[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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