have some members. We have mailing lists for our
    products. We do advocacy work on budget issues.
        I don't know exactly, Congressman, what else--
        Mr. Posey. Well, I just--I know Mr. McMillan's group and I
    know the other people's groups and I have had experience with
    them. I have never seen you before or heard of your
    organization before. So I just wanted some information for my
    own--
        Mr. Ellis. Absolutely. I would be glad to come by and talk
    to you about us any time at your leisure, sir.
        Mr. Posey. Okay. Thank you, Mr. Chairman. I yield back.
        Mr. Klein. I thank the gentleman.
        Mr. Sherman from California?
        Mr. Sherman. Thank you.
        Mr. Witt, I represent Northridge. People all over the San
    Fernando Valley thank you again and again every day for the
    help FEMA extended to us in 1994.
        Mr. Pomeroy, thanks for your work to try to prepare us to
    recover from the next earthquake.
        Mr. Ellis, I want to thank you for your tireless efforts to
    move this country away from democracy and toward empowering
    bureaucrats, bureaucracy or bureaucratocracy. Your hard work
    has not gone unnoticed.
        There are those who say that, oh, we shouldn't provide
    better disaster insurance because that will just encourage
    people to live where we don't want them to live. And if you are
    talking about a few areas near rivers that flood every year,
    that may be; maybe we shouldn't build there.
        But if you want to say that nothing should be built near an
    earthquake fault, you lose your largest State, or at least your
    most populous State. I think Mr. Pomeroy would agree with me
    that well over half the population of California--I see him
    nodding--lives near an earthquake fault.
        And if you wanted to vacate every area that might be hit
    with a hurricane--Mr. Klein, is that your whole State or just
    two-thirds of it?
        Mr. Klein. Probably a good two-thirds, if not the whole
    State. Every county.
        Mr. Sherman. So those who support vacating areas subject to
    hurricanes and earthquakes ought to tear some stars off the
    flag as their symbol of their position.
        We have to encourage people to buy earthquake insurance.
    Either you can help me now, or you can pay me later. That is to
    say, if nobody in California buys earthquake insurance, when we
    are hit, we are coming to Washington, and we are coming for
    everybody who is uninsured.
        Right now, you have to be offered earthquake insurance when
    you buy a house. The only problem is enormous deductible,
    enormous premium, and I know Mr. Campbell buys it; I don't know
    anybody else who does. The reason is that the reinsurance is so
    expensive that is passed on to consumers.
        And so we need a system in which we can provide reasonable
    insurance even if the Federal Government undertakes some slight
    risk, or you can live in a world where you believe the Federal
    Government isn't at risk as long as we have no program because
    God knows there is no risk of an earthquake in California and
    there is no risk that Californians would come here to try to
    collect their uninsured losses from the Federal Government.
        Neither of those is a significant possibility. The only
    thing that is an actuarial risk to the United States is if we
    pass a bill. Then, we acknowledge that there is some possible
    risk to the Treasury, a diminished risk, I might add, but then
    we would have to acknowledge it.
        Mr. Pomeroy, does the CEA operate on an actuarially sound
    basis? Title 2 of Mr. Klein's bill creates a conditional
    guarantee program like CEA, in effect a CEA for CEA. What are
    the chances that the CEA would need to borrow more money? Could
    you handle another Northridge earthquake without access to
    Title 2?
        Mr. Pomeroy. Thank you, Congressman. That is an excellent
    question. And yes, the answer is clearly yes, the CEA does
    charge actuarially sound rates, which is why it is so expensive
    and most people feel they can't afford it.
        Moving to this more efficient structure, we would maintain
    our financial strength. We would be able to pay the claims of
    all of the earthquakes that we are going to see. We would not
    need to borrow--and I should have emphasized this more in my
    testimony--we would not need to borrow, in the vast majority of
    any scenario we can imagine.
        All of our modeling, our scientific-based modeling,
    indicates that the probability of our needing to borrow, if
    H.R. 2555 becomes law, is between .5 and 1 percent, a minuscule
    probability of the need to borrow.
        We look back over history, we have had earthquakes in
    California going back to 1906: the great San Francisco shake;
    Northridge; the famous World Series earthquake back in the
    1980's, Loma Prieta. We could handle any one of those without
    the need to borrow.
        Mr. Sherman. Let me try and squeeze in one more question.
        Mr. Ellis, your testimony in opposition to this bill is
    largely premised on comparisons to the National Flood Insurance
    Program. Since the National Flood Insurance Program is in the
    jurisdiction of another subcommittee, I wanted to make the
    differences clear between this bill and the NFIP.
        Isn't it true that the rate subsidies you reference when
    discussing the NFIP are written in as part of the National
    Flood Insurance Act, and that there are no similar subsidies or
    grandfathering in the bill that we are considering today?
        If Mr. Klein's bill doesn't include provisions like the
    subsidies specifically written into the National Flood
    Insurance Act, wouldn't you agree that Mr. Klein's bill--or how
    can you argue, rather, that Mr. Klein's bill will lead to the
    same subsidized insurance rates that you blame on the NFIP? You
    are comparing apples and oranges--
        Mr. Ellis. No, sir. There is an explicit subsidy in the
    NFIP for pre-firm properties before the flood insurance rate
    maps were created. Separately--
        Mr. Sherman. And is there such a subsidy--
        Mr. Ellis. There is separately--in the Flood Insurance
    Program, there is a subsidy that exists because they did not
    take into account catastrophic risks, which is why you end up
    with a $2 billion-a-year program having $20 billion in debt to
    taxpayers.
        Clearly, properties other than flood--other post-firm
    properties are flooded. You have cases of repetitive losses
    within that program. You have a variety of different
    characteristics of that which are replicated. And I think at
    this is still--
        Mr. Sherman. Excuse me. You mentioned the grandfathering.
    Is there any grandfathering in Mr. Klein's bill?
        Mr. Ellis. No, sir. There is no grandfathering. But that is
    not the only subsidy in the Flood Insurance Program, sir.
        And on the democracy issue, I would just argue that we are
    about democracy and democratizing the budget. That is why we
    publish a variety of objective documents, to make the budget
    more transparent and more accountable to the American taxpayer.
        Mr. Sherman. Sir, reclaiming my time, you have a point of
    view. You are not just a library. And you work every day to try
    to diminish the power of elected officials--
        Mr. Ellis. No, sir.
        Mr. Sherman. --and increase the power of bureaucrats. I
    yield back.
        Mr. Ellis. No, sir.
        Mr. Klein. Our last member, Mr. Royce from California, for
    5 minutes.
        Mr. Royce. Yes. I guess I will ask Mr. Ellis some questions
    as well from Taxpayers for Common Sense. One of them has to
    do--I take it part of his concern, perhaps, is with the
    liability issue here, really, because if we consider the
    current liabilities that taxpayers face, we have $104 trillion
    in unfunded liabilities for Social Security. That might give
    this organization pause. It certainly seems to give our Federal
    Reserve Chairman a lot of worry.
        We have that $104 trillion I mentioned in Social Security
    and Medicare liability. We have $12 trillion in debt. We have
    $1.6 trillion in deficit this year. Obviously, there is a
    concern that taxpayers might be overextended.
        But I think the real worry on the part of the Federal
    Reserve Chairman is that when Moody's made that call--what was
    that, 3 weeks ago--where they said we might have to downgrade;
    they warned they might have to downgrade the AAA rating of
    sovereign debt, of our U.S. Treasuries--that, in tandem with
    the comments by the Fed Chairman that we are on an
    unsustainable path, when he testified to the Financial Services
    Committee, I think that probably gives some organizations a
    reason to wonder how much weight, how much of a burden, can you
    add without it breaking the back and creating a reaction over
    at Moody's or just in the public in terms of all of the
    liabilities we have taken on.
        We have double-digit increases in the Federal
    appropriations bills this year. We have the argument, on the
    new health care entitlement program that it is going to break
    even, but I think a lot of people are somewhat suspicious that
    an entitlement program is going to break even. So eventually we
    have to take a step back. And I would ask Mr. Ellis if I could
    get his thoughts.
        Mr. Ellis, are you concerned with the broader implications
    this bill will have in terms of setting a precedent that cannot
    easily be reversed when it comes to guaranteeing State and
    municipal debt?
        Mr. Ellis. Well, certainly this would be the first time
    that I am aware of that we would be starting to back--well, not
    the first time, but it certainly would be a big step towards
    backing State debt and then potentially, yes, moving towards
    the municipal debt. It would be one of the only ones today that
    is doing that. Yes, sir.
        Mr. Royce. So your best judgment when you look at this, you
    see a government program that is going to guarantee State and
    municipal debt, probably grow, and probably have liabilities
    there that are going to add eventually to the debt and the
    pressures on the dollar, I would suspect, and on our
    Treasuries?
        Mr. Ellis. Well, certainly, at least right now, it is going
    to be State debt, at least under this program. And $25 billion
    is where it is capped right now, $5 billion in earthquake, $20
    billion for other losses.
        Clearly, programs like this, if it becomes more popular,
    could grow and it could mushroom. Yes, sir.
        Mr. Royce. So we would set a precedent if we passed it. The
    one aspect of this that I'm a little encouraged about, unlike
    previous drafts, this attempts to go beyond simply cleaning up
    the mess Citizens Insurance created in Florida.
        But I think the overriding concern has to be our current
    fiscal situation, especially at the Federal level, and the
    message that we are sending, and how that translates out of the
    market.
        And I don't know how--after the words of warning we got
    from the Federal Reserve Chairman here, I don't know why we
    would want to stampede down this road because it would be one
    more signal to Moody's and to others, to the credit rating
    agencies, that we are taking on additional risks. And those
    would be my observations, Mr. Chairman.
        Mr. Ellis, would you like to close with any other
    observations?
        Mr. Ellis. No. I think that certainly sums it up,
    Congressman Royce, very well. And thank you for your comments.
        Mr. Royce. Thank you.
        Mr. Klein. I would like to thank the gentlemen and the
    members of the committee. Just if I can reserve 1 minute here,
    just to make a point.
        The discussions about the debt, obviously, everyone in
    Congress and every American is concerned about debt, our
    national debt. And again, what we have tried to think through
    very carefully, and we will look forward--as a work in process,
    we will look forward to continuing to make this bill better, is
    to reduce that national exposure, which I think is very open-
    ended at this moment and has been for many years.
        And if we can manage this in a way in which we can
    hopefully reduce that amount of liability and underwrite it
    through private insurance, I think that seems to be a better
    model.
        But again, we thank Mr. Witt, Mr. Pomeroy, Mr. Ellis, and
    Mr. McMillan for taking time out of your very busy days and
    your professions to be here today. We appreciate that. I will
    note that some members may have additional questions for this
    panel, which they may submit in writing.
        Before we adjourn, the written statements of the following
    organizations will also be made a part of this record of this
    hearing: the testimony of Congresswoman Loretta Sanchez; the
    American Red Cross; International Association of Fire Chiefs;
    National Multi-Housing Council and National Apartment
    Association; National Catastrophe Policy Coalition; Association
    of State Flood Plain Managers; and Independent Insurance Agents
    and Brokers of America.
        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.
        The panel is now dismissed and the hearing is now
    adjourned.
        [Whereupon, at 4:17 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 March 10, 2010

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