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


 
                  LEGISLATIVE PROPOSALS TO REFORM THE 
                    NATIONAL FLOOD INSURANCE PROGRAM 

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                   HOUSING AND COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 21, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-126

                               ----------
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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















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 21, 2010...............................................     1
Appendix:
    April 21, 2010...............................................    41

                               WITNESSES
                       Wednesday, April 21, 2010

Brown, Orice Williams, Director, Financial Markets and Community 
  Investment, U.S. Government Accountability Office..............    12
Conrad, David R., Senior Water Resources Specialist, National 
  Wildlife Federation............................................    24
Costello, Hon. Jerry F., a Representative in Congress from the 
  State of Illinois..............................................     9
Davey, Mark, President and Chief Executive Officer, Fidelity 
  National Insurance Company, on behalf of the Write-Your-Own 
  Flood Insurance Coalition......................................    25
Fugate, Hon. Craig, Administrator, Federal Emergency Management 
  Agency, Department of Homeland Security........................    10
Larson, Larry, Executive Director, Association of State 
  Floodplain Managers............................................    27
Matsui, Hon. Doris O., a Representative in Congress from the 
  State of California............................................     1
Rollins, John W., President, Rollins Analytics, Inc..............    28
Rutenberg, Barry, 2010 Second Vice Chairman of the Board, 
  National Association of Home Builders..........................    30
Scalise, Hon. Steve, a Representative in Congress from the State 
  of Louisiana...................................................     3
Taylor, Hon. Gene, a Representative in Congress from the State of 
  Mississippi....................................................     5
Veissi, Maurice, Veissi & Associates, 2010 First Vice President, 
  National Association of REALTORS...............................    32

                                APPENDIX

Prepared statements:
    Childers, Hon. Travis W......................................    42
    Costello, Hon. Jerry F.......................................    43
    Loebsack, Hon. Dave..........................................    46
    Matsui, Hon. Doris O.........................................    50
    Putnam, Hon. Adam H..........................................    55
    Scalise, Hon. Steve..........................................    60
    Taylor, Hon. Gene............................................    63
    Brown, Orice Williams........................................    74
    Conrad, David R..............................................   100
    Davey, Mark..................................................   112
    Fugate, Hon. Craig...........................................   119
    Larson, Larry................................................   125
    Rollins, John W..............................................   142
    Rutenberg, Barry.............................................   144
    Veissi, Maurice..............................................   154


                        LEGISLATIVE PROPOSALS TO
                       REFORM THE NATIONAL FLOOD
                           INSURANCE PROGRAM

                              ----------                              


                       Wednesday, April 21, 2010

             U.S. House of Representatives,
                        Subcommittee on Housing and
                             Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:10 p.m., in 
room 2128, Rayburn House Office Building, Hon. Maxine Waters 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Waters, Cleaver, Green, 
Clay, Ellison, Driehaus; Capito, Neugebauer, Marchant, and 
Jenkins.
    Also present: Representatives Taylor, Costello, and 
Scalise.
    Chairwoman Waters. The Subcommittee on Housing and 
Community Opportunity will come to order. Thank you very much. 
I would like to ask the members to take a seat at the table.
    We are very pleased to have so many Members of the House 
with us today. And I would like to start the hearing by getting 
the statements from the Members. I know that you're all busy, 
and you don't want to sit through our opening statements.
    So, with us today, we have the Honorable Jerry Costello, 
the Honorable Doris Matsui, the Honorable Steve Scalise, and 
the Honorable Gene Taylor. And we will start with the Honorable 
Doris Matsui.

STATEMENT OF THE HONORABLE DORIS O. MATSUI, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Ms. Matsui. Thank you, Madam Chairwoman. I thank the 
chairwoman, my friend from California, Ms. Waters, and Ranking 
Member Capito for allowing me to have the opportunity to 
testify before the subcommittee today, for scheduling 
consideration of the Flood Insurance Reform Priorities Act 
tomorrow.
    This legislation, which I am pleased to cosponsor, would 
reform the National Flood Insurance Program, NFIP, and contains 
language, H.R. 5125, that I authored, which would provide 
technical changes to Federal flood zone designations.
    I would also like to thank Chairman Frank and Ranking 
Member Bachus for their continued advocacy for H.R. 1525. Both 
of them and their incredible staffs have been invaluable during 
this process.
    Additionally, I am grateful to FEMA for collaborating with 
Congress to craft a number of NFIP modifications. From my 
hometown in Sacramento to the Louisiana Bayou to the plains of 
the Midwest, communities are improving their flood protection 
infrastructure in order to keep Americans safe and secure. 
However, as we work to conform to changing dynamics of Federal 
standards, these communities are seeking clarity as they work 
to meet Federal regulations.
    Public safety is my absolute number one priority. H.R. 
1525, which was approved last summer by the House as part of 
the National Flood Insurance Program Extension Act, would give 
communities clarity, so that they can continue to improve flood 
defenses.
    Specifically, this legislation would update current law to 
take local and State funding into account when determining 
flood zone designations. Sacramento residents and the State of 
California have devoted hundreds of millions of dollars toward 
flood protection. It is crucial that this investment be 
recognized by the Federal Government. FEMA needs to identify 
the contributions made by the States and cities when they 
review the progress made on Federal levees as they determine an 
area's flood designation.
    For example, on one project in my district in the Natomas 
Basin, by next year, the State and local governments will have 
spent more than $350 million over the last 5 years on levee 
improvements, without acknowledgment from FEMA in the remapping 
process. Protecting our constituents from the dangers of floods 
requires a comprehensive approach. Local communities, States, 
and the Federal Government must all be thoughtful and committed 
partners.
    With regard to another issue I would like to raise, I 
believe that it is equally important to note that since 
Hurricane Katrina, FEMA has issued new flood insurance rate 
maps in many parts of this country. In my district, those maps 
place an area in an AE flood zone, and trigger the Federal 
requirement to carry flood insurance for more than 15,000 
homeowners. There is no doubt that the Natomas Basin, like most 
of Sacramento, is at risk of flooding, as it lays at the 
confluence of two major rivers.
    But, as I noted earlier, the Sacramento Area Flood Control 
Agency, SAFCA, is working with the Army Corps of Engineers and 
the California Department of Water Resources to implement an 
aggressive and ambitious levee improvement plan to achieve a 
200-year level of flood protection.
    While these efforts are ongoing, flood insurance has become 
mandatory, and costs homeowners more than $1,250 annually. This 
is nearly 4 times the PRP rate. While I always urge homeowners 
in floodplains to purchase flood insurance, I have serious 
concerns about families being forced to incur higher insurance 
rates during an economic recession. Increased rates on top of 
the annual flood protection assessments that many residents are 
paying each year compounds this problem.
    I am pleased at the legislation to be considered by this 
committee tomorrow with phased-in rates for newly mapped areas. 
This provision is a good start, but I would respectfully 
encourage the committees to work with FEMA to offer reduced 
flood insurance premiums to those areas that have already been 
remapped, or implement other policies that would ensure the 
affordability of flood insurance rates. In doing so, the 
committee would make sure that responsible homeowners across 
the country continue paying into the NFIP without adding risk 
to the floodplain.
    Thank you again for letting me address the subcommittee. I 
look forward to our continuing efforts to improve flood 
protection. I yield back the balance of my time, and I 
apologize for my hoarse voice.
    [The prepared statement of Representative Matsui can be 
found on page 50 of the appendix.]
    Chairwoman Waters. Thank you very much, Congresswoman. Mr. 
Steve Scalise.

 STATEMENT OF THE HONORABLE STEVE SCALISE, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF LOUISIANA

    Mr. Scalise. Thank you, Chairwoman Waters, Ranking Member 
Capito, and distinguished members of the subcommittee. I 
appreciate the opportunity to testify before your subcommittee 
on H.R. 1264, the Multiple Peril Insurance Act. This bipartisan 
legislation has 22 cosponsors, and makes critical reforms that 
are important to the people of South Louisiana.
    By adding multiple peril coverage, which includes wind and 
hail, to the National Flood Insurance Program, homeowners will 
have greater protection against damage caused by hurricanes and 
other storms. Adding wind and hail coverage to the NFIP will 
give the people in my district the peace of mind that their 
homes, businesses, churches, and schools will be protected in 
the face of catastrophic storm damage.
    I commend Congressman Gene Taylor for his leadership and 
diligence on this issue. I am proud to join with Congressman 
Taylor in championing this bill so that no American has to 
experience what the people of the Gulf Coast went through after 
Hurricane Katrina.
    We in south Louisiana have to live with the threat of these 
massive hurricanes every year. But we shouldn't have to live 
without protection from future storms. As this subcommittee 
well knows, after Hurricane Katrina, many homeowners found 
themselves stranded with no payments from their insurance 
companies. Many homeowners were forced to sue their insurance 
companies in order to recoup any money from their policies. 
Some insurance companies overbilled the NFIP for flood damage, 
while denying homeowners on wind damage payments.
    After Hurricane Katrina hit, many private insurance 
companies refused to write any policies that included wind 
coverage, and 46,000 people were forced into the Louisiana 
Citizens Property Insurance Corporation, which is the State's 
high-risk pool, and Louisiana was forced to borrow $1.4 billion 
in order to reinsure these additional policies.
    Dumping policies into State insurers of last resort is not 
an effective or efficient solution to the need for wind 
insurance. Thousands of homeowners who purchased both a wind 
policy and flood insurance found that neither policy wanted to 
pay, even though they were covered for both. That's because if 
some storm damage was caused by wind and some caused by flood, 
it was up to the homeowner, in many cases, to prove whether 
wind or flood came first.
    This added insult to injury for thousands of homeowners who 
lost everything to the storm, and just wanted to get their 
homes repaired. Yet many had to take their insurance companies 
to court, just to enforce these policies they had been paying 
premiums on for years.
    This important legislation takes vital steps to implement 
lessons learned, and prevent history from repeating itself. Our 
current system creates an inherent conflict of interest between 
private insurance companies and the Federal Government over who 
pays what when both water and wind cause damage. This 
legislation eliminates that conflict by providing homeowners 
with the option to purchase one multi-peril policy for both 
wind and water. No longer will homeowners be forced into State-
run wind pools when private insurance companies refuse to write 
wind coverage.
    Adding wind and hail coverage to the NFIP allows us to 
spread the risk geographically, and in a much more efficient 
manner. State-run wind pools concentrate the risk, and a large 
portion of those policies through the State pool could all be 
affected by the same disaster, thus making it very difficult 
for State-run pools to build up enough reserves to pay, in the 
event of a major disaster.
    This problem is not limited to the Gulf Coast alone, 
though. Wind damage is a risk all across the coastal United 
States, and it is important to note that 55 percent of American 
citizens live within 50 miles of a coast. Clearly, this is an 
issue that affects all Americans, not just on the Gulf Coast.
    I recognize that some Members may be concerned that this 
bill puts American taxpayers on the hook for coastal disasters. 
To the contrary, this legislation is designed to be actuarially 
sound. According to the Congressional Budget Office, this 
legislation would pay for itself through the premiums that 
would be assessed.
    Another important component of this bill is the additional 
loss of use coverage. After Hurricane Katrina, the Federal 
Government paid out $34 billion in disaster housing assistance 
alone. Adding loss of use coverage would reduce reliance on the 
Federal Government for disaster assistance in the face of 
catastrophic damage. This bill alleviates some of the burden on 
taxpayers, as opposed to adding to it, by relying on disaster 
assistance that is often expensive and subject to fraud.
    It is time to enact real reform so that homeowners have 
comprehensive hurricane insurance protection. Enacting reforms 
to NFIP will allow us to move forward with a 5-year extension 
and put an end to these short-term extensions that expire when 
Congress fails to act. Chairwoman Waters' bill is a step in the 
right direction towards that full 5-year extension. And I look 
forward to continuing to work towards this goal.
    As we approach hurricane season, enacting these reforms and 
passing a long-term extension becomes more critical every day. 
The ultimate goal of our region is to build a comprehensive 
hurricane protection system that allows us to look back at 
Katrina and say, ``Never again.''
    I appreciate the opportunity to testify before your 
committee, and I look forward to working with you in the future 
to achieve this fundamental goal. Thank you, and I yield back.
    [The prepared statement of Representative Scalise can be 
found on page 60 of the appendix.]
    Chairwoman Waters. Thanks. Next we will hear from the 
Honorable Gene Taylor.

  STATEMENT OF THE HONORABLE GENE TAYLOR, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF MISSISSIPPI

    Mr. Taylor. Thank you, Madam Chairwoman, for holding this 
hearing, and thank you for your many visits to the Gulf Coast 
region to see for yourself why the present situation isn't 
working and doesn't need to be repeated.
    The bill before you that you were so kind to cosponsor 
would do several things. Number one, it would increase the 
amount of coverage for those people who either have their homes 
destroyed, or substantially destroyed in the course of a storm. 
Something that shocked all of us who lost our homes was just 
the incredible cost of replacing them. So it increases that 
value up to $500,000. It increases the value of the contents up 
to $150,000. Because for all of us, again, it was a shock how 
much that stuff in your house was worth when you went to 
replace it.
    Most importantly, though, Madam Chairwoman, it does a 
couple of things. As my colleague from Louisiana pointed out, 
it would prevent the horrible situation where tens of thousands 
of homeowners have to sue their insurance company to have a 
claim paid that should have been paid the day after the storm. 
In many instances, it took years. And it wasn't just average 
joes. The president of the United States Senate, Federal 
judges--if you can say one thing about the insurance companies 
after Katrina, they screwed everyone equally. But the sad part 
is that they screwed everyone.
    The second thing is, as Steve pointed out, the people who 
pay these premiums ought to cover the cost for the loss, not 
the American taxpayer. But after Katrina, we will prove beyond 
a shadow of a doubt, it was the American taxpayer who paid.
    And lastly, in response to this, the insurance companies, 
although they have opposed this measure, have walked away from 
this responsibility only to have another level of government 
assume that responsibility, and that's the State level. Why is 
the present situation untenable?
    Number one is that the present situation has a conflict of 
interest built in, where we hire the private sector to sell the 
policy, no problem there. But we hire the private sector to 
adjust the claim. After Katrina, agents for State Farm, 
Allstate, Nationwide, etc., walked onto a piece of property 
where the house was gone, and had to make the decision. Did the 
wind do it, which means their company pays, or did the water do 
it, which means the National Flood Insurance pays? Every time 
they walked on that piece of property, they said the water did 
it, and the Federal Government has to pay.
    As a matter of fact, an attorney for Nationwide, before the 
Mississippi Supreme Court, when asked point blank if the house 
was 95 percent destroyed by the wind before the water ever got 
there, how do you apportion that claim, how much would 
Nationwide pay, is quoted as saying, ``Not one dime.'' For 
those of you who are fiscal conservatives, you know that is not 
right, and that has to change.
    Number two, it has become a governmental function where the 
States have picked up the liability. And in the case of a 
typical State--Florida, for example, now has about $436 billion 
of exposure. The State of Florida has exposure in a State that 
has a $70 billion general fund budget. So, imagine if they have 
the 4 storms that occurred in 2004, again, you would simply 
bankrupt the State. In my home State, $6 billion of exposure, 
$6 billion general operating budget.
    And the private sector is going to come back and say, 
``Well, the private reinsurance is going to take care of 
that.'' Quite frankly, if you look through that closely, you 
will find that most of these reinsurance policies come out of 
Bermuda. And the experience of the people of Mississippi, 
Louisiana, and Texas, after the last round of storms, was if we 
can't get companies in Springfield, Illinois, and Hartford, 
Connecticut, to pay claims, how on earth do you expect people 
in Bermuda to pay those claims?
    So, the other thing that happens is--again, trying to look 
at this from the Federal responsibility--we paid that bill last 
time. When Steve mentioned--when the insurance companies didn't 
pay--a typical homeowner's policy says if your home is lost, if 
your home is in a way that you can't live in it, they will pay 
to put you up, based on the value of that home. Well, when they 
totally deny your claim, as they did, then the Federal 
Government has to step in: $7 billion, just for manufactured 
housing; $15 billion for housing grants; $7 billion of SBA 
loans; and about $3 billion just for trailers to put people up 
on a temporary basis that the Nation paid for, that the 
insurance companies should have paid for.
    So, Madam Chairwoman, I'm trying to live by your 5 minutes. 
You have been down there a number of times. But the fact of the 
matter is the present situation is unsustainable. The present 
situation is now where a typical person trying to rebuild in 
coastal Mississippi faces a bigger insurance premium for his 
wind coverage than his mortgage. And when you drive around 
south Mississippi today and see the thousands of driveways 
where there used to be a house and there is no longer a house, 
it's pretty simple. They can't afford to rebuild, because the 
insurance is so expensive because of the situation that has 
occurred since Katrina.
    So, I would ask that you give serious consideration to 
this. I very much appreciate you having this hearing. And with 
your permission, I have a much longer statement for the record. 
But I have been trying to live within the 5 minutes allotted, 
and apparently, I have done just that.
    [The prepared statement of Representative Taylor can be 
found on page 63 of the appendix.]
    Chairwoman Waters. Thank you very much. And I want to thank 
you for appearing before the subcommittee today. Without 
objection, your written statements will be made a part of the 
record. Without objection, it is so ordered.
    And I would now like to ask unanimous consent that 
Representatives Matsui, Scalise, and Taylor--and Representative 
Costello, if he shows up--be allowed to be considered members 
of the subcommittee for the duration of the hearing. And please 
join us at the dais, if you would like. Thank you very much.
    Good afternoon, ladies and gentlemen. I would like to thank 
Ranking Member Capito and the other members of the Committee on 
Financial Services for joining me for today's hearing on 
legislative proposals to reform the National Flood Insurance 
Program.
    The Flood Insurance Program provides valuable protection 
for approximately 5.5 million homeowners. Unfortunately, the 
lack of a long-term authorization has placed the program at 
risk. The program has lapsed twice since the beginning of this 
year, for 2 days in March, and for 18 days in April. These 
lapses meant that FEMA was not able to write new policies, 
renew expiring policies, or increase coverage limits.
    This also meant that, each day, 1,400 home buyers who 
wanted to purchase homes located in floodplains were unable to 
close on their homes. Given the current crisis in the housing 
market, this instability in the Flood Insurance Program is 
hampering that market's recovery, and must be addressed.
    I am also concerned about the impact of new flood maps on 
communities. I recently was able to assist homeowners in the 
Park Mesa Heights area of Los Angeles, who had been mistakenly 
placed in a flood zone. I am pleased that FEMA acted quickly to 
correct this mistake. However, there are thousands of 
homeowners nationwide who now find themselves in floodplains, 
and subject to mandatory purchase requirements.
    The Flood Insurance Reform Priorities Act of 2010 would 
restore stability to the Flood Insurance Program by 
reauthorizing the program for 5 years. It would also address 
the impact of new flood maps by delaying the mandatory purchase 
requirement for 5 years, then phasing in actuarial rates for 
another 5 years. The bill also makes other improvements to the 
program by phasing in actuarial rates for pre-FIRM properties, 
raising maximum coverage limits, providing notice to renters 
about contents insurance, and establishing a flood insurance 
advocate similar to the taxpayer advocate at the Internal 
Revenue Service.
    Today's hearing will also examine H.R. 1264, the Multiple 
Peril Insurance Act of 2009. This legislation, authored by Mr. 
Taylor of Mississippi, would allow the Flood Insurance Program 
to provide optional wind coverage. Following Hurricane Katrina, 
many insurers refused to pay out claims for wind damage, and 
instead insisted that the damage was caused by flood, even when 
there was evidence to the contrary. The gentleman from 
Mississippi has personal experience with this. By allowing 
homeowners to buy wind policies, H.R. 1264 would end this abuse 
of the Flood Insurance Program.
    I am eager to hear the testimony of our witnesses today, 
and I would now like to recognize our subcommittee's ranking 
member to make her opening statement. Ms. Capito?
    Mrs. Capito. Thank you, Madam Chairwoman. And thank you for 
holding this important legislative hearing on the Flood 
Insurance Reform Priorities Act of 2010, and the Multiple Peril 
Insurance Act of 2009. I am looking forward to hearing the 
testimony of our witnesses today, including our colleagues who 
have brought their perspectives on the various issues related 
to flood and wind storm risks in their communities, as well as 
their efforts to protect against those risks faced by many of 
their constituents at home.
    Floods are among the most frequent and costly natural 
disasters. And in recent years, storms that have caused 
flooding have been increasing in frequency and severity. 
Because private insurance against flooding is generally not 
available, more than 5 million property owners and 20,000 
communities participate in the National Flood Insurance 
Program, NFIP. While the program continues to provide 
protection and some measure of financial security for many 
homeowners and businesses, there are many serious challenges to 
the financial viability in the years ahead that we must 
address.
    I would depart from my written statement and say this is 
almost like the never-ending story, because we keep extending 
for months, or a few more months, and here we need to seek a 
resolution to this.
    So, first and foremost, the NFIP carries a debt of more 
than $18 billion, and has been placed on a list of high-risk 
government programs by the Government Accountability Office for 
the past several years. The program continues to subsidize the 
premiums of more than one million policyholders, charging them 
significantly less than the full risk rate.
    Furthermore, the NFIP does not collect sufficient premiums 
to build up reserves for unexpected disasters, such as what we 
experienced during the 2005 hurricanes.
    I want to commend the chairwoman for proposing her 
legislation to advance reforms, many of which I believe are 
steps in the right direction toward improving the program. 
While the discussion draft does not address the NFIP's debt, 
which weighs heavily on the program's financial future, it does 
propose many good reforms that were included in legislation 
previously approved by this committee and the House.
    H.R. 1264, the Multiple Peril Insurance Act, is intended to 
provide property owners with an option to purchase an insurance 
policy from the NFIP that covers both flood and wind storm 
experts. Unlike flood insurance, industry experts maintain that 
wind storm insurance is generally available, either from 
private insurance carriers or State-based residual market 
insurance pools. But as we have heard from the testimony of 
both of our congressional colleagues, this has presented huge 
challenges when trying to make these programs work to the 
benefit of the many constituents that were influenced.
    I am concerned that FEMA may not be prepared to handle this 
additional responsibility, and that the taxpayers in general 
could be subjected to greater losses. Perhaps we can find 
another way to address the issue, or these issues that this 
measure seeks to address. As I have already stated, the NFIP 
has an $18 billion deficit, and I do have concern that adding 
wind storm coverage while it is struggling financially could be 
a recipe for a fiscal disaster.
    I look forward to working with Chairwoman Waters and other 
members of the committee, and my other colleagues, on this 
legislative initiative as we begin deliberation on this.
    Chairwoman Waters. Thank you very much. Mr. Green, for 5 
minutes.
    Mr. Green. Thank you, Madam Chairwoman. Our colleague, Mr. 
Costello, has arrived. I will yield my time to him.
    Mr. Costello. I thank the chairwoman for recognizing me. 
Let me apologize. I was supposed to be with the Member panel, 
but I was chairing an aviation subcommittee down the hall. But 
I do appreciate the opportunity to address the subcommittee, 
and ask unanimous consent to place my full statement into the 
record.
    Chairwoman Waters. Yes, certainly, without objection.

STATEMENT OF THE HONORABLE JERRY F. COSTELLO, A REPRESENTATIVE 
             IN CONGRESS FROM THE STATE OF ILLINOIS

    Mr. Costello. Madam Chairwoman, for the past year, I have 
been working closely with a bipartisan working group of 40 
Members, and established the Congressional Levee Caucus with 
Congressman Rodney Alexander, to discuss issues related to the 
FEMA map modification process. A common theme that ran through 
every one of our meetings was: one, the local jurisdictions 
need more time and more accurate information to address the 
impact of the new flood maps; and two, the burden of mandatory 
flood insurance for individuals and communities would be too 
much to bear during this economic downturn.
    The bill introduced yesterday by Chairwoman Waters 
addresses both of those concerns, and builds on legislation 
that I introduced last year, H.R. 3415. The solution crafted in 
this legislation will help a broad range of member 
congressional districts and communities across the country. 
Under Chairwoman Waters' proposal, new flood insurance rate 
maps will take effect on schedule, to ensure that communities 
and homeowners have full information about the risk.
    However, the mandatory flood insurance requirements will 
not take effect for 5 years in newly mapped areas, and 
mandatory insurance rates will be phased in over the subsequent 
5 years.
    I strongly support these provisions, as it will provide an 
incentive for communities to take quick action to fix levees or 
complete other work to mitigate flood risk. Prior to and during 
the delay and phase-in of rates, homeowners will be encouraged 
to voluntarily buy flood insurance and provided information 
about flood risk, the availability of flood insurance, and the 
potential consequences of the failure to purchase insurance. To 
qualify for this delayed and phased-in, local communities must 
develop a communication and evacuation plan to educate the 
community about flood risk, which are two provisions I included 
in our legislation, my bill, H.R. 3415.
    Allowing the flood insurance maps to take effect will 
achieve FEMA's goal of communicating flood risk to the 
community, and ensuring homeowners will have complete 
information. With the delay in the onset of mandatory 
insurance, homeowners will be able to prepare for the high cost 
of insurance when the new flood maps take effect.
    I am an original cosponsor of Chairwoman Waters' bill, and 
I believe it will achieve the goals that I have stated all 
along: provide local communities incentives to rebuild their 
levees; protect homeowners from the high cost of mandatory 
insurance; and effectively communicate the risk associated with 
living in a floodplain.
    Again, I thank Chairwoman Waters, Chairman Frank, Ranking 
Member Capito, and Ranking Member Bachus, and the staff of the 
Financial Services Committee for working with me on these 
important issues. And I look forward to seeing the legislation 
marked up and brought to the Floor for passage.
    I thank the Chair for giving me this time, and I look 
forward to continuing to work with you on these important 
issues.
    [The prepared statement of Representative Costello can be 
found on page 43 of the appendix.]
    Chairwoman Waters. Are there any other opening statements 
from this side of the aisle, Ms. Capito? If not, we will move 
toward having our second panel make their presentations: the 
Honorable Craig Fugate, Administrator, Federal Emergency 
Management Agency; and Ms. Orice Williams Brown, Director, 
Financial Markets and Community Investment, U.S. Government 
Accountability Office.
    I am pleased to welcome our second panel. And without 
objection, your written statements will be made a part of the 
record. You will now be recognized for a 5-minute summary of 
your testimony. Mr. Fugate?

STATEMENT OF THE HONORABLE CRAIG FUGATE, ADMINISTRATOR, FEDERAL 
  EMERGENCY MANAGEMENT AGENCY, DEPARTMENT OF HOMELAND SECURITY

    Mr. Fugate. Thank you, Madam Chairwoman, Ranking Member 
Capito, and distinguished members of the subcommittee. I am 
pleased to be here today to discuss reauthorization of the 
National Flood Insurance Program. Since I have been at FEMA for 
the last 11 months, I think one of our great challenges, as you 
pointed out, is the short-term reauthorizations and the gaps 
that occur, and the impacts, as people try to buy homes and 
provide insurance for their purchases.
    It is important that we understand what the original intent 
of the Flood Insurance Program was. It's to protect communities 
against flood. It's to provide affordable flood insurance. And 
it's to reduce the financial burden on the Federal Government 
in providing that.
    That program is pretty straightforward, but the 
implementation is quite difficult. And as the discussion goes 
in many of my conversations with the Members here, as well as 
your colleagues in the Senate, we do not have a lot of 
flexibility to address unique challenges as we move forward. 
And so, we appreciate the work being done in looking at what 
kind of flexibility could be provided to FEMA, and trying to 
address some of these needs.
    But it comes with a cost. As was pointed out, we have an 
existing debt over $18 billion. But I also think it's important 
to talk about what the potential exposure is. Recently, the 
Miami Herald ran an article about what would happen if a major 
hurricane hit south Florida, and what kind of exposure would 
occur, just from flood damages and storm surge. In a major 
category 5 hurricane, it would be up in the almost $60 billion 
range. But what was really disturbing was, even in a category 1 
hurricane, over $20 billion worth of damage would be flood-
related. There are not $20 billion worth of flood insurance 
policies in effect in south Florida.
    So, again, the potential loss, versus what the program has 
insured, does not always match up. But it does illustrate the 
large exposure with the Flood Insurance Program against these 
events.
    This also goes back to the mandatory purchasing, in that 
the only people who are required to buy flood insurance are 
those at the highest risk--within a 1 percent or greater risk 
of a flood. We know that over 40 percent of the flood damages 
occur outside of that, yet less than 1 percent of those 
homeowners have flood insurance.
    So, you're trying to maintain a program to protect 
homeowners and provide a reasonable cost for this program, yet 
the only requirement to purchase it is at the highest risk. It 
would be as, again, a pre-existing condition is the only people 
who are required to be in this program, yet we're trying to be 
actuarially sound. It creates a lot of challenges as we go 
forward, and we continue to map.
    The steps we can take to ease this burden, I think, are 
again, as we do new maps and we do change rate designations, I 
think it's important we look at existing homeowners and provide 
graduating scale for increases. I very much support giving us 
the flexibility to recognize that when levees are being 
improved but did not require or involve Federal dollars, that 
we give them the same recognition as we do as those with 
Federal dollars, and then recognize that work should defer and 
provide extended periods for implementing any changes. There 
shouldn't be a distinction between Federal and local and State 
dollars if the work is being done to protect the community, and 
we very much support that.
    We know that there will be many challenges as we go 
forward, and we continue to pledge to work with the committee 
on all the policy recommendations from FEMA. But our challenges 
are daunting. As was pointed out, about 25 percent of the 
policies in effect are below actuarially sound rates, which 
means that we are not collecting enough money to cover that 
exposure. We have the existing balance of about $18.8 billion 
we owe, which we do not have any real ability to pay down. We 
currently pay about $100 million in interest back to the 
Treasury.
    So, we have that debt, plus the exposure, plus the fact 
that we have policies that are actuarially below what the cost 
would be to service those policies.
    And again, we're reminded that this program is necessary to 
protect homeowners and protect their mortgages. And when there 
are lapses in the programs, we literally stop home sales in 
these areas.
    We, again, support a longer extension. We continue to work 
on this. Americans depend upon this program. Where we have good 
flood insurance programs, and people do participate, it does 
reduce the cost to the taxpayer. We look forward to working 
with this subcommittee and Congress as we go forward, and I 
will be happy to answer any questions that the committee may 
have, Madam Chairwoman.
    [The prepared statement of Administrator Fugate can be 
found on page 119 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Ms. Brown?

STATEMENT OF ORICE WILLIAMS BROWN, DIRECTOR, FINANCIAL MARKETS 
AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Ms. Brown. Good afternoon, Madam Chairwoman, Ranking Member 
Capito, and members of the subcommittee. I appreciate the 
opportunity to participate in today's conversation concerning 
the condition of the National Flood Insurance Program, and 
options to reform it.
    As you know, GAO placed NFIP on its high-risk list in March 
2006, after the 2005 hurricane season exposed the potential 
magnitude of long-standing structural issues on the financial 
solvency of the program, and brought to the forefront a variety 
of operational and management challenges. FEMA continues to owe 
the U.S. Treasury $18.8 billion in losses and interest 
expenses, which it is unlikely to be able to repay under the 
program's current design.
    My statement today is based on GAO's past and ongoing work, 
and focuses on NFIP's financial condition, its operational and 
management challenges, and possible actions that could be taken 
to address them.
    While the structural issues were well known, the management 
challenges have become more evident in the past several years. 
We have made recommendations addressing virtually every aspect 
of the program.
    For example, we have recommended that FEMA take action to 
improve NFIP's management of data quality, the rate setting 
process, oversight of the insurers that sell flood insurance, 
the expense reimbursement process, its contractor oversight, 
and its claims processes. While preliminary results of our 
ongoing review of FEMA's management reveal that many of these 
problems are ongoing, for the first time we are encouraged by 
FEMA's new tone, beginning with its acknowledgment that it 
faces a number of challenges and is willing to engage in a 
dialogue with GAO about them.
    While acknowledgment of a problem is an important first 
step, we also expect to see FEMA take actions necessary to 
meaningfully address these challenges. We are currently engaged 
in a comprehensive review of NFIP that builds on our past work, 
and plan to issue a report later this year. We hope that this 
report will provide a road map for identifying root causes and 
addressing many of these outstanding issues.
    However, we also recognize that many of the challenges 
facing the program will require congressional action. Moreover, 
we understand that this is no small issue, given the 
complexities of the program and the often competing public 
policy goals, including having rates accurately reflect risk, 
encouraging participation, and limiting costs to the taxpayer.
    For example, many premium rates for properties are 
subsidized by law, and rate increases are capped for a number 
of reasons, including offsetting the cost of catastrophe 
relief. These decisions involve trade-offs that have to be 
balanced with the goals of NFIP. Specifically, while mitigation 
is viewed as vital to limiting the government's exposure, 
charging rates that do not reflect risk may hamper mitigation 
efforts by encouraging property owners to build in harm's way, 
and not adequately mitigating.
    Moreover, the current NFIP structure increases the 
likelihood that the program will have to borrow from Treasury 
when losses exceed premiums collected, thereby exposing the 
taxpayer to greater financial risk.
    Part of this conversation must include a dialogue about the 
appropriate role of government in paying for losses for natural 
catastrophes, which, in 90 percent of the cases, include 
flooding. The other part deals with who should pay for the 
losses. That is, Congress must decide how much of the cost 
associated with flooding the government should pay, versus 
property owners.
    In closing, I would like to note that while the $18.8 
billion that NFIP owes Treasury may not seem large by today's 
standards, it is significant compared to NFIP's annual premium 
revenue, which was $3.2 billion as of February. This debt may 
also continue to grow unless Congress and FEMA take action to 
begin to address some of the program's operational and 
structural issues.
    Finally, one option to maintain subsidies but improve the 
financial stability of NFIP would be to rate all policies at 
the full risk rate, and to appropriate the subsidized amount to 
the program. This structural change would remove the financial 
burden on NFIP by making the subsidy explicit, and make the 
actual flood risk more transparent to the property owner.
    Thank you. And I am prepared to answer any questions that 
you may have.
    [The prepared statement of Ms. Williams Brown can be found 
on page 74 of the appendix.]
    Chairwoman Waters. Thank you very much. I will recognize 
myself for 5 minutes.
    The map modernization process has caused a lot of concerns 
for Members and the communities they represent. What kinds of 
outreach is FEMA doing to communities to make them aware of 
this process, and to alert them to the possibility of mandatory 
purchase of flood insurance?
    Mr. Fugate. Madam Chairwoman, the process is, when we go to 
begin map modernization, we work with the community and begin 
the work of preliminary data, preliminary map findings. There 
is an appeal process.
    But one of the things that has been pointed out to me by 
various members at times is the communication with the public 
has not always been as strong, particularly when we're looking 
at what would be considered for many people in the public an 
adverse finding, in that we increase the area in the special 
high risk which would require mandatory purchasing.
    So, again, as we go through this process, there are 
numerous steps to go through for communities to appeal. But we 
know that we have to continue to work on the outreach, and 
communicate to the public what these potential changes may 
mean, as far as mandatory requirements.
    As you point out, about 60 percent of the mapping is done. 
About 80 percent of the total maps are in a point where we will 
be accomplishing that in the next fiscal year. And about 20 
percent remains to be done. Just off the top, about 7 percent 
of the new maps increase the risk of designation for high risk. 
About 1 percent drop out.
    And so, again, it's that communication, where 7 percent of 
the findings may increase the risk, that communication early, 
and explaining to people why it's important to have flood 
insurance, particularly as those changes occur.
    Chairwoman Waters. Can you explain to me the role that 
cities and counties play in this remapping? When we had the 
problem in Los Angeles, we discovered that there had been some 
notification to the City--they had done nothing--and that there 
was old mapping that had been done in cooperation with the 
county that you were still using as a basis for your 
information. How does that all work?
    Mr. Fugate. It works based upon each city, each county is 
individual, as we try to work and identify who is the authority 
within that community responsible for mapping. Sometimes it's 
in public works, sometimes it's in community planning.
    And again, as you found out in that situation, we had 
overlapping mapping being done, but not necessarily by the 
jurisdiction we initially talked to.
    So, again, what we have found is we have to do multiple 
outreach, and try to understand how mapping is being done, how 
it's going to be implemented, and the jurisdictions that would 
have authority, whether it be a city, a county, or, in some 
cases, a water management district, or other flood control 
boards, such as a levee board or levee authority that may have 
some piece of that we have to work with.
    Chairwoman Waters. Thank you very much. Ms. Brown, in your 
testimony, you note that severe repetitive loss properties make 
up 1 percent of all flood insurance policies, but are 
responsible for up to 30 percent of all claims. What action 
should FEMA take to reduce the claim rates of these properties?
    Ms. Brown. GAO has looked at this issue over the years, and 
we believe that many of the current actions need to be ongoing. 
And there are also some structural changes that need to be made 
around definition.
    There are many challenges, in terms of forcing these 
particular homeowners to mitigate the properties. And there is 
also a dialogue that needs to take place between the program 
and local officials. We believe this is an area where a common 
definition would be helpful, in terms of defining what a 
significant event is, and when the particular issue of a 
repetitive loss is triggered, and what actions homeowners would 
have to take.
    We found examples where homeowners were able to ignore 
letters from FEMA and the NFIP involving losses on their 
property. And by not responding to an offer involving 
mitigation, they were able to avoid being forced to take any 
type of action.
    Chairwoman Waters. I see. Thank you very much. Ms. Capito?
    Mrs. Capito. Thank you. I would like to ask the 
Administrator, in your comments, and also in Ms. Brown's 
comments, you both said that the rates that are being charged 
to the NFIP do not reflect the risk, and they're underpriced. 
What kind of action items do you have to solve this issue at 
the present time?
    Mr. Fugate. Not many. Part of our challenge with the Flood 
Insurance Program is how it's structured, and how we were 
required to provide insurance, and the rates we're allowed to 
charge. And that does--
    Mrs. Capito. Is that statutory?
    Mr. Fugate. It's both statutory and rule. And--
    Mrs. Capito. And--oh, rule, okay.
    Mr. Fugate. And again, what we have found ourselves facing 
is, in trying to phase in or do some of the things that are 
actually being recommended, we would continue to subsidize that 
risk, and that risk may actually grow.
    I think it's the intention of how do we minimize impact to 
existing homes, and phase in improvements or buy-outs, but deal 
with new construction. And so, this is a kind of a bind for us, 
in trying to minimize the fiscal impact to homeowners to have 
to buy flood insurance, but charge a rate that is sound enough 
to be able to keep the program whole.
    When you bring in, basically, $3.2 billion a year, as long 
as you don't have any floods, you're doing well. But one or two 
large-scale flood events far exceed the carrying capacity of 
that program. And so, again, with those that are subsidized--
and that may be a good decision to be subsidized, but it's 
being subsidized at the rate paid, not at the overall program 
level.
    And so, one of the recommendations of the Government 
Accountability Office is to have that specifically authorized 
by Congress, and to pay that differential so that we can at 
least maintain where we're at with our current exposure, and 
begin to start paying down some of our--
    Mrs. Capito. So would that require a further appropriation 
to be able to subsidize? Is that--
    Mr. Fugate. It would, but it would then allow us to start 
paying back down some of our debt. As we are structured right 
now, we really cannot pay down the $18.8 billion. We have no 
real prospects of paying it down. And, as was pointed out, any 
time we have flood disasters that exceed our intake for the 
annual premiums, that number grows. And our interest payments 
then back to the Treasury grow, because we're not structured to 
actually adjust our rates high enough to take that into 
account.
    Mrs. Capito. So the reason that you can't price for risk is 
because statutorily and through rule, you don't feel that you 
have the ability to do that? Is it a combination of--that the 
policy purchaser can't afford that? Is it all of the above?
    Mr. Fugate. I believe it's all of the above. I will ask my 
staff, and I will get you a detailed report back on why these 
are subsidized, and how it's done. But again, if you listen to 
the questions that we get asked a lot of times, if we find that 
the risk has increased, we will challenge the maps. But if 
there is no challenge to the map, then we look at what is the 
impact to homeowners who now have, as pointed out, escrow 
billing of up to $100 a month, $1,200 a year that they weren't 
expecting, and how do we phase that in?
    Well, that, in turn, will subsidize that risk until, at 
some point, we either have a rate being charged that is 
actually based, and we phase that in over 5 years--but in that 
phase-in, it's under the risk that the exposure is being paid 
for.
    Mrs. Capito. Well then, if we're going to, under the multi-
peril bill, which would add wind as a peril under the NFIP, do 
you anticipate that you would be able to adequately price that 
for the risk? And can this program sustain another large--what 
I would anticipate could be large; we really don't know, I 
don't think--added burden without further appropriation?
    Mr. Fugate. It is a key concern to us. And in meeting with 
Congressman Taylor, we have discussed this issue.
    I, coming from Florida, recognize very clearly some of the 
challenges we have when we have perils that are written 
separately, and then trying to figure out how to adjudicate who 
pays. But that issue of how do we maintain and be able to run 
this program, and make it actuarially sound is a question we 
don't have a comfort with yet.
    Mrs. Capito. Well, one of the concerns you just mentioned, 
that it would take further appropriations to reach the proper 
subsidies to be able to get the rates to match the risk, or for 
you to pour down--to pay down the debt that you have to the 
Treasury. But basically, you would just be taking from the 
Treasury to pay down the debt to the Treasury. That has a kind 
of false ring to it, I think, in my mind.
    And I guess, to me, adding another peril--while I 
understand the gentleman--we kind of went back and forth on 
this on the Floor of the House with Mr. Taylor and I when this 
was on the Floor the other day--or last year. I understand 
this, but I do have concerns of the long-term viability of the 
NFIP to be able to take on this added burden at a time when 
you're really falling behind daily, as--if what I'm hearing 
from both of you is the correct analysis.
    And with that, I will yield back the time that I do not 
have any longer.
    [laughter]
    Chairwoman Waters. Thank you very much. Mr. Green?
    Mr. Green. Thank you, Madam Chairwoman. I have a few 
questions for the record. The first question is, is it true 
that when we have flood damage, we also sometimes will have 
wind damage? I know the answer is yes, but I would just like to 
have you--
    Mr. Fugate. Absolutely.
    Mr. Green. And is it true that an insurance company will 
send out an agent to assess the damages?
    Mr. Fugate. That is true.
    Mr. Green. And is it true that this agent will literally be 
employed by the insurance company, not the Federal Government?
    Mr. Fugate. That is true.
    Mr. Green. And employed by the insurance company for 
edification purposes--I know that everybody knows this--but it 
means that this person receives an emolument from the insurance 
company, something that we commonly call a paycheck. True?
    Mr. Fugate. That is true.
    Mr. Green. And receiving this paycheck from the insurance 
company in no way influences the judgment of this person who 
comes out to assess the damages. Is this true?
    Mr. Fugate. That is the intention of the program.
    Mr. Green. I understand the intention of the program. And, 
believe me, I understand that was a difficult question. I 
understand.
    But the point that I would like to get to is this: We have 
something known as de facto subsidies. De facto subsidies, with 
reference to this circumstance, occur when the insurance 
company is in the unique position of deciding whether it should 
pay, or deciding whether the government should pay. And, in so 
doing, every time the insurance company can roll the dice and 
get the government to pay, it gets a subsidy--not a subsidy in 
law, but a subsidy in fact.
    So, there is really an inducement for insurance companies 
to want to have wind coverage in areas where you are going to 
have flood damages, where you're going to have hurricanes. 
Because, when they can get that coverage--if the system remains 
as it is--there is a possibility that they will have a chance 
to roll the dice and make a decision as to whether it is going 
to be flood or it is going to be wind.
    You don't have to agree with that, but my point to you is 
this. If we do not change that system, is it possible that the 
Federal Government is subsidizing some insurance companies by 
way of allowing the agent to determine the damages? Not in 
every case, not in any percentage of cases. But in some cases, 
the insurance companies do win, in the sense that they are in a 
position to deny liability, to deny coverage. And at some 
point, if you don't get a court involved, that decision stands. 
Is this true?
    Mr. Fugate. I could not affirm that at all. What I do--
    Mr. Green. Well, let me just ask you this, then. Okay, I--
excuse me. Let me ask this question quickly. If the insurance 
company denies liability, and if the owner does nothing more, 
does the insurance company's judgment stand?
    Mr. Fugate. The adjustor's decision would stand, unless it 
was appealed.
    Mr. Green. Okay. Let's assume that it is not appealed. The 
adjustor makes a decision in favor of the insurance company. 
True? That does happen, right?
    Mr. Fugate. The adjustor would determine if it was a flood 
or a wind impact, and would then--
    Mr. Green. The adjustor decides that it is, in fact, flood 
and not wind. And you have the possibility of it being both. At 
that point, the insurance company does not have to pay any 
claim on that property with that decision. True?
    Mr. Fugate. It would depend on the policy.
    Mr. Green. The policy will allow a payment when the 
adjustor says that it was water?
    Mr. Fugate. I don't know if you can state--and I would not 
have this experience--state categorically that an adjustor 
found that it was only flood and not wind. They may find that 
it is partial wind and--
    Mr. Green. No, no, no. I am asking you--take as a fact that 
we have an adjustor who says it's flood, not wind. What then 
happens?
    Mr. Fugate. The flood insurance policy, if they have one, 
would then pay.
    Mr. Green. All right. And the person, then, goes to court 
and wins the lawsuit. That means that the adjustor was wrong. 
Correct? If you go to court and win; this is not difficult, 
now.
    Mr. Fugate. That means the judge has made a ruling.
    Mr. Green. Okay. Well, I'm taking it as a fact now that the 
judge has ruled that it was wind and not water. Does not the 
claimant win, then, the person who filed the lawsuit?
    Mr. Fugate. Hopefully, they will receive additional 
insurance dollars from their wind to help rebuild their home.
    Mr. Green. Exactly. And that happens, doesn't it?
    Mr. Fugate. It has happened in my State, where lawsuits 
were filed against both wind and flood--
    Mr. Green. And the point is this: If those persons don't 
have the resources to go to court, to do legal combat with the 
insurance company, they are just out of luck.
    My point is, we can't allow that kind of de facto subsidy 
to continue. And I will yield back, Madam Chairwoman.
    Chairwoman Waters. Thank you very much. Mr. Marchant?
    Mr. Marchant. Thank you, Madam Chairwoman. If the bill, as 
drafted, is passed and becomes law, will the homeowner have 
wind coverage with his homeowner's insurance, as well as wind 
coverage with the new program?
    Mr. Fugate. I do not know.
    Ms. Brown. It would depend on the homeowner's policy. GAO 
did a review a couple of years ago, looking at this issue. And 
one of the issues we raised is, would the private insurance 
market continue to offer wind. And if they do, you may have a 
situation that it would be covered in the private market, as 
part of the homeowner's policy, as well as a combination wind/
flood policy.
    Mr. Marchant. Which would present a whole different set of 
problems.
    Ms. Brown. Possibly.
    Mr. Marchant. And that would be of deciding which party was 
then going to actually pay.
    But if the Federal Flood Insurance Program covers the wind 
damage, then theoretically, if it's mandatory, the homeowner 
should be able to drop the wind damage on the residence.
    Ms. Brown. That would be a choice.
    Mr. Marchant. Yes, and--
    Ms. Brown. That's an option.
    Mr. Marchant. In theory, and only in theory, the premium 
will then go down for the homeowner.
    Ms. Brown. Correct.
    Mr. Marchant. It could do that. So, the question of whether 
these properties will be double-covered, or whether the private 
market will completely withdraw wind coverage from its 
coverage--we had a similar thing happen in Texas on foundation 
coverage, where at some point the insurance companies said, 
``We're not going to cover foundations anymore.''
    Ms. Brown. Well, the other issue that we raised in looking 
at this, if this structure were in place, and we maintained the 
WYO structure with the private sector selling the combined 
wind/flood coverage, it presents an opportunity for adverse 
selection, in that the insurance companies could choose to 
continue to offer wind to their lower-risk customers, and not 
offer wind coverage for higher-risk customers, which means that 
the highest-risk homeowners would migrate to the combined 
program.
    Mr. Marchant. But if you had a situation where the 
homeowner's policy actually went down in cost, then the savings 
could be absorbed in a higher premium on the flood insurance. 
And then the program would not have to run in the hole as much. 
You could recoup some of the actual cost of the flood 
insurance.
    Is it your opinion the bill is drafted that way, or is this 
still a question mark, as--
    Ms. Brown. I think part of this really will depend on how 
the private insurance market reacts to--if this were to become 
law, would they continue to offer the coverage in particular 
areas? So it really depends.
    Mr. Marchant. Yes. For the Administrator, you testified 
that in the new mapping, there will be approximately 7 percent 
of area added to what would be the mandatory area?
    Mr. Fugate. That has been our finding, so far, sir.
    Mr. Marchant. And 1 percent deducted. So you're going to 
have a net 6 percent added.
    So, is there any reason to believe that with that increased 
6 percent, you're going to have a huge increase in the number 
of properties that are going to have to have mandatory flood 
insurance when they go to closing on their house?
    And in this case, does that translate into a program that 
is--becomes more solvent, and is able to pay its debt off, or 
does it make for a program that is going to create even more 
losses and even more debt?
    Mr. Fugate. The simple math would suggest, absent floods, 
we will have more revenue coming in. The reality is, you are 
basing it upon a 1 percent per annum risk, which means that 
these people are most likely to flood. And you are trying to 
then be actuarially sound by only the requirement that the 
policies be written at the highest risk.
    So, you may see some short-term increase in funding. But 
the long-term exposure is actually greater. What the maps are 
doing, in many cases, is just more accurately depicting what 
that risk was. But again, because you are only requiring people 
to purchase flood insurance at the highest risk, that pool, 
even if it grows, does not offset the exposure. In fact, the 
exposure increases, even though without floods, it would give 
the appearance of increased revenue streams that may give some 
opportunity to pay down existing debt.
    Mr. Marchant. Thank you.
    Chairwoman Waters. Mr. Taylor?
    Mr. Taylor. I thank the gentlewoman. And to the gentleman's 
point, the Administrator said that the flood insurance lost 
$18.8 billion the year of Katrina. What he didn't tell you is 
that the Nation lost an additional $34.5 billion, because the 
private sector didn't pay their claims. Now, that was: $4.2 
billion in FEMA housing-assisted payments; $7.1 billion in FEMA 
manufactured housing; HUD CDBG housing grants to the tune of 
$15.4 billion; and SBA disaster loans for $7.6 billion.
    So, again, they keep looking at what the flood insurance 
lost. But because the private sector did not pay their fair 
share--the same reason that the insurance industry had $44 
billion in net profits in 2005--our Nation lost $53 billion to 
Katrina. We are trying to keep that from happening again. We 
are trying to get those people who live in the high-risk areas 
to purchase a policy that will cover all these costs, so that 
we don't have to pay it again.
    To that point, Mr. Fugate--and I'm sure you have had some 
time to look into this--you know that our agreement with the 
insurance industry lets them sell the policy, and they get a 
commission for that. We also pay them to adjust the claim. They 
get a paycheck for adjusting the claim. Our contract with the 
insurance industry says that they will do a fair adjustment of 
the claim. If it's 60 percent water and 40 percent wind, they 
pay 40 percent, and the Nation pays 60 percent through the 
Flood Insurance Program.
    Unfortunately, testimony before the Mississippi Supreme 
Court by an attorney for the Nationwide Insurance Company--and 
I'm sure they hired the best to go before the Supreme Court of 
Mississippi--let's hear this. Justice Pierce--and this is a 
quote--``I am giving you the example. If 95 percent of a home 
is destroyed by wind, the flood comes in and gets the other 5 
percent, and you know that, does your interpretation of the 
word `sequence'--now he's talking to the attorney for 
Nationwide Insurance Company--mean that you pay 0?''
    Mr. Landau, representing Nationwide Insurance Company, in 
testimony before the Mississippi Supreme Court, said, ``Yes, 
your honor. They pay zero.''
    Now, going back to your job--you run the Federal Flood 
Insurance Program. You have testimony before the Mississippi 
Supreme Court where Nationwide Insurance Company's paid 
representative says in a circumstance where they should have 
been paying 95 percent of that bill, they pay 0, and stuck the 
Federal taxpayer with 100 percent of the bill.
    What have you done to look into this? Because their 
contract with America says they have to have a fair adjustment 
of the claim. And to the gentleman's point, I am not an 
advocate of bigger government, except at times when government 
can do better than it's doing right now. And this is one of 
those times.
    So, to that point, how many fraudulent claims has the 
National Flood Insurance Program looked into? Because I can't 
think of another single instance, Mr. Fugate--and you correct 
me--where someone can send an unlimited number of bills to the 
Federal Government for up to $350,000, and no one takes the 
time to see if it's a valid claim. And you have on record where 
that company admitted that if 95 percent of that burden was 
theirs, they pay nothing if the last 5 percent was done by the 
flood.
    What have you done about this? Because I am just telling 
you, I am amazed at this Administration's reluctance to do 
something. Because doing nothing is to repeat this $53 billion 
mistake.
    Mr. Fugate. Congressman Taylor, to be specific, a lot of 
this is from Government Accountability Office recommendations 
we're implementing. But to the very point of what you are 
articulating, which is, how do you reconcile dual peril, 
written by two different individuals who have a conflict of 
interest, yet we're contracting with the insurance company to 
adjudicate, I actually have insurance companies come to us, 
asking to withdraw from the program. And we are currently 
looking at how would we provide claims adjustors on the Federal 
dollars to do what we currently pay insurance companies.
    So, not only is this an issue that we know internally that 
we have to face, there are large insurance companies that are 
questioning why they want to continue this for this very 
reason, that it puts them in an untenable situation, where it 
questions their integrity when they're trying to reconcile how 
much was flood and how much was wind.
    Mr. Taylor. Well, Mr. Fugate, again, what changes are you 
recommending so that this conflict of interest doesn't happen?
    And, by the way, how many cases have you looked into where 
there obviously had to be fraud if they're admitting before the 
Mississippi Supreme Court that they are liable for 95 percent 
of the bill, but if there is 5 percent of damage caused by 
flooding, they are not paying anything, which means the Federal 
Flood Insurance Program and FEMA picked up the bill for all 
these additional expenses?
    Mr. Fugate. Congressman, I--
    Mr. Taylor. Has it been--have you looked into one case?
    Mr. Fugate. Personally? I have not, sir.
    Mr. Taylor. Has your Agency looked into one case?
    Mr. Fugate. I will need to respond for the record, so I can 
have the accurate information for that.
    Mr. Taylor. Well, could you give me a guesstimate as to how 
many cases you have looked into?
    Mr. Fugate. No, Congressman, I cannot give you an estimate.
    Mr. Taylor. You can't guess 1, 10, 20?
    Mr. Fugate. No, sir.
    Mr. Taylor. A $53 billion bill, and nobody is looking to 
see if we should have paid it?
    Mr. Fugate. Again, to be accurate, I--
    Mr. Taylor. Thank you, Madam Chairwoman.
    Mr. Fugate. --on the record.
    Chairwoman Waters. Thank you very much. We have 10 minutes 
left. We have to go up and take three votes. We're going to 
hear from Mr. Scalise, then we are going to recess and come 
back and hear from the third panel.
    Thank you. Mr. Scalise?
    Mr. Scalise. Thank you, Chairwoman Waters. Administrator 
Fugate, I know we have worked on a lot of different hurricane 
recovery issues. We still have to work on some issues regarding 
the CDL loan forgiveness rules, but that's another issue for 
another day.
    Regarding this, and kind of following up on Congressman 
Taylor and other Members' questions, regarding the actuarial 
soundness of the program, I agree that the $18.8 billion is a 
problem that has to be addressed, but it's a problem that was 
not caused and has no relation to the issue that Congressman 
Taylor and my bill addresses, and that is bringing the wind 
into the Flood Insurance Program. And, in fact, what I want to 
talk to you about is it's my feeling that the bill that we have 
would actually help solve the actuarial soundness of the 
program.
    And, in fact, if you look at the CBO report on our bill, it 
confirms that it would be actuarially sound, and it would pay 
for itself. But what it would also do is I think it would 
address the heart of this problem that we're having right now, 
and that so many homeowners had, and that is the debate between 
wind versus flood.
    It was such a frustration for so many of my constituents 
who bought a policy for--their homeowner's policy, it covered 
fire and theft, but it covered wind. And then they also paid 
for their flood insurance policy. And so they paid both, and 
then they got both. They got wind and flood damage. And yet, 
neither policy was going to pay, because each was pointing the 
finger at somebody else. And in many cases, you might have had 
somebody who lost their whole roof. So, clearly, there was 
going to be some wind damage. But the homeowner's policy was 
saying, ``We're just pointing to the Flood Insurance Program. 
Make them pay.''
    And so, what happens is your program, NFIP, can only charge 
premiums right now, based on flood risk. And so you, by law, 
can only charge premiums for flood. But, in fact, you are 
paying claims for flood and for wind. You are paying for both, 
but you are only charging premiums for one. So you can't be 
actuarially sound under your current rules.
    And, in fact, our bill would help fix that problem, because 
you eliminate the debate. No longer do you have two different 
people with, as the Government Accountability Office had 
suggested--two different people who have conflicts of interest. 
Because it's in the best interest of the insurance company to 
say, ``Hey, if we can get NFIP to pay it, that's money we 
save.''
    Well, if you combine them into a multi-peril policy, now 
you are basing your premium on the combined risk, and you don't 
have this concurrent causation question any more. Because if 
it's caused by wind or by flood, it's all under one roof. It's 
all one policy and they are paying you that premium. And then, 
when you pay the claim, you are paying the claim, it doesn't 
matter whether it was wind or flood at that point. You are 
paying the claim because you charged the premium based on an 
actuarially sound matter to cover both.
    But right now, under the current rules, you are paying 
claims for both, but you are only charging premiums for one. So 
I can see why you're in an actuarially unsound basis. Because 
for various reasons--and I hope you look into--the conversation 
between you and Congressman Taylor--and a lot of this happened 
before you got here--but clearly, the NFIP was paying claims 
for things that they had no business paying for. Because just 
through--and GAO gets into this, and they actually point out 
how there were those conflicts, and how the various insurance 
companies that chose to do this just said, ``For everything we 
can dump onto the flood program, we will make them pay,'' 
because they will.
    And, unfortunately, you all held up your end of the bargain 
and you paid claims, but there were so many people who were 
waiting and had to go to court, take their insurance company to 
court to make them pay for the wind damage that was done, even 
though they paid on the policy.
    And the other thing that this policy has is it has loss of 
use. The policy in our bill, it has a loss of use program. So 
what it also does is addresses the problem of those FEMA 
trailers for so many people who had to wait maybe 2 years, and 
maybe they finally got paid for their insurance claims, but 
they had to wait 2 years and they were living in a FEMA 
trailer, because they had no means to live.
    And so, with a loss of use component that is also 
actuarially sound, now that will also be paid for not through 
your separate program that the FEMA trailer has dealt with, but 
also through their actuarially sound multi-peril claim.
    So, I just wanted to talk about all that. Because I think 
as you are looking at how it affects your program, I think it 
helps the actuarial soundness of the Flood Insurance Program by 
combining the perils, so you don't have to pay for somebody 
else's damage.
    Mr. Fugate. That has a lot of interesting points. However, 
the reason I am 25 percent below has nothing to do with that. 
And there may be some degree, but I can't quantify that. The 
reason I am 25 percent below actuarial rate is when Congress 
reauthorized a Flood Insurance Program in 1994, they limited 
the annual increase to 10 percent per annum. So I cannot--if 
you remap and you find areas at higher risk, I can only move up 
a certain amount. And so that leaves me not able to be 
actuarially sound, because I am capped at a 10 percent increase 
in the program.
    Mr. Scalise. Yes, but that's on flood. This--
    Mr. Fugate. That would--
    Mr. Scalise. The wind program is a totally separate 
program, and requires actuarial soundness.
    Mr. Fugate. I am--
    Mr. Scalise. And I know I'm out of time. I apologize. Thank 
you.
    Chairwoman Waters. Thank you very much. And our bill will 
move that up from 10 percent to 20 percent, so you will have a 
little bit more flexibility.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses, and to place their responses in the record. This 
panel will stand in recess until after the votes. We will be 
back.
    [recess]
    Chairwoman Waters. Our first witness will be Mr. David R. 
Conrad, senior water resources specialist, National Wildlife 
Federation.
    Our second witness will be Mr. Mark Davey, president and 
chief executive officer, Fidelity National Insurance Company, 
on behalf of the Write-Your-Own Coalition.
    Our third witness will be Mr. Larry Larson, executive 
director, Association of State Floodplain Managers.
    Our fourth witness will be Mr. John Rollins, president, 
Rollins Analytics, Inc..
    Our fifth witness will be Mr. Barry Rutenberg, 2010 second 
vice chairman of the board, National Association of Home 
Builders.
    And our final witness will be Mr. Maurice Veissi, Veissi & 
Associates, 2010 first vice president, National Association of 
REALTORS.
    Without objection, your written statements will be made a 
part of the record. You will now be recognized for a 5-minute 
summary of your testimony.
    So, let us start with Mr. Conrad.

     STATEMENT OF DAVID R. CONRAD, SENIOR WATER RESOURCES 
            SPECIALIST, NATIONAL WILDLIFE FEDERATION

    Mr. Conrad. Good afternoon, Chairwoman Waters, Ranking 
Member Capito, and members of the subcommittee. My name is 
David Conrad, and I serve as senior water resources specialist 
for the National Wildlife Federation, the Nation's largest 
conservation, education, and advocacy organization. We greatly 
appreciate the subcommittee's holding this hearing today, and 
your continuing interest in the reform and reauthorization of 
the National Flood Insurance Program.
    I want to underscore three major points from my written 
testimony. First, while the National Flood Insurance Program is 
broken, essentially bankrupt with a debt of $18.7 billion to 
the U.S. Treasury, many of its fundamental problems can be 
corrected. This committee has an opportunity to pass meaningful 
reforms that will get the program on better fiscal footing and, 
most importantly, provide better protection for people, 
communities, and the environment. Unfortunately, the discussion 
draft, or the flood insurance reform bill, falls far short of 
what is needed, and may even make things worse.
    Second, these are not normal times. The Nation's scientists 
are telling us that climate change is already causing heavier 
rainfall, changing patterns of snowfall, bringing more severe 
hurricanes, and increasing sea levels, all of which will 
increase flooding risk and likely exacerbate already increasing 
flooding damage.
    Third, tomorrow is Earth Day. And it's important to 
recognize that the NFIP, as it is currently functioning, is 
leading to increasing development and damages to wildlife 
habitat, wetlands, coastlines, and other environmental 
resources. We need to fix these perverse incentives for more 
development and redevelopment in these environmentally 
sensitive high-risk areas.
    Unfortunately, the committee is considering adding wind 
storm coverage to the NFIP, and establishing a Federal backstop 
for State natural catastrophe funds. In our view, these are 
anti-environmental proposals that would exacerbate these 
problems.
    Let me comment directly on the National Flood Insurance 
Reform Priorities Act, the discussion draft that we received. 
First, what we like. We support the 5-year phase-out of pre-
FIRM subsidies for two major classes of properties: non-
residential properties; and non-primary residences. We also 
support increasing from 10 to 20 percent the amount that FEMA 
can annually raise premiums to reduce subsidies and improve the 
NFIP's actuarial soundness.
    Now, what we think needs to be fixed, expanded, or 
eliminated in the discussion draft. The bill should be amended 
to phase out subsidies for severe repetitive loss properties, 
and properties that have already cost the Flood Insurance 
Program more than the value of the home or business in 
cumulative claims.
    We would strongly object to sections 6 and 10, that would 
delay or waive requirements for mandatory purchase, where 
residents remain vulnerable and inadequately protected from 
flooding. As we saw in Hurricane Katrina, it's a dangerous 
mistake to assume no flood insurance is necessary because there 
are Corps of Engineers or other levees, especially decertified 
levees.
    We also believe the NFIP should be reauthorized for 3 
years, and not 5 years. Administrator Fugate has initiated a 
major 2-year effort to review the NFIP, with the intent to make 
comprehensive, administrative, and legislative recommendations 
to guide the course of the program in the future. The next 
reauthorization should dovetail closely with the 
Administration's efforts.
    Now, another overriding concern. Given the committee's 
decision to limit this reauthorization to insurance and finance 
aspects, we believe many of the most critical and necessary 
reforms are not being made in this bill, including needed 
measures that can better target assistance to low-income 
Americans, to improve land use planning and building codes, and 
to make hazard mitigation and environmental protection the 
heart of NFIP's risk reduction strategy.
    Regarding H.R. 1264, we do not believe the Federal 
Government should get into the business of assuming liabilities 
and responsibilities for wind coverage. Not only would such an 
expansion of the NFIP threaten the program's long-term 
financial health, it would also fuel development in many more 
high-risk and environmentally sensitive areas.
    In conclusion, once again, the National Wildlife Federation 
greatly appreciates the opportunity to provide our views on 
legislation to reform the NFIP. Many of the views we have 
expressed are shared by Smarter Safer, a broad coalition 
working to advance far-sided policies to better protect 
communities and the environment.
    We look forward to working with the committee as the 
process continues, and I look forward to responding to any 
questions the members may have. Thank you.
    [The prepared statement of Mr. Conrad can be found on page 
100 of the appendix.]
    Chairwoman Waters. Thank you.
    Our next witness will be Mr. Mark Davey.

STATEMENT OF MARK DAVEY, PRESIDENT AND CHIEF EXECUTIVE OFFICER, 
  FIDELITY NATIONAL INSURANCE COMPANY, ON BEHALF OF THE WRITE-
               YOUR-OWN FLOOD INSURANCE COALITION

    Mr. Davey. Madam Chairwoman, Ranking Member Capito, and 
subcommittee members, my name is Mark Davey, and I am president 
and CEO of Fidelity National Insurance Company. Fidelity is a 
write-your-own flood insurance partner with the NFIP, and the 
largest writer of flood insurance in the Nation. We are also a 
member of the Write-Your-Own Coalition, which is made up of 85 
private insurers who collectively administer 95 percent of the 
NFIP's policy base.
    Thank you for the opportunity to testify today on behalf of 
Fidelity National and the Write-Your-Own Coalition, and to 
share our views on proposed flood insurance reform legislation.
    First and foremost, we would like to compliment and voice 
our support for the draft flood insurance legislation authored 
by Representative Waters. We feel the bill provides much-needed 
stability and refinement for the betterment of the National 
Flood Insurance Program.
    I would like to directly respond to the questions you 
proposed. You requested we share our views, relative to the 
status of the NFIP, and any improvements the program may need. 
All things considered, the program is functioning well, in 
spite of numerous program expiration and delays in 
reauthorization. While the program remains heavily in debt, the 
NFIP has successfully retired $500 million of debt accumulated 
from Hurricanes Katrina, Rita, and Wilma. Not only has the 
program retired $500 million of debt, it has also shouldered 
the additional burden of Hurricane Ike during the same time 
frame.
    The Flood Program and the stakeholders would greatly 
benefit from streamlining and simplifying the flat application 
process. A streamlined policy application and underwriting 
process would enable more agencies to understand a market flood 
insurance.
    Purchasing a traditional homeowner's policy through our 
organization takes an agent approximately 5 minutes to complete 
the transaction. By contrast, even with a highly automated Web-
based flat application process, a proficient flood producer in 
most circumstances will invest several hours before 
successfully placing a flood policy.
    There needs to be a continued push for adequate rates at 
all program levels. Our goal should be to create a program 
which can be financially self-sufficient. The program cannot 
survive and meet its responsibilities if its existence comes in 
question each time the NFIP has to ask Congress for more money.
    Not in the bill, but something I proposed, is the inclusion 
of additional living expense coverage. Adding this coverage 
will provide a valuable coverage, which will allow 
policyholders to get back on their feet much faster following a 
flood event. This coverage will provide the ability for the 
insured to keep their lives on track, as opposed to being 
thrown out on the streets. I advocate we add this additional 
coverage and charge an appropriate premium to properly 
underwrite this new proposed coverage.
    You asked in what ways the long-term reauthorization brings 
stability to the housing market. When a buyer of a property 
located within a special flood hazard area is confronted with 
the inability to buy flood insurance, it often derails the 
transaction, leading to the cancellation of the purchase. In 
some circumstances, purchase transactions have been abandoned, 
based on buyers' well-founded fears of their inability to 
secure flood insurance for the duration of their ownership. The 
lack of immediate flood coverage has an extremely negative 
effect on housing sales in mandatory flood zones.
    You asked me to discuss how short-term reauthorizations 
have impacted our company and our clients. Lapses are extremely 
difficult to manage. We endeavor to run our operations as 
efficiently as possible. Our computer mail-in phone systems are 
matched to our daily work loads, both from a customer service 
standpoint and a computer systems standpoint. Digging out of a 
backlog accumulated by program lapses is extremely difficult, 
and we cannot provide the level of service to our customers to 
which they are accustomed.
    With the recent lapse, we were confronted with issuing 
approximately 5 percent of our annual policy's renewal notices 
and other necessary documents immediately upon program 
reinstatement. When our production platforms normally run 8 to 
10 hours a day, 7 days a week, the catch-up window dictates 
double and triple shifting, which is extremely costly and 
disruptive.
    Lapses cause undue stress, confusion, and frustration to 
policyholders and potential policyholders. Because we are 
always hopeful appropriate action will be taken to avoid 
lapses, in every circumstance we have to scramble to notify and 
educate the general population and all those involved in the 
Flood Program of lapse, and our current changes in procedures 
when, in fact, we do fall into a lapse environment.
    The non-quantifiable and most costly aspect is the loss of 
new and renewal policies, not just in special flood hazard 
areas, but also areas that the flood insurance is not 
mandatory. Policyholders contemplating renewing their policies 
with limited disposal are far less likely to renew if they feel 
the program's existence is in jeopardy. As we do everything 
possible to encourage program participation, the worst message 
we can convey is the program's continuation is in question.
    You asked me to discuss what impact the map modernization 
effort has had on write-your-own companies. Continued and 
refined map modernization is essential for the health of the 
NFIP. It is imperative we provide consumers with the most 
accurate information available.
    [The prepared statement of Mr. Davey can be found on page 
112 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Our third witness will be Mr. Larson.

 STATEMENT OF LARRY LARSON, EXECUTIVE DIRECTOR, ASSOCIATION OF 
                   STATE FLOODPLAIN MANAGERS

    Mr. Larson. Thank you, Madam Chairwoman, and members of the 
subcommittee. The Association of State Floodplain Managers' 
14,000 members implement the National Flood Insurance Program 
at the State and local level, and I represent their thoughts.
    The NFIP really is no different than it has been for the 
last 42 years. It is, essentially, the same program that was 
authorized in 1968. Congress has tweaked the edges here and 
there over time, but we're essentially operating on that same 
model. This bill, again, tweaks around the edges. We are 
concerned with significant reform to the program, and we are 
pleased that FEMA is undertaking an effort to come back to you 
with some broad recommendations on options in which that needs 
to happen.
    Significant changes are needed to address its debt and the 
inability to reduce flood losses in the Nation, which continue 
to go up, despite the program being here for 42 years. And, 
despite all the flood control projects that we built in the 
last 80 years, we are still increasing flood damages 
significantly, which doubled in the last decade per year.
    Ideas, big ideas, need to be thought about. Is it time to 
turn flood over to the private sector? Is there any reason the 
private sector can't run flood insurance right now? That needs 
to be considered.
    Floods are getting bigger. We are going to have more 
damages. There is more property at risk. And that's the big 
issue. Risk is the probability of getting flooded times the 
consequences if you are flooded. Probabilities have not changed 
significantly, but consequences have changed dramatically. 
Building in high-cost coastal areas, building behind levees, 
all those consequences are going up greatly. And we're not 
going to be able to control that under the current process.
    We are seeing more intense storms. People in Des Moines 
have said, ``We have had three 500-year floods in the last 15 
years.'' We are seeing more intense rainfalls. We are seeing 
sea-level rise. We are seeing these things that will increase 
our risk. So, significant program changes are necessary.
    These issues we are dealing with: the struggles we are 
having now with mapping and levees and insurance--mapping is 
not the issue. Mapping merely identifies the risk. And we need 
to know that. Levees are not the issue. We know that all levees 
will fail or overtop at some point. That's not just me saying 
that, that's every expert in the world saying that.
    Insurance is the only security some of those people have 
for what they own, which typically is the only thing they own--
that house. Without insurance, they're left naked.
    So, delaying the map without insurance puts people in this 
situation such as Representative Taylor--where now there is no 
way to regain that loss that they had. Other options that are 
in the bill such as phasing in, those sorts of things, seem to 
make a lot more sense. The PRP, Preferred Risk Policy--or the 
policy that FEMA has talked about, some of those options.
    In the Nation, about 1 percent of the people are at risk of 
flooding. Seven percent of the land area of the Nation is 
floodplain, but only about 1 percent of the people are at risk 
of flooding. About half of those people carry insurance. And as 
Mr. Fugate talked about, trying to figure out how to run an 
actuarially sound program when there are only very few of those 
11 million structures that are required to have insurance is 
problematic.
    So, broadening that risk, or broadening that base, 
spreading that risk, is how you have to get an actuarial 
program.
    We would agree with the GAO concern that part of this issue 
is who benefits and who pays, and striking that balance. Do 
those who live at risk pay their appropriate share of living at 
risk, or is that being paid for by the rest of us who don't 
live at risk? That's the challenge that you face in this 
committee, and that Congress faces in trying to actually reform 
this program.
    I will respond to other questions as you have them. Thank 
you very much.
    [The prepared statement of Mr. Larson can be found on page 
125 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Rollins?

  STATEMENT OF JOHN W. ROLLINS, PRESIDENT, ROLLINS ANALYTICS, 
                              INC.

    Mr. Rollins. Good afternoon, Chairwoman Waters, and Ranking 
Member Capito. My name is John Rollins. I am an actuary holding 
qualifications in the Casualty Actuarial Society and American 
Academy of Actuaries. I have worked in Florida property 
insurance for the last 11 years, serving as chief actuary of 
private insurance companies, as well as a director at the 
State-run wind pool of Citizens Property Insurance Corporation. 
I have testified to lawmakers in Florida and other States on 
the issue of government-backed property insurance systems in 
disaster-prone areas, and published some research papers on the 
subject.
    After many years of observing public policy decisions and 
their impact on property insurance markets as well as public 
finances, my message to you today is simply this: in designing 
rates for any property insurance program ultimately supported 
by taxpayer capital, great care should be taken that the 
legislative definition and the practical definition of the 
phrase ``actuarially sound'' conforms to the principles of the 
U.S. casualty actuarial profession itself.
    Some background is in order. We know that an insurance 
policy is really just a promise to pay for a predefined type of 
possible loss in exchange for some up-front premium. Now, by 
law, insurance contracts must be backed by capital sufficient 
to pay the claims, even when many claims occur at the same 
time, and the costs are well in excess of the premiums charged.
    Disasters, by definition, are infrequent, unpredictable, 
and severe. And for these events, the required capital can be 
catastrophic as well: 20 or more times the average annual loss, 
for example, contemplated in the premium.
    The job of actuaries is to determine that fair premium. But 
the job becomes more difficult when the losses are 
catastrophic, and yet more difficult when the supporting 
capital for the insurance is provided in other than some kind 
of economic transaction, such as through government support.
    The relevant actuarial principle states, ``A rate is 
reasonable and not excessive, inadequate, or unfairly 
discriminatory if it is an actuarially sound estimate of the 
expected value of all future costs associated with an 
individual risk transfer.''
    Each word or phrase in that statement has implications for 
pricing decisions for these government-backed insurance 
programs. First, the phrase ``not excessive, inadequate, or 
unfairly discriminatory,'' you may recognize as the definition 
of a lawful rate under most State insurance laws. So actuarial 
soundness is historically a sufficient condition for a lawful 
rate. Or, said another way, it's hard to imagine a rate which 
would be actuarially sound yet unlawful.
    Second, those rates must reflect expected costs. So, it's 
not sound to peg the rate to the most favorable outcome or the 
most unfavorable outcome, or whatever is convenient. Rates have 
to reflect the probability-weighted average over all the 
scientifically tenable outcomes. What that means in catastrophe 
rate-making is that scientific models and simulation models are 
very useful, since any recent snapshot of activity may show bad 
disasters or may show no disasters.
    Third, such rates have to reflect all costs, not just those 
we prefer to reflect, or that we can easily quantify. Rates 
have to be made on a cost basis, rather than an economic basis. 
But real costs incurred to issue a properly capitalized policy 
must be reflected.
    Fourth, such rates are to reflect future costs. Rates may 
not be made to recoup past losses. So, past data may or may not 
be predictive of future losses, but past experience is not some 
kind of an account to be squared by raising or lowering future 
premiums.
    And, finally, actuarially sound rates must reflect the cost 
of risk transfer. What that means is they have to include a 
provision for the cost of that capital, required on demand to 
pay claims after catastrophic events. Private insurers transfer 
risk through reinsurance and risk sharing arrangements, and 
they pay those costs immediately. Government programs can 
borrow from future taxpayers to fund today's risks. The cost of 
that capital may be arguable, but actuaries and economists 
agree that it should not be zero.
    Therefore, the key is that an actuarially sound rate for a 
government-backed insurance program must be greater than simply 
the expected annual loss to the program, plus provisions for 
the known expenses.
    Failure to implement actuarially sound rates in such 
programs at both the State and Federal levels has had unwelcome 
consequences, as testified by many of my colleagues here at the 
table, including: overdevelopment of environmentally sensitive 
areas, as these low insurance rates offered by government-
backed insurers and subsidized by future taxpayers encourage 
consumers and developers to underestimate the risk and build in 
harm's way; expansion of the risk in government-backed 
insurance pools, as the private insurers may retreat from the 
areas in which they cannot or will not compete with these 
subsidized rates; and crowding out of that capital, which 
otherwise would be at risk in lieu of the taxpayer capital we 
put at risk; depletion of the public treasury, as new debt must 
be incurred and then serviced, as you have heard over the 
course of the hearing with the National Flood Insurance 
Program, by potentially generations of taxpayers.
    Finally, wealth transfers from all taxpayers to an often 
high-income subset of residents that choose to live in risky 
but perhaps picturesque areas, because all taxpayers pay 
proportionately to service the debt incurred to these 
underfunded programs.
    Despite the fact that enabling legislation frequently 
utilizes phrases like ``actuarially indicated,'' or 
``actuarially sound,'' the rates for those programs, in 
practice, may not measure up. So I urge lawmakers to carefully 
define the concept of actuarially sound rates during the 
legislation development and continuing implementation of these 
programs.
    And I thank you for the opportunity to appear before you.
    [The prepared statement of Mr. Rollins can be found on page 
142 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Mr. Rutenberg?

STATEMENT OF BARRY RUTENBERG, 2010 SECOND VICE CHAIRMAN OF THE 
          BOARD, NATIONAL ASSOCIATION OF HOME BUILDERS

    Mr. Rutenberg. Chairwoman Waters, Ranking Member Capito, 
and members of the subcommittee, thank you for the opportunity 
to testify today. My name is Barry Rutenberg, and I am the 2010 
second vice chairman of the board of the directors of the 
National Association of Homebuilders. I am also a builder and 
developer from Gainesville, Florida.
    NAHB commends the subcommittee for addressing reform of the 
NFIP program, and releasing a draft flood insurance bill that 
includes a much-needed long-term extension and reauthorization 
of the program. For the last several years, the NFIP has had to 
undergo a series of short-term extensions that have created a 
high level of uncertainty in the program.
    The NFIP recently experienced several short-term 
authorization lapses, causing severe problems for our Nation's 
already troubled housing markets. Unfortunately, during this 
latest delay, many home buyers faced delayed or canceled 
closings, due to the inability to obtain NFIP insurance for a 
mortgage.
    In other instances, builders themselves were forced to 
delay or to stop or delay construction on a new home, due to 
the lack of flood insurance approval. NAHB supports this long-
term extension to ensure the Nation's real estate markets 
operate smoothly and without delay.
    FEMA's Flood Insurance Program plays a critical role in 
directing the use of flood-prone areas and managing the risk of 
flooding for residential properties. The availability and the 
affordability of flood insurance gives local governments the 
ability to plan and zone its entire community, including 
floodplains. In addition, if a local government deems an area 
fit for residential building, flood insurance allows home 
buyers and homeowners the opportunity to live in a home of 
their choice in a location of their choice.
    The home building industry depends upon the NFIP to be 
annually predictable, universally available, and fiscally 
viable. Unfortunately, the losses suffered in the 2004 and 2005 
hurricane seasons included the devastation brought about by 
Hurricanes Katrina, Rita, and Wilma. They have severely taxed 
and threatened the solvency of the NFIP.
    According to FEMA, between NFIP's inception in 1968 through 
2004, a total of $15 billion has been needed to cover more than 
$1.3 million in losses. However, the combined claims for 2004 
and 2005 exceeded the total amount paid during the entire 37-
year existence of the NFIP program.
    While these losses are severe, they are currently 
unprecedented in the history of this important program. And, in 
our opinion, they are not a reflection of a fundamentally 
broken program. Nevertheless, NAHP recognizes the need to 
ensure the long-term financial stability of the NFIP, and looks 
forward to working with this committee to implement needed 
reforms. While my testimony goes into more detail, it is 
absolutely critical that Congress approaches legislation with 
care.
    The NFIP is not simply about flood insurance premiums and 
pay-outs. Rather, it is a comprehensive program that guides 
future development and mitigates against future losses. While a 
financially stable NFIP is in all of our interests, the steps 
that Congress takes to ensure financial stability has the 
potential to greatly impact housing affordability, and the 
ability of local communities to exercise control over their 
growth and development options.
    While NAHB supports a number of reforms designed to allow 
the NFIP to better adapt to changes in the marketplace, we have 
strongly advocated against expansion of the regulated 
floodplain, or changes to the numbers, locations, or types of 
structures required to be covered by flood insurance without 
appropriate study first. Before any such changes could be 
implemented, FEMA should first demonstrate that the result that 
the resulting impacts on property owners, local communities, 
and local land use are more than offset by the increased 
premiums generated and the hazard mitigation steps taken.
    NAHB is, therefore, pleased that the subcommittee's draft 
bill requires that FEMA conduct a study on the feasibility and 
implications of a change to NFIP's mandatory purchase 
requirements within the 100-year floodplain.
    Finally, NAHB is pleased to support H.R. 1264, the Multiple 
Peril Insurance Act of 2009, authored by Representative Gene 
Taylor. Coverage for wind insurance would provide a needed 
addition to the availability and affordability of property 
insurance in high-hazard areas. NAHB is pleased that H.R. 1264 
references the mitigation requirements of consensus-based 
building codes as a measure to lessen the potential damage 
caused by a natural disaster, and, thus, further ensure the 
financial stability of the NFIP.
    Again, thank you for the opportunity to testify today.
    [The prepared statement of Mr. Rutenberg can be found on 
page 144 of the appendix.]
    Chairwoman Waters. Thank you very much.
    Our final witness will be Mr. Maurice Veissi.

 STATEMENT OF MAURICE VEISSI, VEISSI & ASSOCIATES, 2010 FIRST 
        VICE PRESIDENT, NATIONAL ASSOCIATION OF REALTORS

    Mr. Veissi. Chairwoman Waters, Ranking Member Capito, and 
members of the subcommittee, I want to thank you for inviting 
me to testify today regarding legislation to reform the 
National Flood Insurance Program. My name is Moe Veissi. I am 
currently the 2010 first vice president in the National 
Association of REALTORS. I have been a Realtor for more than 40 
years. I am the broker-owner of Veissi & Associates, Inc., and 
TM Realty, the former in Miami and the latter in Daytona, 
Florida. I am here to represent the views of the National 
Association of REALTORS and its 1.2 million members who are 
engaged in all the aspects of residential and commercial real 
estate in the 50 States and 4 territories of the United States.
    Throughout its existence, the National Flood Insurance 
Program has effectively reduced the cost to taxpayers of flood 
damage. It does that by requiring communities who wish to 
participate in this valuable program to implement flood plan 
management ordinances. It is important to note, according to 
FEMA, those requirements reduce flood damage by about $1 
billion a year.
    In other words, participation in this program ensures that 
a $1 billion savings is passed on to the taxpayers who do not 
have to shoulder the enormous expense of underinsured property 
owners after a natural disaster like Hurricane Katrina.
    It is estimated that a third of the $88 billion in remedial 
efforts that the government spent on disaster was due to 
underinsured properties. And while the National Flood Insurance 
Program has been effective at reducing societal costs, flooding 
and damages since 2005 highlight the need to reform the program 
so that it can better protect our people and put this program 
on a strong financial footing.
    Just look at the recent floods in Rhode Island. We all saw 
the images of the Pawtucket River, cresting at about 12.5 feet 
above flood grade. The residential experienced huge damage in a 
flood characterized as 1 event in the last 200 years. NAR 
president-elect Ron Phipps experienced water above 21 feet of 
mean level. Imagine the horror of having to fill a 30-year 
dumpster with parts of your family's memories and history. That 
must have been devastating.
    Extending the Flood Program month to month through stop-gap 
measures--some might say punting from one deadline to another--
is an ineffective way to operate a major Federal program. And 
this creates financial and real estate market uncertainties for 
millions of taxpayers, financial market lenders, and insurers 
who can't or won't operate under these uncertainties.
    The National Association of REALTORS supports a minimum 5-
year authorization of the flood program. Such an extension 
provides much-needed certainty to a recovering real estate 
market and to millions of taxpayers who depend on this 
important program.
    NAR also supports reforms that strengthen the program's 
financial footing. Increasing participation would lead to 
increased funds for the program, help property owners recover 
from flood losses, and decrease future Federal assistance with 
underinsured properties and owners experience losses such as 
happened before.
    We support reforms that would eliminate discount insurance 
rates for older properties with a history of repeated pay-outs 
where the owner has refused to mitigate against future insured 
losses. Yet we oppose changes to rates--charge pre-flood 
insurance rate mapped commercial properties, non-primary 
residential or primary residential homes.
    Pre-flood mapped properties facing identical risks should 
have the same rate. The rate should not be based directly or 
indirectly on the type of occupancy or the income or assets of 
the owner. That way, two properties could be located next to 
each other, but the commercial property could get a bill that 
is about 4 times more than the one right next door. That's not 
right.
    H.R. 1264, the Multiple Peril Insurance Act sponsored by 
Representative Taylor, would ensure access to affordable 
insurance for wind-related hurricane damage, and therefore, 
reduce the amount of post-disaster Federal assistance, saving 
taxpayers real money. Covering both wind and flood would 
eliminate the insurance pushback on what causes the damage.
    As we have learned in the past in Rhode Island; Florida; 
Fargo, North Dakota; Louisiana; and a host of other hometowns 
across this great land, it's far less costly to prepare ahead 
of time for disasters than it is to fund recovery efforts.
    In conclusion, thank you again for the opportunity to share 
the Realtor community's views on the National Flood Insurance 
Program. The National Association of REALTORS stands ready to 
work with members of the committee to develop meaningful 
reforms to this program that will help protect the country's 
property owners and renters to prepare and recover from future 
losses resulting from floods. Thank you so very much.
    [The prepared statement of Mr. Veissi can be found on page 
154 of the appendix.]
    Chairwoman Waters. Thank you very much. And I will now 
recognize myself for 5 minutes for questions.
    Let me turn to Mr. Davey. You mentioned in your oral 
testimony the need for the program to offer additional living 
expense coverage. I am interested in this concept, since you 
talk about helping low-income Americans. Can you delve further 
into how this would work?
    Mr. Davey. Additional living expense was referred to as 
ALE--is an essential part of a traditional homeowner's policy.
    Whether your house is damaged by flood, or whether it's 
damaged by fire, the first thing you have to do when you're 
found without a home, is you have to relocate. And your first 
immediate need is cash. You have to go rent a hotel, you have 
to start purchasing your initial meals at a restaurant. You 
need money.
    When your house is flooded, you have lost everything, in 
most circumstances you don't have access to anything in your 
household. You have to go purchase clothing, start feeding 
yourself, find suitable shelter. That is--if there is one thing 
that happens after a flooding event that's most crucial, the 
first calls we receive are people looking for this additional 
living expense.
    Chairwoman Waters. But wouldn't that increase the price of 
the premium?
    Mr. Davey. It would increase the price of the premium. It 
could be made optional or it could be made mandatory. And I 
don't advocate giving the coverage away. I advocate charging 
the actuarially sound premium for that coverage.
    But it is an absolute need of the policyholder after their 
property has been flooded.
    Chairwoman Waters. You heard earlier this morning the 
Administrator say that, by law, they were only able to increase 
premiums by 10 percent, or the amount that they were able to 
charge. We said we would increase by 20 percent. Do you think 
this is enough to incorporate into it additional coverage for 
those who would want to have this ADL?
    Mr. Davey. Additional living expense? I don't think it 
falls in the category of an increased premium. It's a newly 
introduced coverage. So any premium associated with that 
coverage would not be construed as an increase of our--of the 
NFIP's rates. It's a new coverage, of which--if it's made 
optional, it's at the purchaser's election whether they choose 
to purchase that coverage or not choose that purchase.
    Chairwoman Waters. Okay. I'm sorry, it's ALE, that's what--
additional living expenses.
    Mr. Davey. Correct.
    Chairwoman Waters. Now, could your company offer that?
    Mr. Davey. Could our company offer it outside of the flood 
policy?
    Chairwoman Waters. Yes.
    Mr. Davey. There are companies that have written that 
coverage outside of the flood policy. Unfortunately, the areas 
in which they offer it aren't always areas of highest needs. 
That may be available through companies--through a--what they 
call a companion policy that is written in conjunction with the 
NFIP.
    Chairwoman Waters. All right. Let me just ask--Mr. Veissi, 
I have heard reports that during this month's lapse in the 
Flood Insurance Program, each day up to 1,400 home buyers were 
unable to close on their homes. How did this lapse impact the 
real estate market and home buyers?
    Mr. Veissi. At a time when the real estate home market is 
beginning to now fire up and, from an economic standpoint, 
support the economy, it could be devastating.
    The reality is that most lenders will not loan on a home 
that is not sufficiently insured. And so, if you can't get 
flood--or wind, for that matter--then those impediments would 
stop--literally, stop--the sale in many of the coastal areas. 
Remember, about 1 out of every 2 Americans live within 50 miles 
of the coast. The effect of that could be absolutely 
devastating.
    Chairwoman Waters. Thank you very much. And I know that Mr. 
Taylor is here, and he is going to talk a lot more about wind 
insurance. But Mr. Veissi, can you discuss the importance of 
this legislation and how it's needed to protect homeowners in 
areas prone to wind damage?
    That's for Mr. Rutenberg or Mr. Veissi.
    Mr. Veissi. I would be more than happy to. The reality is, 
especially in coastal areas where there are two types of 
flood--one type is wind-driven flood and the other is flood as 
we would imagine it in Rhode Island and some of the other 
areas.
    The bounce back between the insurance company and the 
insured can get very dramatic. In one case, the wind-driven 
flood may be--the insurer may want compensation from that, and 
the insurance company will say, ``No, that's flood.''
    And then, from the flood standpoint, that insured will go 
back to the flood and say, ``Well, I need to be compensated for 
this,'' and that insurer would say, ``No, no, that's wind-
driven damage.''
    The impact of that is absolutely enormous. You have two 
insurance companies battling against one another, not wanting 
to pay. I can understand that. But understanding that something 
happened to that one homeowner, that one homeowner needs to be 
compensated. Combining those two together would be absolutely 
the case.
    Chairwoman Waters. Thank you. Ms. Capito?
    Mrs. Capito. Thank you. Mr. Davey, I have a question. If 
somebody is getting an FHA mortgage, and they happen to fall 
within the FEMA floodplain, are they required to get flood 
insurance for that?
    Mr. Davey. They are. Yes, they are.
    Mrs. Capito. And how is that priced? Mr. Rollins has raised 
big questions about whether the rates are actuarially sound. 
How do you--I assume you do this in your regular line of 
business--calculate that? And what kind of concessions do you 
have to find if it's going to be subsidized or otherwise? Do 
you do income ratios, or what?
    Mr. Davey. I am not sure I understand the question.
    Mrs. Capito. When you're writing a flood policy, an NFIP 
policy. You do that, correct?
    Mr. Davey. The pricing mechanism?
    Mrs. Capito. Yes. How do you determine what the rate is on 
that, and--
    Mr. Davey. The NFIP has set rating guidelines and rating 
protocols that we follow.
    Mrs. Capito. So you can't go away from that?
    Mr. Davey. No, no. We adhere strictly to the rates that are 
set by the NFIP.
    Mrs. Capito. Okay. Okay, thank you. Mr. Rollins, you really 
raised some questions on whether the rates are actuarially 
sound. And with a program that is $18 billion in debt, I think 
that's a logical question.
    What improvements would you make to set this on the right 
course actuarially, or with rate setting?
    Mr. Rollins. Thank you, Ranking Member Capito. Each program 
has to stand on its own, from the standpoint of being 
actuarially sound. So an actuarially sound rating plan for car 
insurance or wind insurance is not the same, is not necessarily 
going to be based on the same factors as one for flood 
insurance.
    But that said, all actuarially sound programs share one 
common characteristic, which is that they properly account for 
the present value of all expected future costs associated with 
the risk. And that includes not only the--sort of the run-of-
the-mill average annual losses, but they have to include some 
kind of loading or provision to reflect the fact that a severe 
year may occur, particularly in a program that's subject to 
catastrophes, whether that be wind, earthquake, or flood. And 
that loading can be significant.
    Now, my experience, admittedly, is more with coastal 
property and wind than it is with the NFIP's rating structure. 
But that loading--what troubles me, as an actuary, is that 
loading is rarely recognized as a matter of legislative 
definition or as a matter of practical definition within the 
rating plan.
    So, what you end up with is a program that apparently is 
actuarially sound for perhaps a number of years, and then a 
loss many times the annual premium can overwhelm that. And it's 
easy to then look back and say, ``If we were to distribute this 
cost over the past 10 or 20 years, we could have had the right 
loading.''
    But it's--as one major insurance company famously said, 
they lost 50 years of premiums in 5 hours in Hurricane Andrew.
    Mrs. Capito. Right.
    Mr. Rollins. That would be prima facie evidence that the 
program was not actuarially sound.
    Mrs. Capito. Okay. Mr. Conrad, I understand you are a 
proponent of flood insurance reform, and are concerned that the 
program continues to be weighted down by repetitive loss 
properties. And according to a recent report by the 
Congressional Budget Office, in a study sample, about 40 
percent of subsidized coastal NFIP properties were worth at 
least half a million dollars. I would imagine that some of 
these might be repetitive loss properties.
    How would adding wind coverage, in your opinion, to the 
troubled NFIP exacerbate these problems?
    Mr. Conrad. Unless and until we address the repetitive loss 
problem in the Flood Insurance Program, we have a program that 
is always in a downward spiral with repetitive losses.
    I believe that if you were to--and the estimate--there have 
been some estimates about how much that's costing a year. And 
I'm not sure that we have actually plumbed that completely to 
the depth, even at FEMA. But to add wind in this area--FEMA has 
no experience with wind at this point. So, at least in the 
first decade, they would be shooting in the dark in terms of 
how to do wind.
    I think what--the effect would be to just increase the 
uncertainty and the risk in the Flood Insurance Program that is 
already sort of there because of a number of different factors 
in the way the repetitive loss problems are plaguing the 
program.
    Mrs. Capito. All right. Thank you.
    Chairwoman Waters. Thank you very much. I am going to hold 
each person to the 5 minutes. We have to be out of the room for 
the Financial Services Committee to come in. So, with that, Mr. 
Cleaver for 5 minutes.
    Mr. Cleaver. I yield back my time, Madam Chairwoman.
    Chairwoman Waters. Thank you. Mr. Green, for 5 minutes.
    Mr. Green. I will yield my time to Mr. Taylor, Madam 
Chairwoman, and thank you very much.
    Chairwoman Waters. Thank you very much. Mr. Taylor?
    Mr. Taylor. I would like to address this question to you, 
Mr. Davey, as a representative of the National Flood Insurance 
Program.
    Your contract with America calls for a fair adjustment of 
the claim by your personnel. You are paid to sell the policy, 
you are paid to adjust the claim. Are you aware that, within 2 
weeks of Hurricane Katrina, State Farm sent an internal company 
memo that instructed their adjustors--and this is a quote--
``Where wind acts concurrently with flooding to cause damage to 
the insurer's property, coverage for the loss exists only under 
flood coverage.'' Now, that's an instruction to their 
adjustors. Does that sound to you like a fair adjustment of the 
claim?
    Mr. Davey. Representative Taylor, I can't comment on State 
Farm's practices. What I can share with you--
    Mr. Taylor. Okay. If I may--
    Mr. Davey. --is the practices we engaged in, which did not 
invoke the anti-concurrent clause in the settlement of our 
property claims as a result of Hurricanes Katrina, Rita, and 
Wilma.
    Mr. Taylor. All right. Well, let me ask you, since it was 
not an isolated instance, in testimony before the Mississippi 
Supreme Court, a hand-picked attorney for Nationwide Insurance 
Company was posed a question by Justice Pierce of the 
Mississippi Supreme Court: ``I am giving you the example of 95 
percent of the house is destroyed by wind. The flood comes in 
and gets the other 5 percent, and you know that. Does your 
interpretation of the word `sequence' mean you pay 0?''
    The lawyer for Nationwide Insurance Company, Mr. Landau, 
answered, ``Yes, your Honor,'' which means they pay zero. Does 
that sound like a fair adjustment of the claim?
    Mr. Davey. I--
    Mr. Taylor. Come on, you have to have an opinion, sir.
    Mr. Davey. I can't comment on the fashion in which they 
adjusted our claims. I can tell you how we adjusted our claims. 
Where there was 60 percent of the responsibility coming from 
wind and 40 coming from water, we paid our 60, and the water 
paid 40. We did not invoke the anti-concurrent clause in the 
settlement of any Katrina, Rita, or Wilma claims.
    Furthermore, for every loss--and we were a substantial 
player, we represented roughly 30, probably 35 percent of the 
market share in the Louisiana area--we employed a separate 
adjustor specifically to adjust flood losses, and the insurance 
companies that had the property had their own adjustor to 
adjust the wind side.
    So, where we were the write-your-own character providing 
the flood coverage, there was a separate adjustor specifically 
assigned to appraise the damages arising from flood and flood 
only.
    Mr. Taylor. Going back to my question to Mr. Fugate, how 
many, given the two things that I just told you, which were the 
practice of Nationwide Insurance Company and State Farm 
Insurance Company, which I think contributed to the $53.3 
billion bill that our Nation paid after Hurricane Katrina, how 
many investigations for fraud were there, that you are aware 
of, where--instances of where the Nation feels like it was 
billed unjustly by the insurance industry?
    Mr. Davey. I will tell you--again, I cannot speak on behalf 
of other carriers--
    Mr. Taylor. Do you know of one, sir?
    Mr. Davey. I don't know of one. I'm not aware of any.
    Mr. Taylor. A $53 billion bill to our Nation, internal 
company memos that are completely contrary to the contract that 
these two companies have with our Nation, and you don't know of 
a single investigation for fraud?
    Mr. Davey. The only company that I am responsible and 
should have knowledge of, is our--
    Mr. Taylor. Okay.
    Mr. Davey. --the companies in which I am responsible for 
the--
    Mr. Taylor. Okay, just for further--
    Mr. Davey. --operation and owner--
    Mr. Taylor. --clarification, Mr. Davey, is it accurate to 
say that your adjustors were empowered to send the Federal 
Government a $350,000 bill, and no one from the Nation double-
checked to see if that was a fair billing to our Nation?
    Mr. Davey. Well--
    Mr. Taylor. $250 for the--
    Mr. Davey. --contrary to that--
    Mr. Taylor. $250 for the--
    Mr. Davey. They did check. We did--the NFIP did engage in 
audits. They came in and audited our Katrina, Rita, and Wilma 
claims. They went through, I don't know how--what the sample 
size, but in every and each claim which they examined, there 
was no evidence found where NFIP monies were spent on wind 
coverage. Every dollar we paid out through our organization 
went to actual flood damage.
    Mr. Taylor. Okay.
    Mr. Davey. I--
    Mr. Taylor. Lastly, are any of the--and I'm glad to hear 
that, for those companies that you represent. I am curious how 
many of those companies are offering wind coverage in coastal 
America right now. And if you would like to name them, I would 
like to hear their names.
    Mr. Davey. The Fidelity National Group were operational 
from Maine to the Gulf of Mexico.
    Mr. Taylor. And have their rates increased substantially 
since Hurricane Katrina? By ``substantially,'' I mean by 
hundreds of percent.
    Mr. Davey. No, they have not.
    Mr. Taylor. How much have they increased, sir?
    Mr. Davey. I don't--it varies, State by State.
    Mr. Taylor. Would you like to venture a guess?
    Mr. Davey. No.
    Mr. Taylor. You want to give me a ``for instance?'' How 
about in my State of Mississippi? How much do you think the 
rates have gone up?
    Mr. Davey. I don't know.
    Mr. Taylor. Would it be fair to say they have more than 
doubled, tripled, quadrupled? Is it fair to say that wind 
coverage for a typical property owner in the three coastal 
counties of Mississippi--
    Mr. Davey. They have not doubled or tripled--
    Mr. Taylor. --pays more for wind insurance than they do for 
their mortgage?
    Mr. Davey. Wind insurance--
    Mr. Taylor. Would you agree with that statement?
    Mr. Davey. Wind insurance is a covered peril under the 
homeowner's policy. And, dependent on how susceptible the 
property is to wind plays a substantial role in what portion of 
the overall premium that covered peril represents.
    Mr. Taylor. Okay. Last question. As far as wind coverage, 
what percentage of the reinsurance purchased by the companies 
you represent is actually coming from companies offshore in 
places like Bermuda? Is it half? Is it a third? Is it a 
quarter?
    Because the question is, if homeowners can't get payment on 
Chinese drywall, and if homeowners couldn't get folks in 
Springfield, Illinois, or Hartford, Connecticut, to pay claims, 
how do you really expect a reinsurance company out of the 
Bahamas or Bermuda to pay their fair share when the time comes?
    Mr. Davey. Well, let me first of all say that the contract 
of insurance that you hold with your insurance company, whether 
it be Fidelity National, Allstate, State Farm, is with that 
insurance company. And the responsibility for the fair 
settlement of your claim and the full payment of that claim, 
lies only with that carrier.
    If that carrier chooses to purchase reinsurance from a 
highly rated entity, whether it be a U.S. reinsurer, which--our 
book of business, the reinsurance we purchase is split between 
domestic reinsurers and reinsurers around the world, all who 
meet our internal guideline of financial stability--believe me, 
we send them millions of dollars every year. We have yet to 
collect any meaningful sum from those carriers.
    When, in fact, we make our claim, after sending them 
millions of dollars each and every year, they will pay us. They 
have been collecting our premiums, we have been paying our 
premiums. And when the time comes for reimbursement under that 
contract of insurance that--where we purchased insurance from 
those insurers, they will pay.
    Chairwoman Waters. Mr. Taylor, you have the last word.
    Mr. Taylor. Thank you, ma'am.
    Chairwoman Waters. Go ahead, you have the last word.
    Mr. Taylor. Mr. Davey, again, there were some good players 
after Katrina, but there were a heck of a lot of bad players. I 
hope you are right when it comes to reinsurance. Based on what 
happened after Katrina, I believe you are wrong.
    Thank you, Madam Chairwoman.
    Chairwoman Waters. Thank you very much. The Chair notes 
that some members may have additional questions for this panel, 
which they may wish to submit in writing. Without objection, 
the hearing record will remain open for 30 days for members to 
submit written questions to these witnesses, and to place their 
responses in the record.
    This panel is now dismissed. Before we adjourn, the written 
statements of the following organizations will be made a part 
of the record of this hearing: the Honorable Charlie Melancon; 
American Rivers; the National Multi Housing Council and the 
National Apartment Association; Property Casualty Insurers 
Association of America; Independent Insurance Agents and 
Brokers of America; the Honorable Travis Childers; the 
Honorable Dave Loebsack; and the Honorable Adam Putnam.
    This meeting is adjourned. Thank you.
    [Whereupon, at 5:03 p.m., the hearing was adjourned.]

















                            A P P E N D I X



                             April 21, 2010

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