[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
                  LEGISLATIVE PROPOSALS TO REFORM THE 
                NATIONAL FLOOD INSURANCE PROGRAM, PART I 

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                        INSURANCE, HOUSING, AND
                         COMMUNITY OPPORTUNITY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELVETH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 11, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-16


                               ----------
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
KENNY MARCHANT, Texas                BRAD MILLER, North Carolina
THADDEUS G. McCOTTER, Michigan       DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JOE DONNELLY, Indiana
BLAINE LUETKEMEYER, Missouri         ANDRE CARSON, Indiana
BILL HUIZENGA, Michigan              JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin             GARY C. PETERS, Michigan
NAN A. S. HAYWORTH, New York         JOHN C. CARNEY, Jr., Delaware
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio

                   Larry C. Lavender, Chief of Staff
     Subcommittee on Insurance, Housing, and Community Opportunity

                    JUDY BIGGERT, Illinois, Chairman

ROBERT HURT, Virginia, Vice          LUIS V. GUTIERREZ, Illinois, 
    Chairman                             Ranking Member
GARY G. MILLER, California           MAXINE WATERS, California
SHELLEY MOORE CAPITO, West Virginia  NYDIA M. VELAZQUEZ, New York
SCOTT GARRETT, New Jersey            EMANUEL CLEAVER, Missouri
PATRICK T. McHENRY, North Carolina   WM. LACY CLAY, Missouri
LYNN A. WESTMORELAND, Georgia        MELVIN L. WATT, North Carolina
SEAN P. DUFFY, Wisconsin             BRAD SHERMAN, California
ROBERT J. DOLD, Illinois             MICHAEL E. CAPUANO, Massachusetts
STEVE STIVERS, Ohio
























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 11, 2011...............................................     1
Appendix:
    March 11, 2011...............................................    47

                               WITNESSES
                         Friday, March 11, 2011

Brown, Orice Williams, Managing Director, Financial Markets and 
  Community Investment, U.S. Government Accountability Office 
  (GAO)..........................................................     5
Ellis, Stephen, on behalf of the SmarterSafer Coalition, and Vice 
  President, Taxpayers for Common Sense..........................    18
Houldin, Spencer, Chair, Government Affairs Committee, 
  Independent Insurance Agents and Brokers of America (IIABA), 
  and President, Ericson Insurance...............................    22
Jallick, Donna M., on behalf of the Property Casualty Insurers 
  Association of America (PCI), and Vice President, Flood 
  Operations, Harleysville Insurance.............................    28
McConkey, Sally, Vice Chair, Association of State Floodplain 
  Managers, and Manager, Coordinated Hazard Assessment and 
  Mapping Program, Illinois State Water Survey...................     6
Nutter, Franklin W., President, Reinsurance Association of 
  America (RAA)..................................................    24
Parrillo, Sandra G., Chairman, the National Association of Mutual 
  Insurance Companies (NAMIC), and President and CEO, the 
  Providence Mutual Fire Insurance Company.......................    26
Rutenberg, Barry, First Vice Chairman, the National Association 
  of Home Builders (NAHB)........................................    29
Sullivan, Terry, Chair, Committee on Flood Insurance, National 
  Association of REALTORS, and broker/owner, Sullivan Realty....    20

                                APPENDIX

Prepared statements:
    Brown, Orice Williams........................................    48
    Ellis, Stephen...............................................    67
    Houldin, Spencer.............................................    74
    Jallick, Donna M.............................................    80
    McConkey, Sally..............................................    83
    Nutter, Franklin W...........................................   102
    Parrillo, Sandra G...........................................   112
    Rutenberg, Barry.............................................   122
    Sullivan, Terry..............................................   137

              Additional Material Submitted for the Record

Biggert, Hon. Judy:
    Written statement of Allstate Insurance Company..............   156
    Written statement of the International Code Council (ICC)....   158
    Written statement of Lloyd's of London.......................   159
    Written statement of the National Multi Housing Council 
      (NMHC).....................................................   161
    Additional information provided for the record by Franklin 
      Nutter.....................................................   163
    Written statement of the National Association of Professional 
      Insurance Agents (PIA).....................................   164
Gutierrez, Hon. Luis:
    Written statement of the American Insurance Association (AIA)   166
    Written statement of the National Wildlife Federation (NWF)..   169
Fugart, Hon. Craig, Administrator, the Federal Emergency 
  Management Agency [Administrator Fugate was scheduled to 
  testify but was unable to do so because of the emergency 
  situation with the tsunami]:
    Written statement and attachments............................   174
Sullivan, Terry:
    HUD's Federal Register notice from 1977 providing the history 
      of the NFIP................................................   194


                    LEGISLATIVE PROPOSALS TO REFORM
                      THE NATIONAL FLOOD INSURANCE
                            PROGRAM, PART I

                              ----------                              


                         Friday, March 11, 2011

             U.S. House of Representatives,
                Subcommittee on Insurance, Housing,
                         and Community Opportunity,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Judy Biggert 
[chairwoman of the subcommittee] presiding.
    Members present: Representatives Biggert, Hurt, Capito, 
Westmoreland, Duffy, Dold; Gutierrez, Waters, Cleaver, and 
Sherman.
    Also present: Representatives Palazzo and McCarthy of New 
York.
    Chairwoman Biggert. This hearing of the Subcommittee on 
Insurance, Housing, and Community Opportunity will come to 
order.
    Let me just say before we start that I would like to take a 
minute to express the deepest sympathy for the people of Japan 
as they cope with the aftermath of this terrible earthquake and 
tsunami. While reports of the damage continue to surface, it is 
clear this disastrous event will leave an indelible mark on the 
region. My thoughts and prayers--and I am sure all of us who 
are here agree--are with the people of Japan, not to mention 
our hopes that the effects on Hawaii and the West Coast will be 
minimal.
    And I would like to note that Administrator Fugate cannot 
join us today, given that he must remain at the FEMA 
headquarters to monitor the developments in Hawaii, Alaska, the 
West Coast, and the Pacific Territories and to coordinate 
possible Federal assistance to State and local governments. So, 
we understand his responsibilities, and we hope that we will 
meet with the Administrator within the next few weeks.
    With that, we are going to have opening statements. I will 
start, and welcome the witnesses to today's hearing where we 
will examine legislative proposals to reform the National Flood 
Insurance Program, or NFIP.
    It is critical that, well in advance of NFIP's September 
30th expiration date, Congress begin a dialogue and shape a 
reform measure. Millions of homeowners and businesses in 
Illinois and across the country, not to mention our recovering 
housing market, can ill afford the turmoil caused by a program 
lapse, which occurred during the previous Congress.
    That said, to the credit of my colleague, Ms. Waters, the 
former subcommittee chair, much progress was made on NFIP 
reform legislation, some of which is included in the draft bill 
that is under discussion today.
    There is no question that the program is in dire need of 
reform. For many years, the NFIP has been--for lack of a better 
phrase--underwater, with longstanding management and financial 
challenges, and was last reformed in 2004. The NFIP borrowed 
millions from taxpayers following the 2005 Gulf Coast 
hurricanes and continues to be financially unstable.
    Since 2006, the NFIP has been cited by the Government 
Accountability Office as a high-risk Federal program in need of 
fundamental reform.
    It is crucial that we work to restore the financial 
integrity of the NFIP so that homeowners and businesses in 
floodplain areas, like many in my State of Illinois, are not 
left without any protection, and taxpayers are not on the hook 
for the failure of the NFIP.
    We must work towards a long-term plan for flood insurance 
that eliminates taxpayer risk in the near-term. Important 
reforms to the NFIP must improve its financial stability, 
reduce the burden on taxpayers, and examine ways to increase 
private market participation.
    Today, I would like to welcome guest members to our 
committee, regulators, engineers, insurers and reinsurers, 
REALTORS, home builders, and many other experts to examine 
near- and long-term strategies for a flood insurance program 
that our families, businesses, and local communities can count 
on.
    With that, I recognize Ranking Member Gutierrez for his 
opening statement. We have agreed to limit the opening 
statements to 5 minutes.
    Mr. Gutierrez. Good morning, Chairwoman Biggert, and 
everyone here today. I want to thank our witnesses for taking 
the time to testify. We are here to discuss legislative 
proposals to reform the National Flood Insurance Program.
    As you may recall, we were successful in passing the Flood 
Insurance Reform Priorities Act of 2010 last summer, which was 
introduced by Congresswoman Waters. The bill received broad 
bipartisan support. But unfortunately, the Senate did not take 
it up, so here we are once again.
    Since the program is slated to expire at the end of 
September, I hope we can once again work together to pass this 
critical, necessary legislation and not allow the program to 
lapse, as it has done in the past.
    Finally, as we move forward, we need to make sure 
reauthorization adds stability to the National Flood Insurance 
Program and to our housing market.
    I look forward to all the testimonies. I would like to 
introduce two statements for the record.
    The first is from the American Insurance Association, Write 
Your Own Flood Insurance Coalition. AIA expresses the need for 
a meaningful and long-term extension and contributes to this 
ongoing discussion with their recommendations.
    The second is from the National Wildlife Federation, a 
SmarterSafer Coalition, as it raises environmental concerns to 
keep in mind as we move forward with NFIP reform this year.
    Thank you, Madam Chairwoman. I would like to see who else 
on our side would like some time, as time permits.
    Chairwoman Biggert. Thank you.
    At this point, I would ask unanimous consent that our 
colleague, Mr. Palazzo, can join our subcommittee and 
participate in the hearing today.
    Without objection, it is so ordered.
    Welcome.
    And now, we recognize Representative Dold for 2 minutes.
    Mr. Dold. Thank you, Madam Chairwoman.
    And I want to welcome you all here, as well, and thank you 
for being here.
    The Flood Insurance Program insures more than 5 million 
residential and commercial property owners in more than 20,000 
American communities. These millions of property owners and 
their communities depend on this program to provide some 
measure of security against inevitable flood risks.
    At the same time, with this program's existing debt and 
with the persistence of federally-subsidized premiums, the 
program remains undercapitalized, and the program's financial 
solvency is in jeopardy--all of which places the American 
taxpayer at an ongoing, substantial risk.
    Clearly, we need to minimize taxpayer risk by making this 
program more self-sufficient and by expanding the private 
sector's role in protecting against flood disasters. The 
important question for us is how to accomplish these important 
objectives.
    One thing that also seems clear is that the strategy of 
short-term authorizations and the corresponding temporary 
program lapses have not worked to minimize taxpayer risk or to 
expand the private sector's role. In fact, the short-term 
authorizations and temporary lapses have had the opposite 
effect, while also destabilizing an already fragile housing 
market.
    To properly reform and strengthen this program, we need to 
reauthorize this program on a long-term basis, and we need to 
do so promptly to avoid any additional lapses in the program. 
Long-term reauthorization will allow us to create stability and 
predictability for property owners, while moving towards 
meaningful and necessary reforms.
    We must also gradually reduce Federal subsidies that keep 
flood insurance premiums artificially low, that keep private 
insurers out of the market, and that keep taxpayers on the hook 
for most of the flood losses. We must also consider how to deal 
with repetitive loss properties to index coverage for limits 
for inflation and to expand available coverages.
    We need to consider policies that will limit adverse 
selection and better spread risks. We need to consider giving 
private market insurers some certainty and uniformity regarding 
applicable law when selling and administering policies under 
what is necessarily a national flood insurance market.
    In the end, we need to create the conditions under which 
the taxpayer risk is minimized, private sector involvement is 
expanded, and policy owners are protected.
    I look forward to working with the chairwoman and my 
colleagues on both sides of the aisle to achieve these most 
important national objectives.
    I yield back.
    Chairwoman Biggert. Thank you.
    I would also like to ask for unanimous consent for Mrs. 
McCarthy, a member of the full committee, to participate in 
today's hearing.
    Without objection, it is so ordered.
    I will now recognize Mr. Cleaver for 2 minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman, and Ranking 
Member Gutierrez.
    The tsunami hitting Japan yesterday, or last night, 
provides us with a reminder of the devastation that can be 
caused by flooding. And it also is appropriately getting the 
attention of the FEMA Administrator, which is why the 
Administrator is not with us this morning.
    Madam Chairwoman, I think that it is time that we do an 
overhaul of the NFIP, because, obviously, there are concerns. 
We attempted in the aftermath of Hurricane Katrina to provide 
some reform to the program, but we did not get very far.
    Something has to be done. We are about $18 billion 
underwater--pardon the pun--and the program simply cannot 
continue as it is now.
    We need to struggle with--and debate, if necessary--the 
issue of the wind damage coverage, which was one of the 
controversies when we tried to deal with this issue back in 
2009.
    So, I am looking forward to raising those questions about 
reform to our panel this morning, and to actually find out from 
them whether or not they believe that we have time to do 
anything before the September expiration date, because I think, 
expeditiously, maybe we can address this issue.
    Thank you, Madam Chairwoman. I yield back.
    Chairwoman Biggert. Thank you.
    I would also like to submit for the record, by unanimous 
consent, written statements from Allstate, the National 
Association of Professional Insurance Agents, the International 
Code Council, Lloyds of London, and the National Multi Housing 
Council.
    We will now start with our witnesses.
    And I would also like to submit, without objection, the 
testimony of Administrator Fugate for the record.
    Without objection, it is so ordered.
    And we are happy to have with us: Orice Williams Brown, 
Managing Director of Financial Markets and Community Investment 
for the Government Accountability Office; and Sally McConkey, 
vice chair of the Association of State Floodplain Managers, and 
manager, Coordinated Hazard Assessment and Mapping Program, 
Illinois State Water Survey.
    As you may know, you can address the dais for 5 minutes, 
and then we will follow that with questions and answers.
    So, Ms. Brown, if you would like to be recognized for 5 
minutes?

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

    Ms. Brown. Thank you.
    Chairwoman Biggert, Ranking Member Gutierrez, and members 
of the subcommittee, I appreciate the opportunity to 
participate in today's hearing on the National Flood Insurance 
Program. As you know, floods are the most frequent national 
disaster in the United States, causing billions of dollars of 
damage each year.
    This morning, I would like to share my thoughts on three 
areas: FEMA's administration of NFIP; the proposed reforms put 
forth in the discussion draft; and other possible areas for 
reform.
    First, NFIP serves a vital role in providing protection 
against flooding to over 5.6 million policyholders nationwide. 
As you know, NFIP is one of 30 programs or areas on GAO's 2011 
high-risk list.
    It first appeared on this list in March 2006, after the 
2005 hurricane season exposed the potential magnitude of 
longstanding structural issues on the financial solvency of the 
program, and brought to the forefront a variety of operational 
and management challenges that must also be addressed to help 
ensure the long-term stability of the program.
    In our ongoing work examining FEMA's management of NFIP, 
our preliminary results reveal challenges in strategic 
planning, human capital planning, interagency collaboration, 
records management, acquisition management, and information 
technology. While FEMA continues to make some progress in 
addressing certain areas, fully addressing these fundamental 
issues will be vital to its long-term operational efficiency 
and stability.
    Second, using the broad public policy goals identified by 
GAO on the role of the Federal Government in providing natural 
catastrophe insurance, I will share some thoughts on reforming 
NFIP as outlined in the discussion draft. These broad goals 
include charging rates that reflect the risk of flooding, 
limiting costs to the taxpayer, encouraging broad property 
owner participation, and encouraging private sector 
involvement.
    Successfully reforming NFIP will require trade-offs among 
these often competing goals. For example, currently, nearly one 
in four policyholders does not pay a full risk rate, and others 
pay grandfathered rates.
    The discussion draft addresses this structural issue by 
phasing out these rates over time. This not only results in 
rates that reflect the risk of flooding, but also can help 
minimize the cost to taxpayers, and could help encourage 
private sector participation.
    The trade-off involves potentially losing policyholders who 
may opt to leave the program, potentially increasing post-
disaster Federal assistance. However, these challenges can be 
overcome by a variety of options including targeted subsidies, 
tax credits, and mitigation.
    The goal of encouraging broad participation in the program 
could be achieved by increasing targeted outreach to help 
diversify the risk pool. One way for FEMA to do this is to make 
sure its incentive structure is consistent with its goals of 
expanding participation in low-risk zones and areas subject to 
repeated flooding, but have low penetration rates, among 
others.
    Encouraging private markets is the most difficult 
challenge, because there is currently no broad-base private 
market for flood insurance for most residential and commercial 
properties.
    As originally envisioned, NFIP was established as a 
cooperative arrangement between the Federal Government and the 
private sector, with both assuming a share of the risk. The 
concepts in the discussion draft would begin to address this 
issue by giving FEMA greater authority to explore alternatives. 
For example, the discussion draft addresses the possibility of 
reinsurance.
    Finally, while the discussion draft begins to address many 
of the broad public policy goals, I would like to offer a few 
other areas for consideration as the reform discussion 
continues. For example, leveraging mitigation programs in ways 
to make them more effective including: clarifying FEMA's 
authority to charge higher rates when property owners refuse or 
do not respond to mitigation offers, or allowing FEMA to apply 
a surcharge when mitigation offers are refused; actuarial rates 
and whether they should be sufficient to pay for catastrophic 
losses and any borrowing from Treasury; appropriating for any 
subsidies until the full-risk rates are fully phased in; and 
authorizing FEMA to map for all present flood risks, including 
erosion.
    Chairwoman Biggert, Ranking Member Gutierrez, and members 
of the subcommittee, this concludes my oral comments, and I 
would be happy to answer any questions at the appropriate time. 
Thank you.
    [The prepared statement of Ms. Brown can be found on page 
48 of the appendix.]
    Chairwoman Biggert. Thank you very much.
    I will now recognize Ms. McConkey for 5 minutes.

 STATEMENT OF SALLY MCCONKEY, VICE CHAIR, ASSOCIATION OF STATE 
FLOODPLAIN MANAGERS, AND MANAGER, COORDINATED HAZARD ASSESSMENT 
        AND MAPPING PROGRAM, ILLINOIS STATE WATER SURVEY

    Ms. McConkey. The Association of State Floodplain Managers 
(ASFPM) thanks this subcommittee, Chairwoman Biggert, and 
Ranking Member Gutierrez for your attention to the need to 
reauthorize the National Flood Insurance Program.
    We very much appreciate your holding this hearing, and 
appreciate the opportunity to comment on the discussion draft 
legislation and to share our thoughts on the current status of 
the NFIP, challenges the program confronts, and opportunities 
to improve our Nation's efforts to reduce flood-related losses.
    The Association of State Floodplain Managers and its 29 
chapters represent over 14,000 State and local officials and 
other professionals who are engaged in floodplain management 
and hazard mitigation. All ASFPM members are concerned with 
working to reduce our Nation's flood-related losses.
    ASFPM believes that the NFIP has been a useful Federal 
program for addressing flood losses in the Nation and it should 
be reauthorized without lapse. A reauthorization of 2 to 3 
years is important for the stability of the NFIP, and the 
associated predictability is important for the lenders, the 
housing industry, home buyers, policyholders, and the Write 
Your Own insurance companies.
    While a longer period of authorization is important, it 
must be balanced with the need to fully consider many important 
reform ideas which will need further evaluation and 
consideration by the committee.
    There are fundamental issues that need to be thoroughly 
considered. For example, should the NFIP accommodate 
catastrophic losses rather than the average historical loss 
year? If so, are there realistic, affordable program 
adaptations that can achieve this objective? And if not, would 
it not be best to clarify that the program is not expected to 
cover catastrophic losses?
    The Nation must carefully balance the issue of who benefits 
and who pays for develop at risk. We believe that a 2- to 3-
year reauthorization would provide the needed reliability, 
while allowing time for FEMA to complete its ``rethink the 
NFIP'' project, and for Congress and the committee to 
thoroughly review and consider the significant policy and 
legislative options and recommendations for management and 
operation of the NFIP.
    The report is expected out in June of 2011, and we think 
this project will identify, or does identify, the tensions and 
the trade-offs of various options, and needs careful and 
deliberate consideration.
    ASFPM identifies, and has identified, a number of concepts 
which we feel should be part of any reform. First, a 
comprehensive national flood risk management framework is 
needed to actually reduce flood-related losses of life and 
property in the Nation. We must move beyond the current NFIP 
minimum approaches and achieve a fuller integration of Federal 
programs.
    Second, bold reforms should be considered to address 
current flood insurance issues. Flood insurance should 
gradually move towards being actuarially sound, to reflect 
actual risk and enable market-based financial decisions.
    Third, floodplain mapping has changed significantly over 
the life of the program. Better technology, improved methods, 
and the creation of risk assessment techniques allow for the 
identification of flood hazard areas and enable the creation 
and distribution of this information to decision-makers.
    Technological advances will continue, and a long-term 
authorization of the mapping program is needed so we can fully 
utilize those advances, continuing to improve and advance flood 
risk identification.
    Fourth, improvements in floodplain management and hazard 
mitigation elements of the NFIP should be continuously 
evaluated.
    With respect to the current discussion draft, we find that 
the draft developed by this subcommittee includes a number of 
important and helpful changes for the short term to the NFIP, 
compared to the bill passed by the House last summer. We note 
that these constitute revisions rather than the full reforms 
that we are discussing, and we would urge that the subcommittee 
plan on an in-depth consideration of the significant policy and 
legislative recommendations for the NFIP during the 2- to 3-
year reauthorization period.
    ASFPM appreciates that the proposal attempts to modify and 
tighten previous proposals to delay the mandatory purchase 
requirement of properties in areas newly mapped as floodplains.
    However, as a matter of principle, if the risk is known and 
documented, it is not appropriate for the Federal Government to 
help people ignore their risk. Rather than delay mandatory 
purchase, we prefer the subcommittee consider other methods of 
addressing the affordability issue, such as the means-tested 
voucher system to be handled by the Department of Housing and 
Urban Development.
    I actually grew up in East St. Louis, Illinois, where my 
father owned a business. We lived and we worked in the 
floodplain with no real knowledge of the risk that we faced; we 
knew the levees were there, and we did count on them.
    And to be abruptly confronted with the significant expense 
of flood insurance would have been very, very hard on my family 
and my dad's business. But to have had flood damages to our 
home and to the business that were uninsured, that we could not 
recover from, would have been devastating.
    There are a number of aspects in the discussion draft that 
ASFPM agrees with, such as the proposal to use differentiated 
deductibles for pre- and post-FIRM properties.
    The phase-in of actuarial rates for certain properties is a 
step forward, and we agree with most of the listed categories.
    ASFPM very much supports the establishment of the Technical 
Mapping Advisory Committee, which should be an advisory council 
to provide stakeholder input to the needs and uses of the map, 
and to assist FEMA in improving its processes.
    There are a number of issues that require further 
consideration. While ASFPM does support a more in-depth study 
of privatization, any such movement in this area must ensure 
that there are continued, strong incentives for comprehensive 
floodplain management, which is one of the great strengths of 
the current program.
    Further, we would like to suggest two other studies, which 
would be in order, in addition to the privatization initiatives 
already provided for in the draft: first, a study of the 
feasibility of group insurance for entire communities, for 
identified flood hazard areas, or for residual risk areas 
behind levees; and second, an economic analysis of the overall 
effect on taxpayer funds of providing flood insurance vouchers 
to low-income property owners.
    Also, the Severe Repetitive Loss Program is needed to 
assist in reducing the approximately $200 million drain on the 
National Flood Insurance Fund. And we urge the committee to 
work with FEMA to identify statutory-type changes to better 
implement this program and the use of demolish-and-rebuild as a 
mitigation option.
    ASFPM is grateful for the opportunity to share our thoughts 
with the subcommittee, and hope they will be helpful as you 
move forward with legislation. We will be glad to respond to 
any questions, and to assist the subcommittee in any way we 
can. Thank you.
    [The prepared statement of Ms. McConkey can be found on 
page 83 of the appendix.]
    Chairwoman Biggert. Thank you so much.
    Now, we will begin the question-and-answer period, and I 
recognize myself for 5 minutes.
    Ms. Brown, over the past 5 years, FEMA has paid more than 
$2 billion in interest payments to service its debt, nearly $2 
billion more to reduce it. But FEMA still owes $17.75 billion 
to U.S. taxpayers. Many have asserted that FEMA is unlikely to 
ever be able to repay its debt.
    Do you foresee any scenario in which the debt can be paid, 
repaid over time? And can you outline a range of public policy 
options for how Congress might enable FEMA to be able to 
address its debt to the U.S. Treasury?
    Ms. Brown. We have looked at this issue. And the bottom 
line is, as it currently stands, FEMA has been able to make 
principal repayments, because they have experienced relatively 
low flood loss years. And that is how they have been able to do 
it.
    It is not clear that it is reasonable to expect that to 
continue to occur in the future in order for FEMA to be able to 
make those payments. So, there is a possibility that in certain 
years where FEMA experiences higher-than-normal flood years, 
that they actually could see their borrowing from Treasury go 
up, because they may actually have to borrow from the Treasury 
in order to make their interest payment.
    There are a range of scenarios that could be taken to 
address this. A decision could be made to forgive the debt in 
order to allow the program to start on a more sound financial 
footing, provided appropriate reforms are in place.
    Another way to do it would be to consider a surcharge that 
FEMA could add to existing premiums, to be used to pay down the 
debt. That raises questions of fairness. Is it fair for the 
current and future policyholders to have to pay a surcharge to 
repay the debt?
    So, there are many ways to think about it.
    This is not something that we have specifically studied, 
but we have looked at and read a number of possible 
alternatives. But this is a challenge that has to be addressed 
in order for the program to be put on a more stable financial 
footing going forward.
    Chairwoman Biggert. GAO has also suggested that operational 
and management issues may also limit efforts to address this, 
NFIP's financial challenges, and meet the program goals.
    Can you highlight some of those issues for us?
    Ms. Brown. Yes. In the last decade, we have identified and 
made recommendations to address issues surrounding the rate-
setting process and how that is handled. We have raised issues 
with the quality of the data that FEMA uses to do some of its 
rate-setting. We have raised concerns about the financial 
management controls and the system in place.
    We have had findings surrounding the oversight of the Write 
Your Owns (WYOs). We have also looked at the incentive 
structure that FEMA uses to incent WYOs surrounding increasing 
the number of policyholders in the program and expanding the 
risk pool.
    We have also, in the work that we currently have underway, 
we have identified a number of challenges associated with their 
information technology, and investments that they have made in 
a program, a technology program, that failed, that cost FEMA 
substantial sums of money.
    So, human capital management, identifying where they need 
people, and a mechanism to make sure that the program is being 
adequately managed during emergencies and outside of 
emergencies, a full range of issues to be fully addressed.
    Chairwoman Biggert. Thank you.
    And then, Ms. McConkey, given your experience in Illinois, 
can you provide the committee with your point of view on risk-
based pricing and how it should work, and also, alternatives 
that communities could consider for mitigating flood damage--or 
risk, I should say?
    Ms. McConkey. It is very important that the people who are 
living at risk, know the risk and share the--and be part of the 
paying for their risk. It is, we feel, inappropriate to 
externalize that risk to the rest of the taxpayers, the Federal 
taxpayers.
    But we also understand that you have to gradually move 
towards actual rates for flood insurance, and that we also need 
to look at a more holistic view of our at-risk communities, and 
not just consider flood insurance, or just a levee to be the 
ultimate answer.
    We need to look at really having more sustainable 
communities, which might include a strategic retreat from the 
floodplain, or buying flood easements, or other management 
techniques, mitigation techniques that will really, long term, 
reduce our flood risk in the Nation.
    Chairwoman Biggert. Thank you. My time has expired.
    I recognize Ranking Member Gutierrez for 5 minutes.
    Mr. Gutierrez. Thank you very much.
    I would like to yield my time to Congressman Cleaver.
    Mr. Cleaver. Thank you, Ranking Member Gutierrez. I do have 
some questions.
    Ms. McConkey, you are a Midwesterner and grew up in the 
shadows of Missouri. We have had unusual snowfall this winter, 
which means that, very shortly, a mixture of the melting snow 
and the normal spring rain can and does often create flooding 
in Illinois and Missouri.
    We are also still in the throes of a recession, in spite of 
good news from time to time, but we are still in the throes of 
a recession. And a large number of unemployed folk are living 
in areas that are susceptible to flooding.
    Do you agree that it would be difficult for many of the 
people just struggling to exist, who did not purchase flood 
insurance, to have to go to a private insurer at a time like 
this?
    There is a great deal of talking about the privatization 
and what does privatization do to people who are vulnerable, 
like those--you probably know some of them. Is it unfair for us 
to think in terms of privatization as a way for them to protect 
their homes and property?
    Ms. McConkey. Actually, what we believe is that, to deal 
with people with affordability issues, managed through a 
program like HUD, that has experience with means-tested 
systems, so that you could--
    [laughter]
    Actually, I can talk pretty loud.
    [laughter]
    We really think that it should not be handled through the 
insurance mechanism to deal with the affordability, that it 
should be through a means-tested program, like handled by HUD, 
where you would get vouchers if you cannot afford the flood 
insurance. That way, you have the protection of the flood 
insurance without distorting the insurance aspect of the 
program, and you have protection for individuals irrespective 
of if it is FEMA flood insurance, or if it is private flood 
insurance.
    That is our solution.
    I do not know how the rates would change with the 
privatization. I cannot speculate on that.
    Mr. Cleaver. No, it was not the rates as much as it is the 
fact that, I guess to some degree it is. But I am concerned 
about people who are just struggling right now to survive and 
are vulnerable.
    Ms. McConkey. Exactly.
    Mr. Cleaver. But before my time expires, I am from the 
Missouri side. My other concern, Mrs. Biggert--and I appreciate 
very much you moving ahead, trying to do something with regard 
to the flood insurance overhaul.
    It seems to me, though, that there ought to be--and Mrs. 
Biggert asked you the question--maybe, if this bill moves--and 
I hope something moves, because I think we are dealing with an 
$18 billion problem, and the fact that we have people who are 
out here vulnerable.
    And I would really hope that before September, we could 
come up with a bill, but that the legislation ought to address 
this $18 billion problem we have. I listened carefully to the 
options. None of them are extremely attractive, I might add.
    But we have to do something, or we will continue to meet 
and talk about an $18 billion problem. And I think now is the 
time for us to attack the problem. I do not think we ought to 
wait.
    And so, I do not know whether FEMA should send options, 
maybe even more that you did not mention, or some way we need 
to begin that struggle now, instead of postponing it.
    I yield back the balance of my time.
    Chairwoman Biggert. Thank you.
    I think, Mr. Cleaver, that we really are having this 
hearing now, because we do need to move ahead. And we have 
expected having maybe another hearing, but at least a mark-up 
soon. This is a draft discussion right now, but we really 
wanted to proceed.
    I know that the study is supposed to come out in June. But 
I think we really want to be moving ahead before then. And I 
think maybe we will get an update on all of what is going on as 
far as the study, too.
    But it is very important that we do not let this slide. As 
you know, it is much harder to do it later on and get the 
Senate engaged, which has always been a problem.
    [laughter]
    You could say that.
    I now recognize Mr. Hurt from Virginia for 5 minutes.
    Mr. Hurt. Thank you, Madam Chairwoman.
    Thank you all for being here. Welcome. And thank you for 
your obviously significant interest in this important issue.
    The chairwoman spoke of the $18 billion debt that has 
accrued through this program. And I have read that the deficit, 
the built-in deficit for this program annually has been $1.3 
billion.
    And Ms. Brown, I was wondering if you could talk about that 
deficit? Is that something that has been consistent post-
Katrina, pre-Katrina? Are you able to comment on that?
    Ms. Brown. I am not. This is not anything that we have 
specifically looked at.
    Mr. Hurt. Okay. With respect to the proposal that we are 
evaluating, this draft bill, can you talk about what, in real 
terms, the taxpayer subsidy is for this program? Are you able 
to talk about that?
    Ms. Brown. Yes. I can give a rough estimate based on the 
full risk rates currently charged and the estimate for the 
subsidized amount. And the current estimate is that the subsidy 
basically results in those subsidized properties paying about 
40 to 45 percent of the full risk rate.
    We did a rough calculation based on the current policies in 
force, and estimate that somewhere around $1.8 billion a year 
is being subsidized. That is the amount that is lost in 
premiums, if there was a full risk rate--
    Mr. Hurt. And has GAO, in looking at this draft bill, been 
able to determine what that might be reduced to, if you are 
able to encourage the private market to come into this 
business?
    Ms. Brown. It depends on how that happened. The challenge 
with flood insurance has been, historically, there really was 
not a private market. And there was not a private market for a 
number of reasons.
    So, depending on how that was structured to bring the 
private market in, there are a number of things that would have 
to be dealt with. If you bring the private market in, and they 
are able to focus on the lowest-risk properties, that would 
leave the program with a very concentrated risk pool. And all 
of the riskiest properties will be in NFIP. That can 
potentially expose the program to greater losses, because there 
would be this concentrated risk.
    So, the impact that the private market would have is really 
unclear until there is a better sense of kind of how that would 
be structured and what role the NFIP would play in that 
particular scenario.
    Mr. Hurt. Okay. Obviously, one of the issues, a fundamental 
issue, I think, that we all have to kind of deal with--and this 
issue to me is a new one--is the issue of moral hazard. And 
obviously, I would think we probably all agree that there are 
places that people should not live.
    Under the current proposal that we are looking at today, do 
you see that the moral hazard issue--that is, encouraging 
behavior, or encouraging people to do things that are not in 
their best interest--would that be minimized? Or could that be 
increased by the proposal that we are looking at today?
    I would like an answer maybe from you, Ms. Brown, as well 
as you, Ms. McConkey, if you feel like it.
    Ms. Brown. The closer premiums come to fully reflecting 
risk is a clear signal to a property owner that they are living 
in harm's way. So, to the extent that the discussion draft 
moves those premiums in that direction, it definitely would 
help elevate the risk that homeowners and property owners are 
exposed to currently.
    Mr. Hurt. Ms. McConkey?
    Ms. McConkey. I do not think I could say it any better.
    Mr. Hurt. Okay. Thank you.
    I yield back my time.
    Thank you, Madam Chairwoman.
    Chairwoman Biggert. Thank you, Mr. Hurt.
    I now recognize Mr. Cleaver for his 5 minutes.
    Mr. Cleaver. Thank you, Madam Chairwoman.
    I just have one question. Then I would like to yield the 
balance of my time to the gentlelady from New York, Mrs. 
McCarthy.
    I am still on the $18 billion. And there have been some 
suggestions that perhaps reinsurance could be a way to 
eliminate future debt. I would like to just get your response 
to that, both of you.
    Either of you?
    One of you?
    [laughter]
    Ms. Brown. The issue of reinsurance, one of the things in 
the discussion draft that was interesting is that there is an 
opportunity for FEMA to do some study and pilots, and explore 
the option of reinsurance.
    This is something that we had looked at a couple of years 
ago. There did not appear to be an appetite at that time, but I 
think it is something that is definitely worth revisiting.
    Because the way it currently works is, NFIP, while it is an 
insurance program, it does not function, really, anything like 
private insurance, because private insurers would purchase 
reinsurance to cover that catastrophic level of risk.
    What happened--and we saw this happen in Katrina--because, 
to Representative Hurt's point, prior to Katrina, the program 
was not running a deficit, and it was pretty much self-funding 
up until 2005. And Treasury became the reinsurer, because any 
losses over and above the amount that could be covered through 
premiums, because there is no reserving mechanism, was borrowed 
from the Treasury.
    And what you are left with is Treasury--the program now has 
this outstanding debt to the Treasury, because there was not 
the opportunity for any type of reinsurance mechanism.
    Mr. Cleaver. I yield to Mrs. McCarthy.
    Mrs. McCarthy of New York. I thank my colleague.
    And may I also say thank you to the chairwoman for having 
this hearing. I think it is extremely important.
    I just want to give you a little background. I live on Long 
Island, and we certainly have an awful lot of shoreline. So, 
obviously, we have a lot of homes that need flood insurance in 
case of a hurricane. And so far, we have been blessed that we 
have not had that hurricane.
    But I represent center Nassau County. And I am sorry that 
Mr. Fugate is not here, because of questions that I had wanted 
to ask him.
    But apparently, what FEMA had done was go out to Suffolk 
County, which has a higher level of flooding, even on heavy 
rains, and took those maps, and put them into Nassau County, 
the center of Nassau County, which they are saying that, on 
certain areas in this particular village were a little bit 
higher, even though we are not near any water.
    And I stress that. We are not near any water, nor have any 
of the families had any floods for over 25 years.
    Is there a possibility? Absolutely. Should we look at that? 
Absolutely.
    But I guess the question I want to ask is, the draft 
legislation, which I agree on, contains a provision to bring 
back the Technical Mapping Advisory Council to address mapping 
standards, made up of representations from many different 
agencies familiar with mapping.
    I am interested in getting your thoughts on having the 
mapping process in an entire independent entity in an effort to 
ensure that the most accurate data is used to update the maps. 
Nassau County and Long Island, we just had our maps updated.
    Just to give you a sidebar, I have a retirement home 
somewhere out in Suffolk County, very close to the water. I did 
not get an increase. I am not now in a flood zone. And I do not 
understand that at all, because when it rains heavily, the 
water from the bay comes up, basically on the lawn.
    So, something is wrong here. If I am living there, then I 
should be paying more, in my opinion. I shouldn't say that, but 
right now, I am getting away with it.
    But the people in Nassau County, in the center, in my 
opinion, the maps are wrong. So, I would like your opinion on 
bringing back the Technical Mapping Advisory Council, so that 
we have more accurate maps.
    Ms. McConkey. We very much endorse the idea, the concept of 
bringing back the Technical Mapping Advisory Committee. 
Actually, when it was instated in, I think it was 1994 or 1995, 
through their recommendations, they actually brought out the 
Map Modernization Program, which has really led to great 
progress in improving the quality and the accuracy of the 
maps--in most places.
    So, yes, we do believe that is an important body to have as 
an advisory council.
    Through FEMA's Risk MAP Program, their next 5-year 
initiative, they have taken certain very strong steps to 
address quality issues with the mapping, and also to have 
greater engagement with the community, so that there is more 
ground truthing to what they are doing earlier on in the 
process.
    And so, I--
    Mrs. McCarthy of New York. May I stop you right there? That 
was one of their biggest failures. They did not let the 
community know. They did not let even the counties know. They 
just asked them for their old maps, which is very upsetting.
    Ms. McConkey. FEMA has addressed a lot of problems in that 
regard with their Risk MAP process, where it is very clearly 
prescribed to anyone who--and actually, the group that I 
manage, we do the digital flood insurance rate maps. We do the 
engineering studies for Illinois counties. We have done 78 of 
our 102 counties. So, we are actually--I am involved in that 
process.
    I read the rules, because that is what we are supposed to 
do. And through the Risk MAP process, there really is strong 
community engagement, early on technical meetings, so that 
there is ground truthing of what you are doing. And then, FEMA 
has also set up--and I apologize, I may not have the right 
phrase--but sort of an arbitration, an independent arbitration 
panel, for when there are appeals to the maps.
    So, I think they have listened. They have heard about these 
problems, and that Risk MAP makes great strides in addressing 
the accuracy and the outreach issues.
    Mrs. McCarthy of New York. Thank you.
    Ms. Brown, anything?
    Mr. Cleaver, would you like your time back?
    Chairwoman Biggert. I think his time has expired.
    Mrs. McCarthy of New York. Oh, sorry.
    Chairwoman Biggert. I now recognize Mr. Dold from Illinois 
for 5 minutes.
    Mr. Dold. Thank you, Madam Chairwoman.
    Ms. McConkey, we are delighted that you are here from 
Illinois. Obviously, the chairwoman, ranking member, and myself 
were delighted to have another person from Illinois here on the 
panel. So, thank you so much.
    Ms. McConkey. Thank you very much for the invitation.
    Mr. Dold. Ms. Brown, in the past you have noticed that 
Congress has noted that repetitive loss properties constituted 
a significant drain on the NFIP. Do you have any suggestions on 
the repetitive loss properties and how to make them less of a 
liability?
    Ms. Brown. Yes. This is also an issue that we have looked 
at over time. And while great strides were made with amendments 
that were made in the 2000s to address repetitive loss 
properties, the number of properties has continued to increase. 
And we looked at February numbers, and they are continuing to 
increase.
    There are a couple of things that we would propose be 
considered that deal with mitigation offers and what happens 
when those offers are refused or not responded to, and in terms 
of allowing FEMA, perhaps, the authority to apply a surcharge 
above a--rate for those properties, if the homeowner chooses to 
refuse or not respond to an offer.
    And also, really focusing some attention on the mitigation 
programs and determining if there are ways to make them more 
efficient and effective as a way to address the issue of the 
repetitive loss properties.
    Mr. Dold. And just following up on my colleague on the 
other side who had talked about reinsurance, you currently are 
not using reinsurance right now. Is that correct?
    Ms. Brown. In FEMA? No.
    Mr. Dold. They are not using it. Is there any question that 
you are able, that FEMA is able to use it?
    Ms. Brown. That I am not sure about, if they could if they 
wanted to. Right now, the mechanism is for them to rely on 
borrowings from Treasury.
    Mr. Dold. Would, perhaps, additional insight or authority 
from Congress be necessary to let them do that? It is certainly 
a common practice out there in the insurance industry, in order 
to try to protect from catastrophic losses.
    And certainly, when we look at those areas that are 
particularly hard-hit, or those that continue to be hit again 
and again, it would seem to me that, potentially, at least 
having the mechanism or vehicle available may be something that 
they might want.
    Is that something--what is your take on that?
    Ms. Brown. My take on whether they could do it now, this is 
why I really wish Mr. Fugate was here to address that question 
specifically.
    But in terms of that being an option to be considered, I 
think that is definitely one of the options that needs to be on 
the table and discussed in terms of reforming the program going 
forward.
    Mr. Dold. Okay.
    And, Ms. McConkey, a question for you on the vouchers. You 
had talked a little bit about vouchers before. Can you give me 
any sort of an idea on how you anticipate, or how you would 
like to see something like this, how it would be administered? 
And do you have any idea what the costs of that would be?
    Ms. McConkey. To answer your last question first, no. The 
cost of it is a study that we recommend be initiated through 
this draft legislation.
    The voucher system we envision as something to be managed 
through the Department of Housing and Urban Development, 
because they have experience with means-tested voucher systems. 
FEMA does not.
    But this way, it would allow for people to get the message 
about the risk that they have with their home, and yet not be 
burdened in these times, or because families who really are 
just operating on the edge would not be burdened with the cost, 
that we would pick that cost up.
    It also provides them with fuller protection than no 
insurance at all. If you have insurance, then that means you 
have money to pay off your mortgage. But if you were relying on 
disaster assistance, you are still obligated for that mortgage. 
You really are not covered.
    So, it really provides lower-income people with greater 
coverage. The voucher system, as we said, we believe it should 
be means-tested. And that is the extent of my knowledge on 
that. We would have to do some more research to give you a more 
thorough answer.
    Mr. Dold. Okay. And with just the short amount of time that 
I have left, you talk in your testimony before about--or at 
least in testimony in the past--about floodplain coverage going 
from the 100-year to potentially expanding it beyond that in 
terms of a 250- or even a 500-year event.
    Do you have any idea how much of the country would be 
covered under those instances?
    Ms. McConkey. That is something that I don't think that 
anybody could just estimate without some research on it.
    Going beyond the 100-year, looking at the 500-year, would 
be something to consider as a residual risk area. Probably, you 
could estimate the amount of floods--the difference between 
100-and 500-year floodplain acreage, based on current FEMA 
mapping, if it was all digital. You might be able to get some 
estimate.
    Chairwoman Biggert. The gentleman's time has expired.
    Ms. Capito, do you have any--
    Mrs. Capito. Thank you, Madam Chairwoman. I think I will 
save my questions for the second panel. Thank you.
    Chairwoman Biggert. Mrs. McCarthy, would you like to claim 
your time?
    Okay. Then we will go to Mr. Palazzo from Mississippi.
    Thank you for joining us.
    Mr. Palazzo. Thank you for having me.
    Good morning. I appreciate the courtesy provided by the 
House Financial Services Committee to allow me to participate 
in this morning's very important hearing.
    Thank you, Chairwoman Biggert. I ask consent that my full 
statement be included in the record.
    Chairwoman Biggert. Without objection, it is so ordered.
    Mr. Palazzo. I represent Mississippi's 4th Congressional 
District, which is the only district representing the 
Mississippi Gulf Coast.
    FEMA has served as a partner to our State, and we applaud 
Administrator Fugate's continued leadership to the agency. The 
National Flood Insurance Program is critically important to 
South Mississippi and any area exposed to flood risk.
    As floods continue to be among the most costly natural 
disasters in the United States, I urge the committee to closely 
consider reforms offered by Administrator Fugate to the NFIP, 
and to pass a long-term reauthorization of NFIP.
    Madam Chairwoman, in the absence of Administrator Fugate, I 
would like permission to submit my questions for the record to 
him.
    Chairwoman Biggert. Without objection. All members' 
requests for questions will be put in the record.
    Mr. Palazzo. Thank you.
    I would also be remiss if I did not mention that the high 
cost of wind insurance is a major factor preventing coastal 
residents from building homes and attracting new industry. I am 
committed to a bipartisan effort to resolve this with the goal 
of providing coastal residents with needed cost relief and 
comprehensive coverage.
    I look forward to working with the Financial Services 
Committee to find solutions to our problems.
    Thank you again, Chairwoman Biggert, for allowing me to be 
here today, and I yield back.
    Chairwoman Biggert. Thank you.
    Mr. Duffy, do you have any questions? Or we will move to 
the next panel.
    I would like to thank the witnesses. This has been very 
informative and very helpful to us. And thank you so much for 
being here.
    Ms. McConkey. Thank you.
    Ms. Brown. Thank you.
    Chairwoman Biggert. And I might--for those members who will 
have written questions, the record will be open for 30 days for 
submitting questions for written response.
    And we will now move to the next panel.
    If we can do this very quickly, I might mention that the 
Floor is estimating that we will have votes between 11:45 and 
12:15, so, we do want to move as expeditiously as possible.
    If the panel can take their seats, and they know where they 
are sitting?
    All right. I would like to introduce our second panel:
    We have Stephen Ellis on behalf of the SmarterSafer 
Coalition, and vice president, Taxpayers for Common Sense in 
Washington, D.C.
    Then, we have Terry Sullivan, chair of the Committee on 
Flood Insurance, National Association of REALTORS, and owner 
of Sullivan Realty in Spokane, Washington.
    Spencer Houldin, chair, Government Affairs Committee, 
Independent Insurance Agents and Brokers of America; and 
president, Ericson Insurance Services in Washington Depot, 
Connecticut.
    Frank Nutter, president, Reinsurance Association of 
America, Washington, D.C.
    Sandra Parrillo, chair of the National Association of 
Mutual Insurance Companies and president and CEO of Providence 
Mutual Fire Insurance Company, Warwick, Rhode Island.
    Then Donna Jallick, on behalf of the Property Casualty 
Insurance Association of America and vice president, Flood 
Operations, Harleysville Insurance, Harleysville, Pennsylvania.
    And last but not least, Barry Rutenberg, first vice 
chairman, National Association of Home Builders, Washington, 
D.C.
    Welcome to you all. As you heard, I am sure, please limit 
your testimony to 5 minutes. And after that, we will have the 
question-and-answer period.
    So, Mr. Ellis, if you would like to begin for 5 minutes, 
you are recognized.

   STATEMENT OF STEPHEN ELLIS, ON BEHALF OF THE SMARTERSAFER 
   COALITION, AND VICE PRESIDENT, TAXPAYERS FOR COMMON SENSE

    Mr. Ellis. Thank you. Good morning, Chairwoman Biggert, 
Ranking Member Gutierrez, and members of the subcommittee. I am 
Steve Ellis, vice president of Taxpayers for Common Sense, a 
national, nonpartisan budget watchdog.
    Thank you for inviting me here today to testify. I would 
also like to recognize the people who are affected by the 
tsunami, and also how it accentuates the importance of both 
FEMA and the National Flood Insurance Program.
    Taxpayers for Common Sense has long advocated for reform of 
the National Flood Insurance Program. And with only $3 billion 
in annual revenues offsetting the $18 billion the program is in 
debt to Treasury, all have recognized NFIP is fundamentally 
flawed and must be reformed. The question is: How?
    Any reauthorization of the National Flood Insurance Program 
must make significant changes to put it on sounder financial 
footing with more actuarially sound rates and accurate maps.
    The discussion draft of the reform legislation being 
circulated by the committee is a good start. It responsibly 
tackles rate and subsidy issues, creates a mechanism to 
increase confidence and accuracy in flood mapping, and does not 
stick taxpayers with the tab of bailing out a failed program.
    However, we are concerned with concerned with provisions 
that could inhibit adoption of updated maps, add a new business 
line to the program and mandate annual coverage limit increases 
that will ensure the program's liabilities actually increase 
each year. We look forward to making this good start an even 
better final product.
    TCS is allied with SmarterSafer.org, a coalition of free 
market, consumer, environmental, insurance industry, and 
taxpayer groups in favor of environmentally responsible, 
fiscally sound approaches to natural catastrophe policies that 
promote public safety. The depth and breadth of the coalition, 
some of which are at this table, underscores the importance of 
reforming NFIP.
    I would like to submit for the record SmarterSafer.org's 
principles for reform.
    Chairwoman Biggert. Without objection, it is so ordered.
    Mr. Ellis. But to summarize quickly and clearly, those 
principles are: maps are accurate and up-to-date; there are 
risk-based rates; any subsidies should be explicit and targeted 
only to those who truly need them; and mitigation is encouraged 
as a tool to reduce risk. Taxpayers for Common Sense strongly 
endorses those basic principles to better protect people, 
property, the environment, and the taxpayer.
    I would now like to talk about flood insurance and the 
draft legislation from the taxpayer perspective.
    NFIP does not charge truly actuarially sound rates. The 
program's goal of fiscal solvency is defined as charging 
premiums that will generate enough revenue to cover a 
historical average loss year. That means catastrophic loss 
years are largely left out of the equation.
    The program covers any fiscal shortfalls by borrowing from 
the U.S. Treasury, which is a significant subsidy in and of 
itself, especially since the loans are virtually interest-free. 
The program contains an enormous cross-subsidy as well.
    The draft legislation will provide a mechanism to move 
towards more actuarially sound rates for many properties. The 
graduated phase-in of rates for newly mapped areas are 
responsible both for the homeowner and the programs. The 
legislation also stipulates that most properties have their 
rates increase by 20 percent annually until they are paying the 
estimated risk premium rate.
    In addition, the draft legislation directs that subsidies 
not be available to lapsed policies.
    These changes move the program in the right direction. What 
appears to remain unchanged are subsidies to pre-FIRM and 
generally repetitive loss properties that do not meet any of 
the specific criteria. It is not clear how many properties or 
the potential loss that this represents, but it is an area that 
must be reformed. These properties have been subsidized for 
decades.
    The Nation's floodplains are dynamic. Shifting from the 
impact of development, weather patterns, and topographical 
changes, flood maps must be up-to-date, accurate, and based on 
the best available science.
    We support the envisioned Flood Mapping Advisory Council to 
develop new standards for flood insurance rate maps that will 
incorporate true risk, be graduated, and reflect realities on 
the ground, both man-made and natural.
    The direction at FEMA that implements the new protocols is 
also critical. The council and the development of new mapping 
standards should not, and will not, delay the ongoing FEMA map 
modernization efforts. That program is critical to the long-
term fiscal viability of the program.
    We appreciate that, unlike previous legislation, the bill 
does not automatically delay the implementation of new maps or 
slow walk rate increases. However, the draft legislation could 
delay or undercut new maps by giving the administrator 
authority to suspend flood insurance purchase requirements for 
newly mapped Special Flood Hazard Areas.
    Insulating people from the changes related to the maps on 
paper does not change the geological realities. Their property 
is at risk.
    There are some troubling expansions in the draft. One is 
the creation of a new insurance product for business 
interruption, and another, the loss of use of a personal 
residence. Another would enable coverage limits to annually 
increase by some inflationary measure.
    With the flood insurance program so heavily in debt, it 
does not make sense to expand the coverage provided.
    TCS supports the privatization study called for in the 
legislation and encourages FEMA to pursue the private risk 
management initiatives. Also, FEMA should be authorized to 
develop a catastrophic reserve.
    Communities and individuals should be helped to reduce 
their flood vulnerability, including stronger standards for 
floodplain management and mitigation.
    On balance, the draft legislation is a good step forward to 
reform the troubled Flood Insurance Program. We look forward to 
working with the committee and Congress to move the program in 
the right direction and off the backs of taxpayers.
    Thank you.
    [The prepared statement of Mr. Ellis can be found on page 
67 of the appendix.]
    Chairwoman Biggert. Thank you very much.
    Mr. Sullivan, you are recognized for 5 minutes.

    STATEMENT OF TERRY SULLIVAN, CHAIR, COMMITTEE ON FLOOD 
  INSURANCE, THE NATIONAL ASSOCIATION OF REALTORS (NAR), AND 
                 BROKER/OWNER, SULLIVAN REALTY

    Mr. Sullivan. Thank you.
    Good morning, Chairwoman Biggert, Ranking Member Gutierrez, 
and subcommittee members. Thank you for inviting me to testify 
today regarding legislation to reform the National Flood 
Insurance Program.
    My name is Terry Sullivan. I am the designated broker of 
Sullivan Realty in Spokane, Washington. I have been active with 
the National Association of REALTORS for the last 17 years of 
my 40-year career as a REALTOR.
    Currently, I serve as chair of NAR's Land Use Committee. I 
am honored to represent the views of more than 1.1 million 
REALTORS engaged in all aspects of residential and commercial 
real estate.
    As you know, flooding claims more lives and property than 
any other natural disaster in the United States. It happens 
anywhere, along rivers where snow melts or rain falls, as well 
as the coastlines. Without the National Flood Insurance 
Program, 5.6 million home and business owners across the United 
States would not have access to affordable flood insurance.
    Since the year 2000, the program has averted $16 billion in 
property loss in the 21,000 communities where flood insurance 
is required. In short, the program saves taxpayers money.
    Chairwoman Biggert, thank you for your leadership and for 
drafting the legislation to reauthorize the NFIP for 5 years. 
This would end the current stop-gap approach that has led to 
nine extensions and five lapses in the program since 2008. A 5-
year reauthorization would provide needed certainty for the 
real estate markets to recover from the longest recession since 
the Great Depression.
    The many extensions and shut-downs have immeasurably 
undermined real estate and investor confidence. Just one of the 
lapses delayed or cancelled more than 47,000 home sales in June 
of 2010 alone.
    We are pleased to see the bill would add coverage options 
for business interruption and loss of residential use. Coverage 
which has been updated since 1994 would be indexed for 
inflation.
    Finally, the bill would ensure that repetitive loss 
properties have an insurance rate that reflects their loss 
history, a provision we strongly support.
    All of these reforms will encourage participation, increase 
the funds for NFIP, help property owners recover from flooding, 
and decrease future Federal assistance when underinsured 
properties suffer flood loss.
    While we understand the need for tough reforms to 
strengthen the program long-term, we remain deeply concerned 
about provisions to return to a time when taxpayers relied on 
private insurers to administer the program. It did not work 
then, and it would not work now.
    Madam Chairwoman, this is HUD's Federal Register notice 
from 1977. It provides the history of NFIP and how we got to 
the government program we have today. With your permission, I 
would like to have it included in the record along with my 
written statement.
    NAR is strongly opposed to the private risk initiatives or 
bills, including H.R. 435, to end the NFIP.
    Chairwoman Biggert. Without objection, it is so ordered.
    Mr. Sullivan. Thank you.
    The bottom line is the private market will charge too much. 
Today, the 4 companies that write only 200,000 private policies 
would have to ramp up by 3,000 percent to the NFIP's 5.6 
million current policies. The private insurance markets simply 
cannot guarantee either affordability or availability of flood 
insurance.
    In conclusion, NAR believes that Congress should reform the 
program, not end it.
    Once again, on behalf of the entire membership of the 
National Association of REALTORS, thank you for providing us 
this opportunity to share our views on a vital program, and I 
look forward to answering any questions you may have.
    [The prepared statement of Mr. Sullivan can be found on 
page 137 of the appendix.]
    Chairwoman Biggert. Thank you very much.
    And now, Mr. Houldin?

    STATEMENT OF SPENCER HOULDIN, CHAIR, GOVERNMENT AFFAIRS 
COMMITTEE, INDEPENDENT INSURANCE AGENTS AND BROKERS OF AMERICA 
           (IIABA), AND PRESIDENT, ERICSON INSURANCE

    Mr. Houldin. Good morning, Chairwoman Biggert, Ranking 
Member Gutierrez, and members of the subcommittee.
    My name is Spencer Houldin, and I am pleased to be here 
today on behalf of the Independent Insurance Agents and Brokers 
of America, known as the Big ``I,'' to present our 
association's perspective on extension and reform of NFIP.
    I am the president of Ericson Insurance, a second 
generation insurance agency with offices in Connecticut and New 
York.
    Since 2008, I have served as chairman of the Government 
Affairs Committee for the Big ``I,'' and have represented the 
State of Connecticut on the Big ``I's'' board since 2006.
    The Big ``I'' is the Nation's oldest and largest trade 
organization. An association of independent insurance agents 
and brokers, we represent a national network of more than 
300,000 agents, brokers and employees.
    Many of these agents serve as a sales force for NFIP, 
working with the Write Your Own companies. It is from this 
unique vantage point that we understand the capabilities and 
challenges of the insurance market when it comes to insuring 
against flood risks.
    We think this hearing is especially timely, in light of 
severe storms and flooding that are currently occurring in the 
Northeast and this morning's events on the West Coast. In fact, 
my firm fielded nearly 75 calls this week when clients 
experienced water in their homes up in Connecticut.
    We commend the subcommittee for looking at this very 
important issue.
    The Big ``I'' believes that the NFIP provides a vital 
service to people and places that have been hit hard by natural 
disaster. The private insurance industry has been and continues 
to be largely unable to underwrite flood insurance, because of 
the catastrophic nature of these losses.
    Therefore, the NFIP is virtually the only way for people to 
protect against the loss of their home or business due to flood 
damage.
    Prior to the introduction of this program in 1968, the only 
financial remedy available to consumers after flooding was 
Federal disaster assistance. Since then, the NFIP has filled 
the private market void and created a reliable safety net.
    It is also important to note that for 2 decades, up until 
the 2005 hurricane season, the NFIP was self-supporting.
    With that said, we do recognize that the program is far 
from perfect, and calls for Congress to shore up its financial 
situation.
    For this reason, the Big ``I'' is very encouraged by 
Chairwoman Biggert's draft legislation, the Flood Insurance 
Reform Act of 2011. In the past, the Big ``I'' has released a 
12-point plan to modernize the flood program, and we are happy 
to see that a number of these recommendations have been 
incorporated in the proposed legislation.
    The first of these is a long-term reauthorization, which we 
strongly support. As you know, in recent years Congress has 
relied on numerous short-term extensions. Last year alone, the 
NFIP expired on three separate occasions, only to be 
retroactively extended by Congress each time.
    While the Big ``I'' is grateful for this action, we 
strongly believe that long-term extension is critical to 
provide marketplace stability.
    Additionally, for many years the Big ``I'' has asked 
Congress to begin phasing out subsidies found in the program. 
We are pleased that Chairwoman Biggert's draft legislation 
addresses this for many properties.
    The Big ``I'' welcomes and supports Chairwoman Biggert's 
ideas on phasing out subsidies for commercial building, second 
and vacation homes, homes experiencing significant damage or 
improvements, repetitive loss properties, and homes sold to new 
owners.
    Additionally, the Big ``I'' welcomes the draft 
legislation's proposal to increase the amount FEMA can raise 
premiums in any given year. Currently, FEMA can only increase a 
premium a maximum of 10 percent on a property. The draft 
legislation would propose to increase this to 20 percent, which 
would allow the program to move even more properties towards 
actuarial rates.
    The Big ``I'' is also pleased that the draft legislation 
has chosen to modernize NFIP by increasing maximum coverage 
limits by indexing them for inflation, and by allowing FEMA to 
offer the purchase of optional business interruption and 
additional living expense coverage. The inclusion of optional 
business interruption coverage is particularly important to Big 
``I'' members and their commercial clients, because it 
reimburses them for lost income due to their inability to 
operate due to flood loss.
    As I speak, we have a popular rib restaurant in my town 
that has been shut down since Monday. Their property was 
flooded, as was the road in front of their business. They are 
losing thousands of dollars a day in revenue. But still, their 
normal expenses, including payroll and mortgage, continue.
    It is an uninsurable loss today, and one that is 
detrimental to a small business. With another 2 inches of rain 
last night, there is a good chance they will not be open for 
another week.
    The Big ``I'' also supports strongly the option for a 
consumer to purchase additional living expenses. If their home 
is not habitable due to a flood loss, they need funds to 
provide alternative living arrangements.
    In closing, the Big ``I'' is very pleased that the 
subcommittee is conducting today's hearing, and appreciative of 
the opportunity to testify. Adopting the reforms found in the 
draft legislation would help make the NFIP more actuarially 
sound and more effective at serving both consumers and 
taxpayers.
    Thank you.
    [The prepared statement of Mr. Houldin can be found on page 
74 of the appendix.]
    Chairwoman Biggert. Thank you, Mr. Houldin.
    Mr. Nutter, you are recognized for 5 minutes.

    STATEMENT OF FRANKLIN W. NUTTER, PRESIDENT, REINSURANCE 
                  ASSOCIATION OF AMERICA (RAA)

    Mr. Nutter. Thank you, Madam Chairwoman. My name is Frank 
Nutter, and I am president of the Reinsurance Association of 
America.
    Reinsurance is critical to insurers and State-based 
property insurance programs to manage the cost of natural 
catastrophe risk. It is a risk management tool for insurance 
companies to improve their capacity and their financial 
performance, enhance financial security and reduce financial 
volatility.
    It can serve the same function for the National Flood 
Insurance Program.
    As it currently operates, the NFIP is not an insurance 
program. But it should be, and it can be.
    The fuller application of risk-based rates and an 
appropriate risk-bearing role for the private reinsurance 
sector would transform the program. By doing so, the NFIP could 
also achieve the goal of protecting taxpayers and the Treasury.
    It is a commonly held belief that a private sector risk-
bearing role in the NFIP is unachievable. On behalf of our 
community, the reinsurance community, we would challenge that 
suggestion.
    We commend the Chair's discussion draft regarding 
protecting taxpayers with risk-based rates. The subsidized 
rates were introduced early in the program as an inducement for 
communities to come into the program, and it was a successful 
strategy. But the number of subsidized properties has actually 
risen in recent years.
    In addition, the subsidized rates have facilitated the 
development of environmentally sensitive coastal areas, 
including those at high risk to flood loss, and compromised the 
use of the natural floodplain to mitigate damage.
    Repetitive loss properties, according to the GAO, account 
for only 1 percent of the policies, but 25 to 30 percent of the 
losses.
    In addition, statutory caps on rates may be popular with 
beneficiaries, but the caps distort risk assessment by 
builders, local officials, property buyers, and policyholders. 
And they increase the cross-subsidy from low- or no-risk 
persons and taxpayers to those living in high-risk flood areas. 
And again, we commend the draft in this regard.
    The NFIP should plan for extreme events, but does not. FEMA 
represents that 75 percent of its policies are actuarially 
sound. Sound insurance pricing would reject this 
representation, because the NFIP does not incorporate a 
catastrophe factor for infrequent yet severe loss years, but 
relies on the average annual loss model for its pricing.
    This pricing model is ill-suited for natural catastrophe 
risk, whether it be in the private or public sector. Because of 
the pricing model, the NFIP has neither adequately planned for, 
nor priced for extreme event years.
    The GAO points out the program should operate like an 
insurance entity. If it did, it could reduce or eliminate 
taxpayer exposure to future debt by laying off risk to the 
private sector through reinsurance and catastrophe bonds.
    The private sector role in the program now is appropriate, 
and it relates to the Write Your Own program, which has 
provided the NFIP with a valuable marketing arm and 
administrative capability.
    For a variety of reasons, a private insurance market for 
flood risk has not developed. We believe, however, that a 
private reinsurance risk-bearing role for the NFIP can be 
established, and that the NFIP can address its volatility and 
extreme event exposure and reduce the dependence on taxpayers 
and the Federal debt through risk transfer to reinsurance and 
private capital markets.
    Both financial sectors have significant capacity and 
believe flood risk can be reinsured or transferred. Such a 
transfer introduces a private sector rating verification model 
into the NFIP, thus providing an incentive and guidepost for 
risk-based rates.
    We have offered two approaches to do this. The first is a 
traditional, transactional reinsurance approach. As with most 
State property insurance plans, fair plans and windstorm pools, 
nearly all private insurers address their volatility through 
the purchase of reinsurance.
    As with these other governmental entities and private 
sector insurers, the NFIP would work with modelers, 
underwriters, and brokers to provide the market with an 
evaluation of its risk portfolio, determine what types of risk 
are amenable to risk transfer, and then seek coverage in the 
private sector.
    Should the NFIP find the bids unattractive on a price or 
coverage basis, it would not go forward with the placement. The 
NFIP, therefore, would be in the same place as it is now--
dependent on public debt. If the placement were successful, the 
private sector would provide financial relief to taxpayers.
    As is reflected in the discussion draft, no study is 
necessary to evaluate this alternative, but it can be pursued 
at this time with a full opportunity to evaluate proposals.
    The second option that we have highlighted exists in the 
current draft, and that is the reauthorization of a reinsurance 
pool.
    Section 4011 of the NFIP legislation adopted in 1968 
provides for the Director of FEMA to encourage and arrange for 
appropriate financial participation and risk-bearing by 
insurance companies, to assist insurers to form, associate or 
join a pool, on a voluntary basis, for the purpose of assuming, 
on such terms as may be agreed upon, financial responsibility 
as will enable such insurers, with Federal financial 
assistance, to assume a reasonable portion of responsibility 
for claims under the Flood Insurance Program.
    The provisions of the statute authorizing the pool have 
long been dormant, yet they remain a viable mechanism for the 
creation of another pool, this time to reinsure the National 
Flood Insurance Program, capitalized by those insurers that 
voluntarily wish to provide capacity. The Director and those 
participating insurers would enter into negotiations over the 
risk-sharing formula, and could individually subscribe capacity 
on an annual basis.
    This proposal does not change the Write Your Own program. 
FEMA remains the insurer of the flood risk at the consumer 
level. But it transfers flood risk from taxpayers to the 
private sector, and allows those insurers that wish to 
participate in the risk to do so through a standing facility.
    These two approaches--a traditional property catastrophe 
reinsurance program and/or the reauthorization of the standing 
facility--are both complementary and not exclusive to each 
other. The existing statutory authority may well be sufficient 
to move forward without delay.
    We look forward to working with the committee and the 
Congress on the reform to the Flood Insurance Program, and the 
reintroduction of a private sector reinsurance role in it.
    Thank you.
    [The prepared statement of Mr. Nutter can be found on page 
102 of the appendix.]
    Chairwoman Biggert. Thank you very much.
    Ms. Parrillo, you are recognized for 5 minutes.

STATEMENT OF SANDRA G. PARRILLO, CHAIRMAN, NATIONAL ASSOCIATION 
OF MUTUAL INSURANCE COMPANIES (NAMIC), AND PRESIDENT AND CEO OF 
          THE PROVIDENCE MUTUAL FIRE INSURANCE COMPANY

    Ms. Parrillo. Thank you. Good morning, Chairwoman Biggert, 
Ranking Member Gutierrez, and members of the subcommittee. 
Thank you for the opportunity to speak here today.
    My name is Sandy Parrillo, and I am president and chief 
executive officer of the Providence Mutual Fire Insurance 
Company, one of our Nation's oldest insurance companies.
    We began as a small fire insurance mutual in 1800, and 
today provide personal and commercial insurance protection to 
more than 65,000 policyholders in New England, New York, and 
New Jersey. The Providence Mutual employs approximately 75 
individuals, is represented by more than 300 independent 
agents, and is based in Warwick, Rhode Island.
    I am here today as chairman of the National Association of 
Mutual Insurance Companies to present our views on the National 
Flood Insurance Program. NAMIC represents more than 1,400 
property and casualty insurance companies ranging from small 
farm mutuals, to State and regional insurance carriers, to 
large national writers.
    NAMIC members serve the insurance needs of millions of 
consumers and businesses in every town and city across America. 
Collectively, NAMIC members cover more than 50 percent of all 
homes in the country.
    I would like to begin by thanking the committee for its 
hard work on producing a discussion draft of proposed reform 
legislation. We are encouraged that the draft reflects the 
input of many of the relevant stakeholders, and has the stated 
goal of protecting taxpayers and policyholders.
    It is our opinion that the NFIP is in serious need of 
reform. In order to achieve this goal, NAMIC believes that the 
best option is optimizing the current framework by implementing 
significant reforms that address the existing weaknesses.
    The program's flaws are significant. Subsidized premiums 
have been charged on a non-actuarial basis. Some estimates of 
the subsidies are as high as 60 percent.
    This has been incentivized poor land use and over-
development near desirable waterfront locations. In addition, 
the take-up rates for those in need of coverage remain 
extremely low. Under 30 percent of those who need flood 
insurance purchase it.
    The NFIP was created in 1968, because of the absence of a 
viable private flood insurance market. The unconventional 
nature of flooding makes it virtually impossible to pool risk 
among a large enough population for private insurers to be able 
to offer a viable and affordable insurance product.
    The public-private partnership that eventually emerged 
between the Federal Government and the Write Your Own companies 
has the potential to offer an answer to a seemingly insoluble 
problem.
    We believe that, with the right mix of reforms, the program 
can begin to address the problems of adverse selection, moral 
hazard and financial instability that has plagued it in the 
past.
    We recommend a package of key reforms designed to achieve 
five essential objectives.
    First, to charge actuarially sound rates. The NFIP must 
begin charging risk-based rates, if it is to have any chance of 
being a solvent program. These rates should reflect the true 
cost of providing coverage. Under the current structure, there 
is no chance that the program will ever repay the sizable debt 
it accumulated in 2005.
    We recognize that the move to actuarially sound rates is 
likely to be painful, due to the higher premiums that will have 
to be charged in some instances. For those property owners who 
need assistance, flood vouchers might be offered on a means-
tested basis to help mitigate the cost.
    However, any subsidies that the government believes are 
necessary must be independent of the NFIP and fully 
transparent. Subsidies cannot continue to be hidden within the 
insurance mechanism. And homeowners should be fully aware of 
the real risks and costs of where they live.
    Second, update and improve the accuracy of flood maps. 
Flood maps must be updated based on the best available science, 
with the goal of ensuring that NFIP flood maps accurately 
reflect the risks caused by flooding. Putting off the adoption 
of updated flood maps does a disservice to those citizens, 
property owners, rescue workers and land development officials 
living and working in flood-prone areas, who, in the end, risk 
losing their homes and their lives. We recommend adopting a 
non-political, balanced and credible process for updating the 
maps.
    Third, to improve the take-up rates. Insurance is 
inherently dependent upon the law of large numbers. Thus, the 
insurance mechanism works best and is the most affordable when 
everyone participates in the program.
    Currently, only 20 to 30 percent of individuals exposed to 
flood hazards actually purchase insurance. The program must 
take steps to increase these numbers dramatically in order to 
properly pool the flood risk and achieve financial soundness.
    Fourth, discourage repetitive loss properties. According to 
the CBO, there are currently 71,000 NFIP-insured repetitive 
loss properties, which represent just 1.2 percent of the NFIP 
portfolio, but account for 25 to 30 percent of the total claims 
paid between 1978 and 2008.
    Something must be done to deal with this issue. Quite 
simply, American taxpayers should not be forced to subsidize a 
small subset of NFIP policyholders who continue to rebuild in 
high-risk areas.
    Finally, improve the management and correct operational 
inefficiencies. The NFIP must have quality information 
regarding its policyholders if it is to operate efficiently. We 
must develop and institute clear procedures for monitoring 
contracts and claims records, effectively communicating with 
lenders, and triggering enforcement actions for non-compliance 
with mandatory purchase requirements.
    We believe these reforms are necessary and achievable. I 
have included more detailed policy proposals for each of our 
five key objectives in my written testimony. And as the process 
moves forward, we stand ready to work with the subcommittee to 
address the insufficiencies in the current program.
    Again, thank you for the opportunity to speak here today.
    [The prepared statement of Ms. Parrillo can be found on 
page 112 of the appendix.]
    Chairwoman Biggert. Thank you.
    And Ms. Jallick, you are recognized for 5 minutes.

   STATEMENT OF DONNA M. JALLICK, ON BEHALF OF THE PROPERTY 
   CASUALTY INSURERS ASSOCIATION OF AMERICA (PCI), AND VICE 
      PRESIDENT, FLOOD OPERATIONS, HARLEYSVILLE INSURANCE

    Ms. Jallick. Thank you, Chairwoman Biggert, Ranking Member 
Gutierrez, and members of the subcommittee.
    Thank you for the excellent draft legislation on flood 
reform. The proposed changes address many of the major flaws in 
the current program.
    Thank you also for considering it in a timely fashion; 5.6 
million people depend on this program to protect their homes 
and businesses. And thank you for the bipartisan leadership you 
have demonstrated on flood reform over the last several years.
    My name is Donna Jallick. I am the vice president of flood 
operations for Harleysville Insurance, one of the largest Write 
Your Own flood insurance private partners. Harleysville is also 
a member of the Property Casualty Insurers Association of 
America and the Write Your Own Flood Insurance Coalition.
    I have been working with the Federal flood program for 15 
years. Last year, Congress allowed the NFIP to expire 4 times 
for a total of 53 days. And there have been 10 short-term 
extensions in less than 3 years. Lapses hurt consumers, 
millions of real estate professionals, and our business.
    Private Write Your Own insurers have been leaving the 
program in droves, in part because of the lack of stability in 
the program and the confusion for consumers. When the program 
lapses, insurers have to decide whether to keep collecting 
flood premiums and whether we can afford to put our name behind 
a program that may or may not be continued in the same form by 
Congress. It creates significant liability and vulnerabilities 
for all stakeholders.
    The lack of program stability also makes it difficult to 
administer the program and to explain it to consumers. Our 
disconcerting message must be: buy flood insurance, because we 
think the program will be renewed. And we have a guess as to 
what we think the rates might be when it gets extended 
retroactively.
    We already require agents to spend months training to 
understand and explain the NFIP to consumers. Lapses and short-
term extensions increase this expense.
    Five years is a good proposed extension.
    The available amount of protection for consumers under the 
flood program has not been increased for 17 years. The draft 
would index flood coverage for inflation. That is a good start.
    Federal flood rates, which are currently a fraction of what 
the private market would consider, even for low-risk 
properties, would be appropriately increased under the draft 
legislation.
    Rates for coverage in many high-loss and environmentally 
sensitive areas would particularly be increased closer to 
expected loss costs. This approach still leaves a government 
subsidy, but is a very good start toward reducing that subsidy, 
and it is a proposal that we strongly support.
    We also applaud the proposal to consumers by adding living 
expenses and business interruption to the available coverage. 
People forced from their homes need immediate cash for shelter. 
The proposal makes Federal flood coverage more closely near 
private coverages that protect individuals and business 
consumers, and helps them move forward quickly.
    Just as important as the good provisions in the bill is 
streamlined operations. The number of private insurance 
partners serving consumers in the flood program has dropped 
from 150 to 70 that are actively writing flood insurance over 
the last 6 years.
    While Harleysville has worked very hard to provide our 
policyholders with affordable protection, for many insurers, 
program revenues have been outweighed by growing administrative 
costs. They are leaving the NFIP.
    The draft does not add too many additional requirements to 
the NFIP. Please keep the bill streamlined to ensure the 
program will remain standing.
    Thank you for the bipartisan committee's draft, which 
addresses the critical vulnerabilities in the NFIP, and will 
greatly strengthen flood protection for millions of consumers. 
The Write Your Own flood partners support you, and hope that 
you will be able to keep a straightforward bill with long-term 
extension and no further lapses.
    Harleysville and PCI stand ready to be of any assistance 
desired.
    [The prepared statement of Ms. Jallick can be found on page 
80 of the appendix.]
    Chairwoman Biggert. Thank you.
    And finally, Mr. Rutenberg for 5 minutes.

STATEMENT OF BARRY RUTENBERG, FIRST VICE CHAIRMAN, THE NATIONAL 
              ASSOCIATION OF HOME BUILDERS (NAHB)

    Mr. Rutenberg. Chairwoman Biggert, Ranking Member 
Gutierrez, and members of the subcommittee, thank you for the 
opportunity to testify today.
    My name is Barry Rutenberg, and I am a home builder from 
Gainesville, Florida, and first vice chairman of the board of 
directors of the National Association of Home Builders.
    NAHB commends the subcommittee for addressing reform of the 
NFIP. Builders strongly support a 5-year program 
reauthorization as the best way to provide a steady foundation 
on which to build program revisions and ensure that NFIP is 
efficient and effective.
    For several years, NFIP short-term extensions have created 
a high level of uncertainty in the program, causing severe 
problems in already troubled housing markets. During these 
periods, there were delays or canceled closings due to the 
inability to obtain flood insurance for mortgages. Often, new 
home construction was shut down or postponed due to the lack of 
flood insurance approval, adding unneeded delays and job 
losses.
    NAHB believes this reauthorization will ensure the Nation's 
real estate markets operate smoothly and without delay.
    The availability and affordability of flood insurance gives 
local governments the ability to plan and zone their 
communities, including floodplains. These zoning standards 
allow homeowners the opportunity to live in a home and location 
of their choice, even when the home lies in or near a 
floodplain.
    Home builders depend on the NFIP to be annually 
predictable, universally available, and fiscally viable. The 
NFIP creates a strong partnership with States and localities by 
requiring them to enact and enforce floodplain management 
measures, including building requirements designed to ensure 
occupant safety and reduce future flood damage.
    The partnership depends upon the availability of up-to-date 
flood maps and a financially stable, Federal component, and 
allows local communities to direct development to the needs of 
constituents and consumers.
    Unfortunately, the losses and devastation suffered with the 
2004 and 2005 hurricanes and the 2008 Midwest floods have 
severely taxed and threatened the solvency of the NFIP.
    While these tragedies have exposed shortcomings in the 
NFIP, we believe that reforms to the program must not be an 
overreaction to these historic circumstances. The NFIP is not 
just about flood insurance premiums and pay-outs, but the broad 
program that guides future development and mitigates future 
losses.
    A financially stable NFIP is in all of our interests, and 
Congress' efforts have the potential to greatly impact housing 
affordability and the ability of local communities to control 
their growth and development options.
    A key tool in the NFIP's implementation, the right maps, or 
FIRMs, have been recognized by Congress to be inaccurate and 
out-of-date. FEMA has been successful in digitizing most of the 
FIRMs, yet many are not using the updated data. Because of 
this, large discrepancies remain.
    We believe continued congressional oversight is necessary. 
We commend the proposal to establish the Technical Mapping 
Advisory Council, and hope it will foster more collaboration.
    Beyond fixing the maps, NAHB also supports increasing 
coverage limits to better reflect replacement costs and 
offering various insurance options for consumers, and even a 
possible minimum deductible increase.
    The NFIP must continue to allow State and local 
governments--not the Federal Government--to dictate local land 
use policies and make decisions on how private property may be 
used. FEMA must also better coordinate its activities with 
other Federal agencies who have oversight of other Federal 
programs.
    In my written statement, I discuss FEMA's recent 
requirements of ESA compliance for certain property owners.
    Additionally, before any reforms are enacted to change the 
numbers, location or types of structures required to be covered 
by flood insurance, FEMA should first demonstrate that the 
resulting impacts on property owners, communities, and local 
land use are more than offset by the increased premiums 
generated and the hazard mitigation steps taken.
    NAHB urges Congress to ensure construction requirements 
remain tied to the 100-year standard. Should Congress change 
the Special Flood Hazard Area from a 100-year standard to a 
250-year standard, it would require more homeowners to purchase 
flood insurance and would impose mandatory construction 
requirements that increase costs and impact resale values 
significantly.
    This would also affect FEMA by requiring modifications to 
ordinances and policies, all at a time when FEMA has admitted 
its lack of resources to provide current services.
    I thank you for today. NAHB looks forward to working with 
the committee on this valuable program.
    [The prepared statement of Mr. Rutenberg can be found on 
page 122 of the appendix.]
    Chairwoman Biggert. Thank you so much.
    Unfortunately, if you look at the clock and you see those 
two white dots up there, that means that we have votes, and we 
have about 7 minutes left for voting. These Floor votes may 
take 45 minutes to an hour, but we do want to have the 
opportunity to ask questions. I hope all the members will come 
back, briefly.
    So, the subcommittee stands in recess and will convene 
immediately following the Floor votes.
    [recess]
    Chairwoman Biggert. The committee will reconvene. Now, we 
will get started, so that we do not delay you any longer than 
necessary.
    And I will recognize myself for 5 minutes.
    Mr. Nutter, first, do you believe that the private 
reinsurance market has a willingness to provide reinsurance of 
the NFIP's flood risk?
    And second, to put together a reinsurance program for NFIP 
to place in the reinsurance market, what data would be 
appropriate for FEMA to provide? And is that really necessary?
    Mr. Nutter. Madam Chairwoman, the reinsurance market is 
very interested in exploring this with the NFIP. The 
reinsurance market routinely provides reinsurance for insurance 
companies, but it also provides it for other government-related 
programs. The California Earthquake Authority buys something 
like $3 billion a year in reinsurance capacity. State wind 
pools do.
    So, there clearly is an appetite and a desire to look at 
catastrophe risk. It is a common use of reinsurance.
    I will supply for the committee's staff, if you would like, 
a more detailed set of metrics that would be appropriate for 
this.
    And what I would say is that you would expect that the 
program, working with the private sector, would want 
information related to the types of properties that are 
insured, the insured values, any mitigation in the area--the 
kind of things that even the layman would understand would be 
necessary to fully evaluate the risk--and then to make a 
recommendation to FEMA and the NFIP about how to structure a 
program that would be successful when placed in the market.
    Chairwoman Biggert. Please submit for the record the data 
that is--
    Mr. Nutter. Thank you. I will.
    Chairwoman Biggert. Without objection, it is so ordered.
    Thank you.
    Mr. Ellis, in reviewing the subcommittee's discussion 
draft, can you elaborate for us how it would reduce the burden 
on taxpayers? And can you provide us with specific 
recommendations to improve it in this regard?
    Mr. Ellis. Sure. Thank you very much, Madam Chairman.
    No, we definitely have. I think this bill is a very 
constructive start in this process. And certainly, the areas 
where we are going to allow the rates to actually increase, one 
is that it would go from a 10 percent maximum annual increase 
to a 20 percent maximum annual increase.
    Also, the fact that it increases the deductible for pre-
flood insurance rate map properties to $2,000 is something that 
would help protect taxpayers and reduce some of the subsidy for 
pre-FIRM properties.
    And then, lastly, as you start moving to the special flood 
hazard properties and essentially the provisions to try to 
reduce the subsidies by allowing the rates to increase 50 
percent in the first year and then 20 percent each year after 
that--all of those factors really start moving the program in a 
much more actuarially sound--or much more fiscally sound, and 
off of the backs of taxpayers.
    Chairwoman Biggert. Thank you.
    And then, for anyone who cares to answer, why has there 
been a decrease in the number of companies participating in 
NFIP? Do you think that any primary insurance companies would 
ever be willing to include flood insurance in the basic 
homeowner's policy with regard to properties outside the 100-
year floodplain?
    Ms. Jallick. I would certainly be willing to take that 
question.
    Chairwoman Biggert. Ms. Jallick?
    Ms. Jallick. The main reason carriers have been leaving the 
National Flood Insurance Program is, number one, the profit 
margin is very slim.
    We receive approximately 30 percent for administering this 
program. Out of that 30 percent, we pay our agents 20 percent. 
We then pay State premium taxes of 2 percent, which leaves us 8 
percent to manage this program and to pay for all of our costs.
    Not only that, the program is very, very technical in 
nature. And a lot of carriers have felt that, because of the 
complexity of the program, they do not really have the 
expertise to remain in the program.
    Because of the litigation that has been ensuing over the 
last few years, they feel like the exposure that they are at 
due to the litigation is not worth remaining in the program.
    Chairwoman Biggert. Thank you.
    At this time, I yield back the balance of my time.
    And Mr. Sherman, you are recognized for 5 minutes.
    Mr. Sherman. I thank the chairwoman.
    I also thank my colleague from Los Angeles for letting me 
ask questions first.
    I think it is in the national interest that we have people 
insured. You can do this by mandates, or subsidies, or by 
Federal involvement. Or you can sit back and watch them be 
uninsured.
    The reason that we want to see them insured is apparent to 
those who are soft-hearted. When the disaster happens, you hate 
to see people uninsured. No one has ever accused me of being 
soft-hearted.
    But if you are hard-hearted, every time we have a major 
disaster, we have an extraordinary or supplemental 
appropriation that comes right out of the Federal budget 
increases the deficit. And so, it is in the government's 
interest to make sure people are insured.
    That being said, we are here to talk about flood insurance, 
and I represent a desert. I look forward to seeing how this 
program can be expanded or used as a model for earthquake 
insurance. I represent, for example, Northridge.
    So, I am anxious to see this program work effectively, even 
if it costs the Federal Government something to make sure that 
people have insurance, both in terms of actuarial cost, or in 
terms of the Federal Government being involved, providing 
capital at its lower rates, etc.
    You may say, that is Federal Government involvement we 
should not have. But I have been here a while. And every time 
there is a disaster, all of a sudden, nobody is talking about 
the deficit. Nobody is talking about the growth of the Federal 
Government. Everybody is talking about how to help people who 
are uninsured.
    Ms. Jallick, as you know, the Federal Emergency Management 
Agency has been going through the process of updating the 
floodplain maps. And there have been questions about the 
process of developing the maps, and the impact they will have 
on local communities.
    Some homeowners who have never had to buy flood insurance 
will now have to do so. And homeowners who are currently 
mandated to buy coverage may not have to in the future, causing 
confusion in a lot of areas.
    What would you do to fix the mapping issues? And do you 
have any thoughts on why the floodplain remapping has been a 
problem?
    Ms. Jallick. That is actually a very good question. And I 
feel your pain. And I feel the pain of all of the property 
owners who have been moved to a Special Flood Hazard Area.
    I think that this is something that is being addressed in 
the bill. And it does need to be explored, because there are 
definitely areas that have been removed from the floodplain 
that should still be in it.
    Mrs. McCarthy spoke earlier this morning--she is from Long 
Island--about structures sitting right on water that were 
removed from the floodplain, hers being one of them. There are 
definitely areas for improvement for risk mapping.
    I feel that the council that has been put together that is 
mentioned in this bill is an excellent start. And there are 
many experts who will be able to properly address this issue 
and lend us all some insight as to how we can come up with 
better risk mapping than what we currently have.
    Mr. Sherman. Thank you.
    I now have a question for the record that I would like 
anyone to respond to after some thought when you go home 
tonight or tomorrow, or until the record closes. And that is: 
What should we be doing to make sure that people have the 
earthquake insurance that they need, both to help them as 
individuals, to make sure that lenders are willing to loan?
    You can tell people not to build in a floodplain. You 
cannot tell California not to build near an earthquake fault, 
unless you want to be a 49-State country.
    So, what do we do on earthquake coverage? I would like to 
hear your considered views for the record on that, if any of 
you think you can provide some enlightenment.
    Thank you. And I yield back.
    Chairwoman Biggert. Thank you.
    The gentleman from Georgia, Mr. Westmoreland, is recognized 
for 5 minutes.
    Mr. Westmoreland. Thank you, ma'am.
    Most of you all are in the business world. How long do you 
think it would have taken you all to sit down and try to come 
up with a remedy for losing $18 billion in about 4 years? Would 
you all have thought about that anywhere down the road?
    We are just a little late, I guess, in trying to do this. I 
think, since 2005, this program has gone in the hole about $18 
billion. I think it has paid off a couple of billion since 
then.
    The government does not seem to sense that losing money is 
a problem. But it is to all the taxpayers of this country, and 
so, we have to do something to remedy this. But we do not want 
to do anything that does not make sense.
    We have two speeds up here: do-nothing; and knee-jerk. And 
too many of our solutions come from the knee-jerk type thing.
    But Mr. Ellis, I wanted to ask you, is there any type of 
program that any of the environmental groups or conservation 
groups have about going in and buying some of this property 
that may have had a total loss that is adjacent to a wetlands? 
Or is there any type of program that you all are aware of, or 
that you all are thinking about trying to create that would do 
that?
    Mr. Ellis. Speaking for SmarterSafer, the coalition, we are 
a budget group. But there are environmental groups in that 
coalition. And certainly, there have been interests both after 
major disasters to purchase properties and buy out the owners, 
and then--at the value the home was prior to the disaster--and 
then using that for conservation or other things along those 
lines.
    There was a separate program that was created years ago 
called Challenge 21, that was looking at that.
    So, I would certainly think that that tool and mitigation 
are certainly appropriate areas for FEMA and for this program 
to get involved in, and actually could pay dividends in the 
long run.
    Mr. Nutter. Mr. Westmoreland?
    Mr. Westmoreland. Yes.
    Mr. Nutter. Do you mind if I add to that?
    The current program, the National Flood Insurance Program, 
does have funds allocated for mitigating property losses, 
including purchasing properties that are repetitive loss 
properties. And then, the Pre-Disaster Mitigation program that 
FEMA has does allocate money as a percentage of the overall 
payments for disaster mitigation for just this purpose.
    I think our view would be that maybe FEMA has not been as 
aggressive as it could be in utilizing those funds, and we 
certainly would encourage the Congress to consider enhancing 
those funds to achieve the goal that you mentioned.
    If I could also answer the comment--it was not really a 
question--you asked at the beginning about planning?
    I represent the reinsurance industry. And nearly all 
insurance companies and most State insurance plans, like the 
California Earthquake Authority and others, do, in fact, plan 
for the outlier year, the severe loss, infrequent year, by 
buying reinsurance to protect them against that. And that is 
what we are recommending that the flood insurance program do, 
as well.
    Mr. Westmoreland. Okay. Talking about the repetitive 
losses, I think it is 2 percent of the policies are for the 
repetitive, but 25 percent of the losses is on the repetitive.
    What would some of the insurance companies' idea be for 
remedying that, when 2 percent of your premiums is covering 25 
percent of your losses?
    Ms. Parrillo. Congressman, may I answer that?
    I represent a primary insurer. And I would like to remind 
us of the phrase and the old adage that ``once bitten, twice 
shy.'' And this is what has happened with repetitive loss 
properties.
    Looking at it as a primary insurer, if we insured flood 
losses on a property, and some natural disaster came in and the 
property was destroyed, if the property was rebuilt in the same 
location with no mitigation, I would be not inclined to insure 
that property a second time.
    And I would suggest that we need corrections in the 
National Flood Insurance Program to do that. We do not want to 
allow, to have people rebuild in areas that, under the same 
circumstances, will have these repetitive losses. It is simply 
not fair to the American taxpayer.
    There are folks who wish to do so. If they wish to rebuild 
in these areas, they need to be charged actuarially sound 
rates. If they want to absorb that risk, they need to pay for 
that risk.
    They need to pay for it, not the American taxpayer.
    Mr. Westmoreland. Yes. I could not agree with you more.
    Mr. Rutenberg, I come from a homebuilding background, too. 
And a lot of times, you are faced with having a lot that has a 
lot of contour to it, let us say. And part of it is in a 
floodplain, a 100-year floodplain, or whatever, but the floor 
level may be 15 feet above the flood level.
    My experience has been that the homeowner still had to buy 
flood insurance, even if the floor level was at a level that it 
would be impossible to flood. Has that hindered you? Or have 
you found that in any of the subdivisions, or whatever, that 
you have done business in?
    Mr. Rutenberg. Yes, Congressman. We do find that it is an 
issue for some people. But other people are willing to say, if 
I want to be on this lot--or normally, there is a nice view, or 
something else, that they will pay the premium. And we have to 
work with our county to build it in a way that will ensure that 
it is not a burden in the future.
    I think I might, if I could quickly add that, in many of 
the new developments that we are doing, in my area we now build 
for an 18-inch rain storm event. We have other developments 
that have no retention areas whatsoever, or somewhere in the 
middle, and we are all paying the same.
    And perhaps in the future we should be looking at whether 
or not we should be charged based upon the risk. And if you 
have that much capacity for stormwater, then maybe that is a 
lower risk.
    I would also suggest that, if you are looking for things to 
do, that we seem to have a few people available to work on 
mitigation. And for that 1 to 2 percent, there may be a program 
we want to do, a lower interest rate program, or something on 
that order, for people to go ahead and modify their homes out 
of their own money, spend their money. And that would reduce 
the risk to the program.
    Mr. Westmoreland. Yes, sir.
    Mr. Rutenberg. Thank you.
    Chairwoman Biggert. The gentleman's time has expired.
    Mr. Westmoreland. And I yield back.
    Chairwoman Biggert. Thank you.
    I would note for the record that one town in Illinois, due 
to repetitive loss, moved the town to higher ground. So, I 
think there are various ways that we can take care of that.
    I would now recognize Ms. Waters of California for 5 
minutes.
    Ms. Waters. Thank you very much, Madam Chairwoman.
    I am sorry that our FEMA representative had to leave, but 
certainly had to leave for a good reason. I had a number of 
questions that I would have liked to have asked.
    Chairwoman Biggert. Maybe we will try and get him back at a 
later date.
    Ms. Waters. Okay.
    Let me talk about my bill, H.R. 1026. It 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 the actuarial rates for another 5 years 
and make further improvements to the program.
    That is a little bit different from your bill, Madam 
Chairwoman. But I think we are both committed to working to see 
how we can find the best solutions.
    I would just like to ask the panel--I do not want you to 
take sides, but I want to find out--what about the time, 2 
years as opposed to 5 years? What do you think makes good sense 
and is reasonable, and would help us to get everybody into the 
program at the correct rates, and basically help us to 
stabilize this program?
    Can I get a response from anyone? Give me your thoughts.
    Mr. Ellis. Congresswoman Waters, we would be concerned to 
have a longer delay, such as is envisioned 5 years, and then 
slowing in the rate increase, just because the people are in 
the floodplain. We are essentially denying them some of the 
information that they are actually in the floodplain. And we 
want to give them the tools, and some of that is the rates and 
understanding of that.
    And so, basically freezing the maps or denying them to go 
into place does not really help the communities.
    I would much rather pursue an approach, such as in the 
draft legislation, that would phase in the rate increase, so it 
is not a shock to the system. And then, if there are people who 
are unable to pay, who are truly needy, then we should have, 
outside the rates, certain subsidies to enable them to purchase 
flood insurance.
    I think that is a better way to go, Congresswoman, and 
something that would be responsible to the taxpayer and to 
the--
    Ms. Waters. Based, then, over what period of time?
    Mr. Ellis. I am amenable to the timeline that is in the 
draft legislation. It could be a year that they would--say that 
you do not have to do the purchase, and then they extend it for 
a year, and a year after that, up to 3 years.
    I would rather see briefer and no delays, and just try to 
deal with the rates. But I am amenable to that sort of balanced 
approach.
    Ms. Waters. Anyone else?
    What about the question of the cost to the taxpayers with 
subsidies?
    Mr. Ellis. The subsidies are there right now. We have a 
program that is $18 billion in the hole. I certainly think that 
we are going to have to deal with this issue to try to have 
affordability for insurance for people who are truly needy, and 
something that is outside the program.
    I am not sure what the costs would necessarily be, but I 
think it is important that we get people the accurate maps. And 
we have these tools, which some of it is knowing that they are 
in the floodplain, or what type of floodplain they are in.
    And the second thing is knowing what it costs and what the 
true cost of living in harm's way is. And that gives them some 
decision-making to deal with about where their home is, or 
mitigation measures they could take that would reduce the cost 
or reduce their vulnerability.
    Ms. Waters. Let me, Madam Chairwoman, just say, in addition 
to my concern about the time for phasing in people with the 
correct actuarial rates, I am concerned about too many 
communities in this country that are improperly, incorrectly 
mapped, and the ability of individuals and communities to 
oppose the mapping and how we are going to resolve that.
    And what impact does that have on the delays that I am 
speaking about?
    I want the mapping to be as accurate as it possibly can, to 
avoid people being in the situation where the mapping is 
incorrect, the flood zones that are created or identified 
through the mapping, or are not proper.
    I just went through one of these in my district where, 
luckily, the community got together and just worked very, very 
hard, and got it changed. But I do not know how much of that is 
out there, and whether or not if we need to also think about 
that as we do a delay of getting the program on track.
    Chairwoman Biggert. If the gentlelady would yield?
    Ms. Waters. Yes, I yield to the Chair.
    Chairwoman Biggert. I think that, actually, Congresswoman 
McCarthy was here and had very much sort of the same concerns 
and some maps that she believed were really mistaken. It 
sounded like that. So, this is an issue. And I think the first 
panel replied that there is an appeals process that people 
should take advantage of.
    But you are right. We need to make sure that is correct. 
And I think that we have in this draft attempted to address 
that issue, and that mandatory purchase requirement would be 
suspended for 1 year with the possibility of 2 additional 1-
year suspensions provided that FEMA makes a finding with 
respect to the flood risk mapping on a community-by-community 
basis.
    Ms. Waters. You are talking about when they are in the 
appeals process?
    Chairwoman Biggert. No, I am talking about what is in--now 
I am talking about what is in the draft legislation that we 
have been talking about.
    Ms. Waters. That deals with the incorrect mapping issue?
    Chairwoman Biggert. That is correct. Yes. So, I think that 
there is something in there that you will like--
    Ms. Waters. Yes, I would like to talk further with you 
about it, if I may, because I am told that if you get a study, 
that costs money, that individual homeowners can do studies, 
and the communities can do studies. But it costs money to do 
that.
    And I am not so sure--
    Chairwoman Biggert. If I might again?
    Ms. Waters. Yes.
    Chairwoman Biggert. We also have a mapping council in the 
bill, so that this can be done, other than having the 
communities having to do their own study.
    But I do not want to take any more time--
    Ms. Waters. Okay. Thank you.
    Chairwoman Biggert. The gentleman from Virginia, our vice 
chair, is recognized for 5 minutes.
    Mr. Hurt. Thank you, Madam Chairwoman.
    Welcome. Thank you all again for being here and for helping 
us sort through this important matter.
    As I said during the first panel, it seems to me our 
primary responsibility, or a primary responsibility as we look 
at this, is, obviously, trying to figure out how we minimize 
the impact to the taxpayer and be good stewards of our 
responsibility that way.
    And then, I think also it is incumbent upon us in 
Washington to not promote policies that create moral hazard. 
And obviously, I know that is of great interest to you.
    I have a question, maybe for Mr. Ellis, and then maybe Mr. 
Houldin and Ms. Parrillo. And Ms. Jallick, I would like to hear 
the perspective from your quarter.
    But my question is: What is our goal here, and what is 
achievable?
    Are we able to minimize the impact, if this bill goes 
forward? Do you think that this will be effective in minimizing 
the impact of subsidies to the taxpayer?
    We have heard different figures, $1.3 billion of taxpayer 
built-in subsidy, $1.8 billion. And that is obviously on top of 
the $18 billion debt that has accrued.
    And then, secondly, I think, addressing the issue of moral 
hazard, will we be encouraging or discouraging to the maximum 
extent possible homeowners from making decisions that not only 
threaten their property--and that is, obviously, your concern 
as members of the insurance industry who are here, is the 
property issue.
    But obviously, as we see in Japan, it is not just property. 
It is also lives. And so, I was wondering if you could address 
kind of the big picture or where we are going with this.
    Mr. Ellis. Sure.
    Mr. Hurt. And how do we measure our success?
    Mr. Ellis. That is always critical, I think, with any 
government program, is trying to figure out how to measure 
success, Congressman Hurt. And I think that what we are trying 
to do, or what we would like to see at Taxpayers for Common 
Sense, and then also at SmarterSafer.org, is to move this 
program into a sounder fiscal footing.
    So, to move it to where first, people actually know the 
risk. And part of it is having accurate and up-to-date flood 
maps, so that they actually know where they are living, or 
buying a home.
    Second, that they understand the cost of that risk, that 
they are actually purchasing insurance that is commensurate to 
the risk that is actuarially sound, so that they have also that 
tool, sort of an understanding of where they live. And then 
also, how to mitigate or reduce that risk.
    And lastly, and very important for our group, is trying to 
remove that risk off the back of the taxpayer and putting it 
back on to the policyholders where it logically belongs.
    And so, I think that, we created this program in 1968, and 
we are stuck with it. And there is not a private market--a 
large private market anyway--in flood insurance.
    We are going to have to deal with this program and try to 
move it towards a more actuarially sound basis and also try to 
use it as a tool to help people out--not just help them out in 
buying flood insurance, but help them out of harm's way--to 
give them those tools and that information to reduce their risk 
and also reduce the impact on the American taxpayer.
    Mr. Houldin. Congressman, I agree with the actuarially 
sound concept. I will not go into that further.
    But as somebody who sells the policy to the consumer on a 
daily basis, I think we actually need to make the program more 
attractive, because the more people that we get to buy the 
product, the larger the number is, the bigger the risk pool.
    And so, one of the components of the draft legislation that 
I feel--as somebody who sells to the consumer every day--is 
very important is the loss-of-use coverage for the residential 
property, where we could actually have some coverage for them 
to live elsewhere if there is a flood loss, and the business 
interruption on the commercial side.
    Because right now, when you are trying to sell this product 
to the consumer, there is a lot in the bill--or a lot in the 
policy--that a lot of coverage that is not there, that I think 
would make it more attractive.
    Those components, although we are expanding the policy to 
some degree, we can make actuarially sound right off the bat. 
And I think that the consumer will find it a much more 
attractive program.
    Ms. Jallick. I am sorry. Go ahead.
    Ms. Parrillo. Thank you, Congressman. There are two things 
I would like to address.
    First, as a representative of the National Association of 
Mutual Insurance Companies, we believe that the program is 
necessary. There is not a private market that is available at 
this time to be able to insure those properties. But it does 
need to be reformed. It does have significant weaknesses.
    The first thing I would like to talk about is the take-up 
rates. In my testimony, I testified that less than 30 percent 
of people who are in those floodplains actually purchase the 
insurance.
    First of all, they may not purchase it. If they do, 
purchasing a new home, they have a federally-backed mortgage, 
they are required to have flood insurance. They do, and it 
lapses. There need to be penalties there to ensure that does 
not happen.
    As my colleague here talked about the law of large numbers, 
that is what the insurance mechanism is, how it is predicated 
on that basis. We need to have enough people in there who will 
pay a little, so we will be able to spread the risk across a 
larger base. It will keep the prices reasonable and affordable.
    The second thing I would like to talk about is the idea of 
the actuarially sound rates. And I will take that up. I think 
that is an absolute necessity to this program.
    And there are two points I would like to make about the 
actuarially sound rates. First of all, the NFIP was formed on 
the basis, in 1968, of gradually moving toward actuarially 
sound rates for all properties in the program. Here we are 40 
years later, and we are not close to that.
    We need to be able to be disciplined in the program to be 
able to get to that point, be it 2 years or 5 years.
    Secondly, these subsidized rates, as they are in effect 
right now, apply to all properties, to all property owners, 
regardless of their ability to pay. If you own a beautiful 
property, a waterfront, and you are well established, and you 
can well afford to pay for the cost to insure that property for 
flood insurance, you are paying the same rate as that 
individual who is in a property, perhaps of lesser means.
    Maybe they have been there 40 years and they are on a 
pension. They are paying the same rate. We feel that is 
fundamentally unfair.
    So, that is why we are proposing, to move toward 
actuarially sound rates should be supported by some type of 
means-based testing for those folks--now, again, not through 
the Flood Insurance Program. If you bury that quote, that 
subsidy in the Flood Insurance Program, the insurance 
mechanism, it is hidden to all. It needs to be transparent.
    So, it needs to come outside of the Flood Insurance Program 
and deal with those individuals who truly need the assistance 
of government. And the others who do not, who can pay for it 
themselves and choose to live in those properties, they should 
absorb the costs themselves.
    Ms. Jallick. I would like to comment first on the fact that 
I do not feel that we are stuck with the National Flood 
Insurance Program. I think we should all be extremely fortunate 
that we do have the National Flood Insurance Program.
    The National Flood Insurance Program has worked in the 
manner that is was designed to work. It was designed to protect 
people for a general condition of flooding. The rates were 
designed based on an average loss year.
    Therefore, when you look at a catastrophe like Katrina, the 
bill was never designed to fully make the program actuarially 
sound with something like a Katrina.
    The NFIP did not fail during Katrina. The levees broke. The 
system is not broke.
    The most important goal here is for this program to 
continue to protect the 5.6 million people who currently have a 
flood policy in place. This bill goes a long way towards 
reducing the Federal subsidies and the moral hazard, and 
addressing lingering concerns, such as mapping, which is a true 
concern.
    Mr. Nutter. Mr. Hurt, do you mind if I add one more comment 
to that about the actuarial rates?
    Chairwoman Biggert. One minute.
    Mr. Nutter. The program does not include a factor for 
catastrophe loss years like 2005, but it should. The reason you 
have all this Federal debt is because it does not plan for and 
it does not price for all of that.
    So, if you want to send the right signal to the 
policyholders who live there, but if you also want to protect 
taxpayers, you really do need to factor in that rate. Or as I 
have suggested on several occasions, the program needs to be 
purchasing reinsurance as a way to protect against the outlier 
year.
    Thank you for the opportunity.
    Chairwoman Biggert. Thank you.
    The gentleman from Missouri is recognized for 5 minutes.
    Mr. Cleaver. I just have one question, Madam Chairwoman.
    I disagree with your statement, Ms. Jallick. I think there 
were some things broken other than the levees in the Gulf.
    Shortly after Katrina, the Chair, Ms. Waters and I, along 
with, I think, three other Members, went to the Gulf. We held 
hearings in New Orleans and in Biloxi.
    Katrina was not partisan. We lost a Republican Senator's 
home, and the home of a Democratic Member of the House.
    And the thing that I think has to eventually be addressed 
is this whole issue of wind. Gene Taylor, Congressman Gene 
Taylor, only had his steps remaining on the lot where he lived.
    And I guess the question is: How do you determine whether 
the house was washed away by the flood, or whether the house 
was blown away by the wind?
    And it seems to me that what was broken was that it 
provided a lot of insurance companies with a way out. They just 
declared, you do not have wind insurance, and your house is not 
here because of the flood.
    It seems to me that is something that has to be repaired, 
as secondarily to the repair of the levees.
    Ms. Jallick. In 99 percent of the cases, the two adjusters 
who are assigned to assess the damage will be able to determine 
the difference between wind and water. It is very rare when the 
professional adjusters in the field cannot make that 
determination.
    Adding wind to a policy would just add more debt to the 
taxpayers. Whereas this particular bill, I feel very strongly 
that it, while not a perfect bill, is a bill that can get 
enacted into law--
    Mr. Cleaver. Okay. I support the bill. I want to deal with 
what I was trying to deal with, which is, we have a problem.
    If you are saying that there can be concrete evidence and 
proof on whether it was flood waters or wind, why were we 
having so many controversies if was so easily determined?
    Ms. Jallick. Again, I do believe, 99 percent of the time, 
you do have the ability to distinguish between the wind and the 
water.
    And on a very rare occasion--and again, Katrina is 
something that was not foreseen, not expected. And hopefully, 
we can take some of the missteps that we feel happened during 
Katrina and learn from them, and put things into law going 
forward that will help to shore up any type up misconceptions 
between the wind and the water.
    Mr. Cleaver. Thank you.
    Ms. Jallick. And the expert council that is designed in 
this bill should be able to assist with that, as well.
    Chairwoman Biggert. The gentleman yields back?
    Mr. Stivers from Ohio is recognized for 5 minutes.
    Mr. Stivers. Thank you, Madam Chairwoman.
    And I would like to thank the witnesses for being here and 
sharing your expertise.
    It seems to me that we all know that the Flood Insurance 
Program has to do a better job of pricing risk, number one. The 
flood insurance program also has to--we have to decide how much 
risk we want to give the taxpayers, number two, and whether we 
want to have the taxpayers have a lot of risk.
    The third issue, I think, is how we deal with broader 
participation. We need to all recognize that there are people 
who live in areas that probably should be participating in the 
Flood Insurance Program who are not participating.
    And then the fourth issue to me personally is, I think we 
need to figure out how we can encourage growth of the private 
market over time, not necessarily immediately, and I do not 
think it will happen immediately.
    I would like to kind of hit those one by one.
    And I know that some of your written testimony talks about 
pricing risk. I have a real concern about the government's 
ability to price risk. It just has shown, not just in the Flood 
Insurance Program, but in many programs in many ways, that the 
government does not do a very good job of pricing risk.
    Do you have any specific recommendations--any of you--that 
would help the government do a better job of pricing risk?
    Mr. Nutter. Mr. Stivers, Frank Nutter. We represent the 
reinsurance market.
    And the point that I have made about two suggestions we 
have made is that, if you introduce the private reinsurance 
market into the program, you have introduced into it the risk 
assessment mechanism that the private reinsurance market does, 
which it does routinely for catastrophe risk, for earthquakes 
and tsunamis, and floods and windstorm.
    And I have made two proposals. The first is that the 
program actually go into the market and seek to lay off risk 
into the reinsurance market on the basis of a data analysis 
between the NFIP and appropriate brokers.
    And second, there is a pooling mechanism in the existing 
legislation that has been dormant for 40 years--35 years. And 
while I am not suggesting it be reinstituted, I am suggesting 
that it does provide an opportunity for the private sector on a 
reinsurance basis to participate through a pool with the 
program. And again, it would have that interaction with the 
private sector risk pricing, risk assessment mechanism.
    Mr. Stivers. Thank you.
    And briefly--that was a pretty good answer--does anybody 
else have any other ideas, suggestions? Yes?
    Mr. Ellis. Yes, Congressman. I would just like to add that 
part of it--you are right. Government is never going to be that 
good at pricing risk, just simply because it is not good 
politics, necessarily. Charging people would actually cost--
    Mr. Stivers. Terrible politics--
    Mr. Ellis. So, part of the way to guard against that is to 
make sure that we do not expand the program, so we do not add 
in wind insurance, or we do not actually add in, as has been 
suggested and is in the draft, coverage for business 
interruption or other areas that could be insured separately, 
just because we know that government is inherently flawed in 
that.
    And so, the more that we expand the program, or even 
increase annually the levels that are available in insurance, 
we are crowding out the private market, and we are putting the 
government potentially more on the hook at not pricing risk 
adequately.
    So, some of it is just, do not make it worse.
    Mr. Stivers. Thank you for that.
    Let us talk a little bit about encouraging participation--
and I cannot read your name, I apologize. I know you talked 
about the lack of participation.
    Are there proposals that would--you could pass a law that 
says everybody has to get it. We passed a law in the 1930s that 
said nobody could drink--or the 1920s--and people drank. So, 
passing a law will not necessarily mean compliance.
    What I am curious about is how do we get more compliance of 
people who should be buying flood insurance to buy flood 
insurance, as opposed to just saying it is mandatory? Which, 
obviously, it is maybe a start, or part of it. But I do not 
think that alone is the solution.
    Ms. Parrillo. I think the bill does a very fine job in 
going down the road of ensuring compliance with it. There are 
mandatory purchase requirements regarding properties that are 
backed by federally-backed mortgages. And there needs to be a 
continued enforcement on it.
    Within the National Flood Insurance Program, they need to 
be able to track better those properties that have flood 
insurance, and in the event they allow those policies to lapse, 
to be able to institute any type of remedial action or 
penalties to ensure that it is done.
    Mr. Stivers. Thank you. Let me ask you, let us say my house 
is paid off. I do not have a mortgage. How do we enforce that?
    Ms. Parrillo. I do not think you can enforce that. But I 
would suggest that a prudent person would want to protect their 
largest financial asset. And that may not be a position for the 
National Flood Insurance Program, but one of understanding the 
risks that we all have.
    And I know my colleagues, as independent agents, will 
counsel our clients that the exposures that they have, and to 
properly protect those exposures.
    Mr. Stivers. Let me let somebody else weigh in, because I 
only have a limited number of time. Thank you.
    Mr. Houldin. I just wanted to mention that anything that a 
consumer wants to purchase, they are going to purchase, if it 
is an attractive product to purchase. And right now, the 
program has a lot of unattractiveness to it. I hear it every 
day.
    When I explain the program to a client, it is like, no, I 
do not think it is something I need.
    I think this bill does a lot towards making the policy and 
the coverages much more effective.
    Mr. Stivers. Thank you, Madam Chairwoman. I am sorry. I am 
out of time.
    Chairwoman Biggert. Thank you.
    Without objection, Mr. Cleaver is recognized.
    Mr. Cleaver. Thank you for your generosity, Madam 
Chairwoman. This will be very short.
    I gave up caffeine for Lent, and so I have a headache.
    [laughter]
    And I have to get on an airplane. And I have a double 
headache, because I am on this wind versus the flood.
    Can somebody explain to me what you did to determine 
whether a house was blown away or washed away?
    Because, as I am sure you know, there were throngs coming 
to us about that issue. And as I said, we saw steps remaining, 
the only thing remaining--can you measure something on the 
cement? Help me, somebody.
    Ms. Jallick. If the structure is no longer there, then the 
wind and water adjusters are going to work very closely 
together and look at the proximity to water lines, perhaps. Was 
there a surge that had occurred, which then definitely would be 
the cause of loss was water? If there was a tornado, or through 
wind-driven rain that it was determined that the house was 
destroyed by wind?
    But they would pull weather reports. They would do a lot of 
investigation to make that determination, call in engineers if 
need be.
    Quite frankly, there are going to be times when maybe they 
cannot make that determination. And at that point, then, we 
would expect that the wind and the water carrier would then 
split the cost of the damage.
    And it is very unfortunate when that happens, but it is 
also extremely rare when it happens.
    Mr. Cleaver. Not in Katrina.
    Ms. Jallick. Very rare.
    Mr. Cleaver. Not in Katrina.
    Ms. Jallick. But again, Katrina was not a normal event, as 
well.
    Mr. Cleaver. Thank you, Madam Chairwoman.
    Mr. Rutenberg. May I answer that?
    Chairwoman Biggert. Who was speaking? Go ahead.
    Mr. Rutenberg. You can quite often tell by the construction 
and by the date of the construction, because as we have been 
evolving the construction techniques and the building codes, 
the newer homes are much more protected against wind than the 
latter ones. And depending upon the area and the code that it 
was built on, there are often very good clues. Then, again, 
that goes to the insurance professionals.
    You should know from the viability of the NFIP that the 
newer houses are being built to much higher standards. And 
therefore, the risks are diminished.
    Chairwoman Biggert. Thank you.
    I would like to ask you, any of you who could offer 
suggestions, how would Congress structure assistance for 
certain homeowners, whether we want to do, say, means-testing 
or modest-income homeowners outside of NFIP?
    So, if you have a suggestion, if you could submit that for 
the record, I would appreciate it.
    And as I mentioned earlier, during the coming months, our 
subcommittee intends to mark up legislation and implement 
several reforms that will improve the financial integrity and 
stability of the program. And I think legislation will require 
an examination of ways to decrease the role of taxpayers and 
increase the role of private markets in flood insurance.
    So, more specifically among several provisions, our reform 
measure will aim to improve flood maps to a fair and 
transparent process, phase in adequate rates for risk, increase 
program flexibility to better serve homeowners, and enhance 
local communities' ability to enforce building codes.
    So, NFIP reforms must enhance the program and protect both 
taxpayer and policyholders.
    And with that, I would really like to thank all of the 
witnesses. I think you really have highlighted a lot of issues 
and explained it to a lot of our members who have not been 
through flood insurance before. So, this has been very helpful. 
I really appreciate it.
    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.
    And with that, this hearing is adjourned.
    [Whereupon, at 1:26 p.m., the hearing was adjourned.]






















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                             March 11, 2011

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