[Senate Hearing 112-229]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-229

 
        REAUTHORIZATION OF THE NATIONAL FLOOD INSURANCE PROGRAM

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING THE REAUTHORIZATION OF THE NATIONAL FLOOD INSURANCE PROGRAM

                               __________

                        JUNE 9 AND JUNE 23, 2011

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director
              William D. Duhnke, Republican Staff Director

          Charles Yi, Deputy Staff Director and Chief Counsel
                 Beth Cooper, Professional Staff Member
                     Laura Swanson, Policy Director
                  Brett Hewitt, Legislative Assistant

                 Andrew Olmem, Republican Chief Counsel
          Shannon Hines, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk
                     William Fields, Hearing Clerk
                     Levon Bagramian, Hearing Clerk
                      Shelvin Simmons, IT Director
                          Jim Crowell, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                         THURSDAY, JUNE 9, 2011

                                                                   Page

Opening statement of Chairman Johnson............................     1
    Prepared statement...........................................    29

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2
        Prepared statement.......................................    29
    Senator Tester...............................................     3

                               WITNESSES

Senator Roger F. Wicker of Mississippi...........................     3
    Prepared statement...........................................    30
W. Craig Fugate, Administrator, Federal Emergency Management 
  Agency.........................................................     6
    Prepared statement...........................................    32
    Responses to written questions of:
        Chairman Johnson.........................................    38
        Senator Shelby...........................................    39
        Senator Reed.............................................    48
        Senator Merkley..........................................    54
        Senator Vitter...........................................    57
        Senator Cochran..........................................    60

              Additional Material Supplied for the Record

Prepared statement of Senator Richard J. Durbin of Illinois......    62
Statement submitted by the National Association of 
  REALTORS'...........................................    63

                              ----------                              

                        THURSDAY, JUNE 23, 2011

                                                                   Page

Opening statement of Chairman Johnson............................    83

Opening statements, comments, or prepared statements of:
    Senator Shelby
        Prepared statement.......................................   113
    Senator Johanns
        Prepared statement.......................................   113

                               WITNESSES

Orice Williams Brown, Director, Office of Financial Markets and 
  Community Investment, Government Accountability Office.........    84
    Prepared statement...........................................   114
Chad Berginnis, Associate Director, Association of State 
  Floodplain
  Managers.......................................................    86
    Prepared statement...........................................   135
Adam Kolton, Executive Director, National Advocacy Center, 
  National Wildlife Federation, on behalf of the Smarter Safer 
  Coalition......................................................    88
    Prepared statement...........................................   140

                                 (iii)

Barry Rutenberg, First Vice Chairman of the Board, National 
  Association of Home Builders...................................    89
    Prepared statement...........................................   147
Travis B. Plunkett, Legislative Director, Consumer Federation of 
  America........................................................    91
    Prepared statement...........................................   166
Scott H. Richardson, Policy Advisor, the Heartland Institute, and 
  Partner, Richardson and Ritchie Consulting.....................    93
    Prepared statement...........................................   175

              Additional Material Supplied for the Record

Statement submitted by the American Insurance Association........   178
Statement submitted by Stuart Mathewson, FCAS, MAAA, Chair, Flood 
  Insurance Subcommittee, Extreme Events Committee, on behalf of 
  the American Academy of Actuaries..............................   179
Letter submitted by Shana Udvardy, Director, Flood Management 
  Policy, American Rivers........................................   182
Letter submitted by Franklin W. Nutter, President, Reinsurance 
  Association of America.........................................   186
Statement submitted by Franklin W. Nutter, President, Reinsurance 
  Association of America.........................................   187
Statement submitted by the National Association of Mutual 
  Insurance
  Companies......................................................   190
Statement submitted by the Independent Insurance Agents and 
  Brokers of America.............................................   197
Statement submitted by Craig Poulton, CEO of Poulton Associates, 
  Inc............................................................   200
Statement submitted by the Property Casualty Insurers Association 
  of
  America........................................................   205


    REAUTHORIZATION OF THE NATIONAL FLOOD INSURANCE PROGRAM--PART I

                              ----------                              


                         THURSDAY, JUNE 9, 2011

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:04 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I would like to call this hearing to 
order. Today the Committee meets to examine the reauthorization 
of the National Flood Insurance Program.
    Currently, constituents from my home State of South Dakota 
are dealing with some of the worst flooding that the State has 
ever seen. When I was back in South Dakota last week, I spent 
some time talking to homeowners and business owners in the 
communities that are anticipating some of the worst damage. 
While they are working hard to minimize harm to people and 
property, they are understandably concerned about short-term 
displacement and long-term recovery. I will do my best to see 
that they, along with our neighbors and fellow Americans who 
have had their lives turned upside down by devastating storms, 
are promptly provided with the disaster relief that they need.
    I would also like to applaud Administrator Fugate and his 
staff at FEMA on how they have responded to the flooding in my 
State so far. I hope that the quick response that we saw during 
the recent sudden storms continues when addressing the ongoing 
flooding in South Dakota and around the country.
    The NFIP was created to help communities limit damage and 
speed recovery from flooding disasters. However, it now faces 
several challenges to its long-term viability, including an $18 
billion debt to the U.S. Treasury.
    Over the past year, we have also faced several lapses in 
the NFIP. As many stakeholders have noted, lapses have 
detrimental effects on both the insurance and housing markets. 
This program, which provides over $1.2 trillion in coverage, 
needs certainty. It is my hope to provide this through a long-
term extension.
    As the people of South Dakota and others have seen 
firsthand, flooding is responsible for more damage and economic 
loss than any other type of natural disaster. It affects people 
across the Nation of both parties, which is why I believe that 
in 2008 the Senate was able to come together across the aisle 
and pass a bipartisan reauthorization bill by an overwhelming 
vote of 92-6. Unfortunately, in 2008, we were not able to come 
to an agreement with the House. The recent flooding has made it 
clear that Congress must reauthorize and reform the NFIP, which 
is set to expire this year on September 30.
    As we move ahead, I hope we can once again come together 
and pass a bipartisan bill that will build a sustainable future 
for the program and American citizens.
    I will now turn to Ranking Member Shelby, and then we will 
open it up to all Committee Members who wish to give an opening 
statement. Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman.
    The National Flood Insurance Program was established in 
1968 and was designed to reduce the burden on taxpayers 
stemming from Federal disaster relief for floods. By providing 
flood insurance for properties in high-risk areas, it was hoped 
then that insurance premiums could be used to cover the cost of 
flood damage. Since Hurricane Katrina, however, the program has 
struggled to remain financially viable. In fact, since early 
2006, the GAO has targeted the Flood Insurance Program as 
``high risk because of its mounting debt and the structural 
flaws.''
    Today the program is nearly $18 billion in debt and has 
problems even servicing that debt. Unfortunately, as the GAO 
has shown, the program's debt is only one of many difficulties 
facing the Flood Insurance Program as it is constituted today. 
Every aspect of the program I believe must undergo significant 
revision for it to survive and to continue on a sustainable 
path.
    During the 109th Congress, this Committee approved 
unanimously and the Senate overwhelmingly passed legislation 
that, while not perfect, addressed many of the core 
deficiencies of the program. That legislation would be a good 
starting point for this Committee as we move forward toward 
reauthorizing the National Flood Insurance Program. But as we 
begin this process, I believe several issues deserve a close 
examination by this Committee.
    First, we should examine the relationship between the 
program and write-your-own insurance companies. According to 
GAO, write-your-own companies may be receiving excessively high 
reimbursements and bonuses from the program. The GAO 
recommended that the write-your-own program have more 
transparency and accountability. This is something we should 
pursue.
    The Committee should also examine the types of properties 
the Flood Insurance Program is covering to ensure that its 
resources are spent effectively. For example, the Congressional 
Budget Office has determined that 12 percent of the homes 
covered under the program are worth more than $1 million. I 
believe we must ensure that the program requires wealthy 
participants to pay the full cost of their insurance.
    The Committee should also examine the program's map 
modernization effort that we have been working on. The map 
modernization process has been ongoing for several years, and 
it is crucial for the long-term success of this program. 
Updated maps are important for two reasons: first, they warn 
developers and homeowners about the risk of developing or 
living in a floodplain; second, they ensure that participants 
are paying fair prices for flood coverage.
    Some communities have called into question the validity of 
the maps, and others have argued that they have been excluded 
from the mapping process. Community participation I believe is 
crucial, but this process needs to take place rapidly to ensure 
that the risk is accurately reflected and homeowners and 
communities are fully informed.
    Many of the existing maps are several decades old and do 
not accurately reflect the cost and risk of living within a 
floodplain. I think we should also see--I would like to see a 
simple definition of the phrase ``actuarially sound'' in any 
bill to reform the program. This simple act will clearly state 
our intent to make this program self-sustaining.
    Finally, I believe this Committee should consider ways to 
privatize portions of this program. We should transfer risk 
from the program to the private sector to the maximum extent 
possible. If we are able to accomplish these objectives, we may 
finally achieve the original purpose of the Flood Insurance 
Program: to reduce the escalating cost of flooding to 
taxpayers.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Tester.

                STATEMENT OF SENATOR JON TESTER

    Senator Tester. Yes, thank you, Mr. Chairman. Thank you for 
holding this hearing on the reauthorization of the National 
Flood Insurance Program. It is a very, very important program. 
We need to get a long-term solution for this. Hopefully both 
sides of the aisle can work together to make that happen 
because this is very, very important.
    I say that because the State of Montana is not exactly a 
flood State; it is a headwater State. It is underwater right 
now, and--I should back up. Good to have you here, Senator 
Wicker, and I appreciate your work on this issue. But the fact 
of the matter is we have seen record precipitation. We have 
record snowfalls still up in the mountains. I had talked to 
Craig Fugate yesterday at a hearing, and we will follow up on 
that conversation.
    We have many, many challenges across this country when it 
comes to disasters, and water is one of them apparently this 
year.
    So, with that, I want to thank you for having this hearing, 
and I look forward to the opportunity for questions and 
interchange between myself and Administrator Fugate. Thank you.
    Chairman Johnson. I would now like to welcome Senator Roger 
Wicker from Mississippi, our Banking Committee colleague, to 
the Committee. Senator Wicker has switched seats temporarily to 
testify before the Committee.
    Senator Wicker, welcome.

   STATEMENT OF ROGER F. WICKER, A SENATOR FROM THE STATE OF 
                          MISSISSIPPI

    Senator Wicker. Well, thank you very much, Mr. Chairman and 
Mr. Ranking Member and Senator Tester. I have a written 
statement, which I will not read in its entirety and ask that 
it be included in the record at this point.
    Chairman Johnson. Thank you.
    Senator Wicker. I would also notice that the States of 
Montana and South Dakota have sent a great deal of water down 
our way this year, which we are experiencing right now. It only 
enforces the fact that we are all in this together and that we 
do need a multiyear reauthorization, and so I am here today to 
agree with Members of the Committee in that respect and to 
speak for a few moments about my proposal, which I am calling 
the COASTAL Act.
    You were kind enough to allow me to testify last year 
before I became a Member of this Committee to sort of talk 
about the unique perspective we have and people in the State of 
Alabama and Louisiana and the Gulf Coast have with regard to 
flood insurance and the way it interplays with wind insurance. 
At that time I spoke about three reforms that I advocated:
    Number one, improving enforcement by FEMA and lenders with 
respect to those required to purchase and maintain flood 
insurance. I do not think we do a good job there.
    Number two, charging rates that are actuarially sound, as 
the Ranking Member just noted.
    And, Number three, updating FEMA's flood insurance maps so 
that those in flood-prone areas are aware of the risk and 
obtain proper insurance coverage.
    Mr. Chairman, it has been 6 years since Hurricane Katrina 
devastated the Gulf Coast. While we have made significant 
progress in rebuilding our communities and businesses, for many 
Mississippians recovery is still not complete. And one of the 
biggest impediments to our efforts is the lack of affordable 
property insurance. The availability and affordability of wind 
insurance is crucial in any State where there is a coastal 
exposure. For vast numbers of property owners, private 
insurance coverage for wind damage has not been available in 
the Gulf Coast since the aftermath of the 2005 hurricane 
season.
    Hurricanes, as we all know, present a unique problem for 
coastal property owners because damages can be caused by 
multiple perils, including high winds and devastating storm 
surges. Currently homeowners cannot purchase a single policy 
that covers all hurricane-related damages. Wind losses are 
covered by private insurers or State-run wind pools, while 
covering for flood damage is largely backed by the Federal 
Government through NFIP.
    As I have testified before, many property owners who 
suffered severe property damage from Hurricane Katrina were 
forced to go to court to determine which insurer was 
responsible for damage in wind versus water disputes.
    Now, I want to also quote from the Government 
Accountability Office, which issued a report in 2007 which 
called for greater oversight of wind and flood damage 
determinations. In that report GAO found that claims 
information collected by NFIP did not allow FEMA to effectively 
oversee damage determinations and apportionments after 
hurricane events. These are the words not of Senator Roger 
Wicker but of the Government Accountability Office, and I 
quote:
    ``For a given property, FEMA's ability to assess the 
accuracy of payments for damage caused only by flooding is 
limited because NFIP does not know what portion of the total 
damages was caused by wind and what portion was caused by 
flooding.''
    The report goes on to say, ``Because both homeowners and 
NFIP policies can be serviced with a single write-your-own 
private insurer, a conflict of interest exists during the 
adjustment process.'' The words, Mr. Chairman, of GAO.
    Now, to help resolve these issues, I have recently 
introduced the Consumer Option for an Alternative System to 
Allocate Losses Act, the COASTAL Act. This legislation, S. 
1091, which I invite each of you to cosponsor, addresses 
several problems that arose in the aftermath of Katrina. These 
problems include: Number one, disputes and costly litigation 
between consumers and insurers over the wind versus water 
claims; Number two, inherent conflicts of interest, as GAO 
pointed out; and, Number three, the lack of oversight with 
respect to the adjustment process and claims paid by NFIP.
    I believe the COASTAL Act is a commonsense approach to 
addressing these problems. The legislation would use data 
currently collected by NOAA and other participating entities to 
allocate property damages following significant storms. Under 
the COASTAL Act, a formula would be established that utilizes 
storm information provided by NOAA and its partners, combined 
with structural information for each property, to allocate 
losses caused by high winds and storm surges from hurricanes. 
This alternative loss allocation system would be based on the 
timing, location, and magnitude of wind speeds and the storm 
surge before, during, and after a major storm impacts the 
coastline of the United States. Only properties completely 
destroyed by a hurricane would qualify under this loss 
allocation system. Slab cases, as they are commonly known, have 
the greatest uncertainty because there is little or no evidence 
left behind.
    The COASTAL Act is by no means a silver bullet for all the 
problems associated with flood insurance and NFIP. However, it 
is a fair and objective way to provide more certainty to the 
slab claims process, which is a very costly piece of the 
greater Flood Insurance Program. The advantage of my proposal 
is that it is based on activities that NOAA already carries 
out. Extensive storm data related to wind and storm surges are 
currently collected throughout each named storm that threatens 
the coastline. This is done primarily now for the purpose of 
doing a better job of informing emergency managers. I would 
emphasize that the COASTAL Act does not create a new program. 
It, rather, uses information that we currently have for the 
purpose of better allocating the responsibility for wind versus 
water.
    I believe this proposal will provide more structure in the 
marketplace, which should increase the availability of 
insurance and competition, thus driving down premiums over 
time.
    I also believe this system will help us hold insurance 
companies accountable for covered losses rather than forcing 
taxpayers to foot more of the bill through the deeply indebted 
National Flood Insurance Program.
    In conclusion, Mr. Chairman, I would say Congress has an 
opportunity to make wind and water coverage available and 
affordable while putting the National Flood Insurance Program 
on a sustainable path forward. I will continue working with 
each of you, my colleagues on the Committee, to pass a 
multiyear reauthorization bill that can be signed into law, and 
I urge all of my colleagues to join us in this effort.
    Thank you.
    Chairman Johnson. Thank you, Senator, for your testimony.
    Now I would like to invite Craig Fugate, Administrator of 
the Federal Emergency Management Agency, to the table for his 
testimony. Prior to his May 2009 confirmation as FEMA 
Administrator, Mr. Fugate had a long career in emergency 
management at the State and local level, including serving as a 
volunteer fireman.
    Welcome, Administrator Fugate. You may proceed with your 
testimony.

STATEMENT OF W. CRAIG FUGATE, ADMINISTRATOR, FEDERAL EMERGENCY 
                       MANAGEMENT AGENCY

    Mr. Fugate. Thank you, Chairman Johnson, Ranking Member, 
and Members of the Committee. I have submitted written 
testimony. If it please the Chairman, we will submit that for 
the record.
    Chairman Johnson. It will be received.
    Mr. Fugate. I will proceed with a brief statement then.
    I think Senator Shelby summed up really the structural 
issues we are faced with in the Flood Insurance Program, and I 
think one of the things that I would like to emphasize here is, 
as the program exists now, it is unlikely we can retire the $18 
billion debt. I also see the risk that that would actually 
substantially increase in either a large-scale hurricane or a 
tsunami event. I think we do a much better job with riverine 
flooding and making the determination of how to manage that 
risk. But in these larger-scale events, there are structural 
issues within the Flood Insurance Program that produce high 
vulnerabilities that are not addressed in the current system.
    So how do we address that risk? I think one of the issues 
that we see and we agree with is this risk should be better 
shared with the private sector versus strictly looking at a 
taxpayer-run system. I believe there are policies that could be 
moved to the private sector, that there are incentives, or 
pilots we could use to determine what would be the incentives. 
I also think there are going to be those policies that are such 
high risk that the private sector will never be able to manage 
that risk, and that will continue to be something we would have 
to look at as what would be the Federal share of managing or 
subsidizing that risk.
    I also believe that the efforts to go forward in 
reauthorization need to take a longer view of reauthorization 
for a greater period of time than shorter-term 
reauthorizations. In our listening sessions with both 
constituents as well as the industry, they have informed us 
that it is very detrimental to have short-term 
reauthorizations, particularly in a real estate market that is 
trying to right itself. When we have lapses in the ability to 
write insurance or uncertainty in that, it makes it difficult 
for realtors and others to do closings as well as for write-
your-own companies to be able to manage their portfolios and 
continue to offer those services.
    So, again, I believe we need to look at in reauthorization 
how do we incentivize the program to encourage the private 
sector to participate, but also recognize there are going to be 
those higher-risk policies that we will still need to look at 
how the Federal Government does that.
    We need to look at a longer reauthorization to provide 
stability as we go forward with these improvements. Even if we 
do not have all the answers today, I think that stability is 
the one thing we heard loud and clear that we needed to 
address.
    Then, finally, the last piece of this that I think we need 
to look at is how do we deal with making this insurance more 
actuarially based, based upon the risk, which I think 
encourages the private sector to come into this market. And I 
am not opposed--I have heard this term that, well, why would we 
let the industry cherrypick the best policies and we keep the 
most toxic policies? The answer is the best market out there 
for getting this out of all Federal is to allow them to take 
those policies that they can manage the risk now. In many 
cases, those people do not buy flood insurance anyway because 
it is not mandated. Yet every time there is a declared disaster 
with flooding, we end up having to provide assistance.
    So I am not opposed to the private sector writing the least 
risky policies if that would increase the amount of protection 
people have. But I also think--and this comes back to something 
we are struggling with every time we do map revisions or 
updates and we change the risk. When people find that their 
risk has increased and they are now required to mandatorily 
purchase flood insurance because they are in a high-risk area, 
the price of that oftentimes becomes a detriment to people and 
a brand-new cost that they had not anticipated in their 
mortgage or in their budgets.
    So I think we also need to look at, as we change these 
designations, how do we do a graduated increase in these 
policies, how do we move people to be more actuarially sound, 
but also recognize for low-income areas, there may be a need to 
provide additional assistance or give more time before we get 
to a full adjusted rate more closely reflecting actuarial. And, 
again, these are some of the areas that I think--I agree with 
this concept that we have got to get the private sector more 
engaged in providing coverage in the flood insurance policy, 
and that could be either through direct provision, through 
reinsurance, or other models. But I also believe we still have 
a significant number of policyholders that it will still 
require some sort of Federal support to make it affordable and 
continue to provide that protection from these risks.
    Again, I thank you, Mr. Chairman, for the opportunity to 
testify, and I look forward to the questions.
    Chairman Johnson. Mr. Fugate, some South Dakotans have been 
told to evacuate for as long as 2 months. Can you tell me what 
actions you are taking in South Dakota to assist our 
communities and residents in this disaster? Can you also tell 
me what resources are available to South Dakotans while they 
are displaced and during the recovery phase?
    Mr. Fugate. Mr. Chairman, we are working with the Governor 
and the team there as we are getting moire and more flooding, 
looking at the assistance. There are two pieces of the 
assistance that can be provided. Obviously those people that 
have flood insurance would have that, but we also provide 
through other programs in a declared disaster. If the President 
grants a disaster declaration, that includes individual 
assistance. We do provide housing assistance and those types of 
support to the survivors in the event of a flood. So, again, we 
continue to work with South Dakota and as we go through the 
request from the Governor.
    Those areas that do have individual assistance, that 
assistance is being provided for housing and other assistance 
based upon the impacts to their homes.
    Chairman Johnson. In your testimony you outline several 
far-reaching NFIP reform policy alternatives that the NFIP 
working group has been discussing. When do you plan to publish 
some of these alternatives?
    Mr. Fugate. Again, we have looked at some very broad areas. 
In doing this what we found was there was no consensus, there 
was no single idea. But when we looked at both constituents and 
industry, we found there were about four areas--there seemed to 
be centers of gravity of interest. As we have done that and 
looked at that, we think some of those may not be the best way 
to go. I think we are probably now looking at focusing on a 
system that utilizes the Federal programs but with the greater 
participation of the private sector and how we do that. So as 
we continue to work through this summer, we are looking at 
later on coming up with a more consolidated recommendation and 
coming forth with the consensus report.
    Chairman Johnson. As you know, we are facing a September 30 
deadline for reauthorization. In the past many in the Senate 
have been reluctant to extend the program without reform. One 
of the NFIP reform policy alternative options you mention is 
program optimization. In this area of program optimization, 
what are some of the most important reforms Congress can make 
in the near term?
    Mr. Fugate. Well, I think one of the limiting factors in 
being actuarially sound is we are currently held to a 10-
percent rate increase, I believe, per year in moving people 
that can afford the insurance to being more actuarially based. 
Again, this comes back to, as Senator Shelby pointed out, those 
that can afford the higher premiums, we need to be able to move 
them to those, but we also have to understand that low-income 
or people that have limited means, that creates a double impact 
in that we may actually be forcing them to make hard decisions 
about how they are going to pay for flood insurance. But I 
think the ability to move toward where people can afford the 
flood insurance to pay the actuarially sound rate without any 
reductions or phase-in time frames would be the first step, and 
then looking at how we take communities that because of the 
economic structures we phase them in more gradually. But as it 
is now, we are still having to move slowly through this, even 
for those people that cannot afford a higher premium.
    Chairman Johnson. In your testimony you mentioned that the 
current in-or-out nature of the flood hazard areas sometimes 
gives citizens the impression that they are inaccurate. Do you 
have recommendations for how rates can be set in a more 
granular fashion? What resources would you need to achieve 
this?
    Mr. Fugate. Well, right now we deal with everything outside 
of a 1-percent flood zone as a preferred rate, and if you are 
in the 1-percent--which is another challenge is how do you 
explain the risk where we actually require the purchase of 
flood insurance is a chance of a 1 in 100-year flood, yet that 
does not mean that every 100 years you have a flood or it takes 
100 years to have a flood. You can have these back-to-back 
events. And I think the question is where we see an increased 
risk but it is below a 1-percent or that higher level, do we 
still do preferred risk? Preferred risk is actually, I think, 
in some cases probably below what the market would actually 
insure at. So we actually--I think in some ways we have created 
the structural imbalance where we are charging a preferred rate 
because the risk is much lower, but we are probably writing it 
below what the private sector would be comfortable writing it 
as, and so we create a disincentive to get the private sector 
to look at that. In effect, and particularly in large-scale 
events such as hurricanes or tsunamis, we are actually 
subsidizing a greater risk there that when you look at river 
floods and other things suggests that that risk is not as 
great.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    The program's goal, as I understand it, of fiscal solvency 
is defined as charging premiums that will generate enough 
revenue to cover a historical average loss year. How does the 
program's rate setting policy compare to that of private sector 
insurers? In other words, would it meet the definition that I 
raised in my opening statement of actuarially sound?
    Mr. Fugate. I think we do a much better job on the riverine 
flooding. I do not think it is actuarially sound when you look 
at widespread impact, such as the hurricanes and the tsunamis.
    Senator Shelby. But if we do not get--first, define what 
actuarially sound means, and get to this, it seems to me that 
every time there is a catastrophic event and you are hit with 
everything, that it is leading the fund toward bankruptcy 
rather than actuarial soundness. Is that fair?
    Mr. Fugate. That is fair, Senator Shelby, but it also asks 
another question. It would be difficult to do that at a current 
rate that would be actuarially sound unless we had another way 
of distributing that risk, and since we are only writing that 
one hazard, without private sector engagement, it is hard to 
distribute that risk.
    Senator Shelby. And how do we change the distribution of 
the risk? Do we do that by mapping and by identifying and 
broadening the amount of money coming in? How do we do that?
    Mr. Fugate. One part would be to better reflect those areas 
and their risk and then have greater participation in the Flood 
Insurance Program based upon that risk. But I think the other 
challenge would be this is one risk. It means that every time 
you have significant floods, you are not able to balance that 
against other risks or other markets, and that is where the 
private sector, particularly in reinsurance markets, would give 
us more flexibility to share this risk against other risk so it 
is a more distributed versus all concentrated, that year to 
year, we probably do pretty good until we get a big hurricane 
or big tsunami, and then we are upside down again with large 
amounts of taxpayer dollars going to pay out the claims.
    Senator Shelby. Where are we in our mapping program, 
roughly, as to where we were, say, four or 5 years ago?
    Mr. Fugate. Senator Shelby, I would like to give you that 
in writing----
    Senator Shelby. Could you do that for the record?
    Mr. Fugate. Yes, sir, for the record. We have made 
significant improvements. However, as we have gone through 
this, we have learned some valuable lessons, one of which is to 
provide an unbiased science technology type review before we 
have disputes over our process. And so that is building a 
little bit more time in, but we continue to move forward----
    Senator Shelby. What is the impediment there, or the 
challenge there?
    Mr. Fugate. As we go through, because the funds that are 
available to do this, and as we hire the contractors to do the 
map upgrades and updates, we find ourselves from time to time 
dealing with technical issues and dispute resolution of using 
data that we have versus the local data or State data. 
Previously, we never had an impartial way to do the dispute 
resolution, so we have set up a technical advisory modeled 
after other dispute resolution processes using a scientific 
advisory panel to review our data and the local or State data 
and give us a better resolution that helps move that along.
    Senator Shelby. It is my understanding that FEMA has 
created a new category of what you call grandfathered 
categories for homes that have been mapped into riskier areas. 
These grandfathered properties enjoy, as I understand it, 
taxpayer subsidized flood insurance rates. Discuss how the 
newly grandfathered category works. Is it a permanent category? 
And do these grandfathered properties undermine your efforts at 
FEMA to place the flood program on a more actuarially sound 
basis?
    Mr. Fugate. Senator Shelby, I will speak in general and 
then I want to respond in writing to the specific details.
    Senator Shelby. Sure.
    Mr. Fugate. This refers to, as we know that we are having 
map designation changes, where prior to the updated maps, 
people did not either have a mandatory purchase requirement or 
had preferred risk, and as you go into the higher risk, those 
payments, or the amount that they would be required to pay has 
produced economic hardships.
    What we do is we work with the local communities. If people 
will purchase insurance going into that, before the maps become 
final, they maintain a preferred status and they are graduated 
into the full status.
    But again, it is an economic hardship, particularly these 
are not in many cases affluent communities. Oftentimes, what we 
find is these are existing communities, working communities, 
and it is a sudden and oftentimes very dramatic increase in 
their insurance premiums for flood insurance.
    Senator Shelby. Write Your Own Program. The GAO has 
uncovered several problems with the participation of Write Your 
Own insurers in the program. The GAO found, according to the 
report, that FEMA paid reimbursement rates that were greater 
than the actual flood-related expenses incurred by insurers and 
that the Write Your Own bonus structure is often excessive. Do 
you agree with the GAO's finding? If not, where do you differ?
    Mr. Fugate. We continue to look at that, but it is a 
question of incentivizing the private sector to write those 
policies, and so these are rates we negotiate with the Write 
Your Own policies. Again, we continue to look at the cost 
effectiveness of that, but it comes back to if the industry is 
not willing to do that at a rate that we can pay them, then we 
do not--we end up doing it ourselves.
    Senator Shelby. Could you comment briefly on the risk that 
exists for communities--you have seen a lot of this lately--
that are located behind levees, flood walls, and dams, and 
whether there should be a mandatory purchase requirement for 
people living in these residual risk areas, or are they real 
risk areas, not residual.
    Mr. Fugate. Well, this is an area, again, of quite a bit of 
controversy. It is a zone we call Zone X. They are not required 
to purchase insurance because the protection of those 
structures reduces their risk below 1 percent. However, if you 
do have a failure, it is oftentimes catastrophic and many of 
those homeowners do not have flood insurance.
    Senator Shelby. What happens when they--the Corps, recently 
we have seen, breached the levee or the dam. What happens 
there, and there is no flood insurance?
    Mr. Fugate. In that particular case, Senator, that is a 
designed system. Residents in that floodway were notified and 
are notified annually they are in a floodway and that floodway 
may be activated----
    Senator Shelby. OK.
    Mr. Fugate. ----and they are required to purchase flood 
insurance.
    Senator Shelby. OK. Thank you, Mr. Chairman. Thank you.
    Chairman Johnson. Senator Tester.
    Senator Tester. Yes. Thank you, Mr. Chairman, and I 
appreciate, Administrator Fugate, your recommendations on the 
Flood Insurance Program, and I particularly appreciate the 
short-term versus long-term argument. It has played havoc with 
the housing industry, a portion of our economy that we need to 
help promote. And so this flood insurance from a long-term 
basis is critically important.
    I want to talk a little bit about a couple other issues 
first, though. On June 1, our Governor asked the President to 
declare a disaster for the State of Montana. Can you give me 
any insight on how close we are getting to this declaration 
from your level?
    Mr. Fugate. It is moving through the system, as we got the 
information and it is moving in the system, sir. It is at our 
level to be worked on, so it is not in the region anymore. We 
have it.
    Senator Tester. OK. And so you know I am going to ask a 
follow-up. Can you give me any sort of idea when we can 
anticipate this declaration?
    Mr. Fugate. Again, we will be--we want to make sure we have 
the best possible data to make a recommendation for the 
President and we will then await his decision.
    Senator Tester. OK. That did not answer my question. Can 
you give me any sort of idea on when that date might be? Is it 
going to be in a week? Two weeks?
    Mr. Fugate. It is moving through now, sir. I would say 
weeks, not months. I would be almost ready to say days, not 
weeks, but we want to make sure we have all the information to 
make the recommendation.
    Senator Tester. Good enough. Disaster Relief Fund, very 
quickly. This is kind of a follow-up on what I talked about 
yesterday when you were in front of the subcommittee yesterday. 
Are you confident that the Disaster Relief Fund will not be 
depleted in this fiscal year?
    Mr. Fugate. Based upon what we have right now, I think we 
will make it to the end of the fiscal year, but we have some 
costs that have come in on the most recent flooding and the 
recent tornadoes that we are having to evaluate and we hope to 
have some answers to that in the week, particularly with the 
debris missions in Mississippi and Joplin, Mississippi [sic], 
we are adding those in and taking a look at those costs.
    Senator Tester. OK. We will need to stay in touch on that 
as it is moving forward.
    Levee certification, it is a difficult problem. We have 
been in meetings together on this issue. And it is across the 
country, almost every river drainage. The Army Corps, they 
annually and periodically inspect levees that it constructed. 
However, the standards for the certification studies are 
incompatible with FEMA. FEMA and the Army Corps are not--and I 
am not being critical, but it is a fact--not on the same page 
when it comes to these certification standards. Has there been 
any discussion with the Army Corps about convening together to 
develop a common set of standards that would allow that the 
data collected by the Army Corps would satisfy your 
certification requirements in FEMA?
    Mr. Fugate. Senator Tester, we are working with the Corps. 
I think the answer to that in the short term is, yes, we are 
working toward that, but I think there is another piece of 
this. When we do our maps, we only looked at previously 
accredited levees, and if it was not accredited, we would map 
it with nothing, which did not reflect any protection or 
accurately do the risk.
    We are currently working on and are submitting for review 
an ability to actually map the existing structure as is, so 
that where we have structures that may not be accredited but 
are there, we will no longer take the position that we are 
going to zero them out and map without the structures. That 
process will be going out to the internal review, and then we 
think in about another 30 to 45 days will go external, and we 
are moving toward using what is there versus a standard that 
says, unless you have an accredited levee, we will only look at 
that structure. We will now, after this process, look at 
structures that are there and then map what that risk looks 
like.
    Senator Tester. OK. So are we talking the same thing with 
accreditation and certification?
    Mr. Fugate. Yes, sir. Again----
    Senator Tester. That is good enough. So what about the 
levees that had been previously certified? And by the way, I 
appreciate that answer and I appreciate the work. What about 
the levees that had been certified before? What is the 
situation with those, because in my particular situation, some 
of them fall under your first answer. Some of them will fall 
under the answer that they are certified by the Army Corps and 
now that certification either does not work or the Army Corps 
says that we cannot certify anymore for whatever reasons, no 
money or liability, whatever it might be. So can you tell me, 
what about the levees that have been certified previously by 
the Army Corps?
    Mr. Fugate. The previous certification is--one part is are 
they currently certified, and as the Corps looked at what 
happened to failures, and we continue to see failures in levees 
this year, as they revise those standards, that is what an 
accredited levee becomes.
    What we recognize is many levees do not meet that. It may 
be because they do not have on their free board or other design 
issues, but they offer protection. As we move toward factoring 
that in, I think it becomes less of an issue that we are not 
looking at levees unless they are accredited. We are looking at 
what is there.
    But we will respond back in writing, sir, on where we are 
at on that with the Corps.
    Senator Tester. OK. That would be good. You know the issue. 
I know you know the issue intimately. What we have done through 
map modernization and whatever, through the Army Corps and FEMA 
not having the same standards, or whatever it might be, as we 
put communities in the situation where--and I have said this 
before to you, but it has been a while ago--where the folks 
that are going to do the certification, the errors and 
omissions here are so huge that the cost runs so high that it 
puts communities in rural America that are not exactly affluent 
in real problems with flood insurance. And so I look forward to 
working with you on this to try to get this done, because it 
impacts almost every community on every drainage, I think in 
this country, but I do know in Montana.
    With that, thank you for being here.
    Chairman Johnson. Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman.
    Thank you, Administrator, for your work, particularly and 
including the recent Mississippi River flooding which impacted 
many States, including Louisiana, although we were certainly 
not the most impacted.
    I agree with virtually all of your comments. I want to 
underscore something you said, something Senator Tester 
emphasized, which is the need for a full-blown longer-term 
reauthorization. This reauthorization or extension in tiny 
increments has really not served our communities and the 
economy well at all, and I know you know that, and you 
reflected that in your testimony.
    For instance, according to the testimony of Terry Sullivan, 
who is Chair of the Committee on Flood Insurance with the 
Realtors, the last lapse we had of the program in June of last 
year led directly to the cancellation or delay of 47,000 home 
sales closings at a time when, as Senator Tester said, we need 
every closing in sight in terms of trying to revive this 
economy and the real estate sector in particular, and for no 
good reason, we shut down permanently or temporarily 47,000 
closings. So my first goal is a full-blown long-term 
reauthorization. I know that is shared on the Committee, and I 
certainly hope we get there.
    Let me go to some particular issues of how we do that 
reauthorization. One is the current coverage limits. As you 
know, those have not been changed at all since 1994. That means 
the coverage limit, the amount, is a fraction, in real terms, 
of what it was in 1994. Do you think it is appropriate that we 
would look at that and adjust that in the context of moving the 
whole program to a much more actuarially sound footing?
    Mr. Fugate. Senator, I would actually--I had some 
conversations with some folks that have coastal property, as 
well, where their homes maybe in 1994 were $200,000 but now 
they are being appraised or their replacement cost would be a 
quarter-of-a-million or higher, and so we recognize that the 
Flood Insurance Program, particularly where we have had these 
homes that have appreciated so much, the insurance is not 
really covering replacement value. It may cover an existing 
mortgage, but it certainly is not covering what they have.
    But coming back to what Senator Shelby said earlier, is it 
best that we do that through the Flood Insurance Program, or do 
we look at the Flood Insurance Program as a base level coverage 
and then look at how we bring the private sector in to provide 
a higher level of coverage? I would argue that if I have a home 
valued that much, I may be able to afford more than a working 
class fishing family that does not have that expensive of 
property.
    So I guess the question is, as we look at those higher 
levels of coverage, do we do that at a full actuarial value 
with the Federal backing, or is this an area that the market 
may be interested in participating and that we do the base 
level coverage and they do a higher level.
    But I agree. We have property out there that we do not 
cover the replacement cost with the Flood Insurance Program 
because of its caps, but in many cases, the way to go forward, 
I think, may be one of those opportunities to look at how we 
engage the private sector.
    Senator Vitter. I am certainly completely open to that path 
forward as long as there is a path forward. I mean, right now, 
that opportunity for additional coverage is either not 
widespread or certainly not widely understood and taken 
advantage of, but I do not think it largely exists.
    I want to go back to one of Senator Tester's comments, 
which is levee recertification. To me, at least in Louisiana, 
the biggest issue is something you did not particularly focus 
on, which is the fact that the Corps has basically walked away 
from their historic role in recertifying levees which they 
design and they built, and after Katrina, they basically said, 
we are walking away from that. It is all on the locals.
    As a practical matter, it has just proved unworkable. We 
are talking about jurisdictions and entities which in 99 
percent of the cases do not have either the expertise or the 
resources to handle that. And again, I am talking about levees 
that the Corps designed and the Corps built and the Corps 
checks on and the Corps is the logical lead agency, at least, 
in that ongoing recertification. Can you comment on that and 
how we can make progress on solving that issue?
    Mr. Fugate. Well, Senator Vitter, what we have done, I 
think, moves us beyond only looking at a levee that the Corps 
has accredited or the local jurisdiction accredits to those 
standards. We are working toward looking at the levees as built 
and using those to determine risk versus only looking at the 
accredited levees. So that is step one----
    Senator Vitter. And let me just interrupt. Thank you for 
that policy change. That is enormously important. As you 
indicated, before you all made that major policy change, if it 
was not up to the 100-year standard, it did not exist on FEMA 
maps, did not provide any protection, which was not reality. So 
thank you for that change. But, as you know, my question still 
remains.
    Mr. Fugate. Again, we continue to work with the Corps on 
that. I know this is primarily where the ownership of the levee 
have transferred from the Federal Government to State or local 
jurisdictions and how do they maintain that accreditation, and 
that is something, again, we continue to work with our partners 
in the Corps, but I know it is a financial difficulty for local 
jurisdictions to have those levees, to maintain those 
standards. In many cases, it is the cost of having engineers 
come out and review the levees. Again, that is why we are 
hoping that as we go forward with looking at those levees that 
may not be accredited but are providing significant protection, 
how do we map that versus only accredited levees would be 
mapped.
    Senator Vitter. Well, I just encourage you to stay involved 
in that, because the post-Katrina system is not working, and in 
my opinion, it is just the Corps trying to CYA, quite frankly, 
so the next time something bad happens, as it did in Katrina, 
they can point to somebody else rather than themselves, and we 
need a workable system. Thank you.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you, Mr. Chair, and thank you for 
your testimony, Administrator.
    I want to echo what my colleague, Senator Vitter, has just 
said, that it is the sense of the many Oregon communities that 
the Corps has walked away from its historic role in certifying 
levees and left them in an almost impossible situation in which 
they cannot afford the private certification, but without the 
certification, their business districts and their housing 
districts are decimated. They are between a rock and a hard 
place, and I just want to make sure that those concerns of 
communities being decimated by this change of policy is getting 
to your ears.
    I am not sure if you have been out to visit these 
communities and understand how this affects everything--
homeowners who were not in a floodplain but are now in a 
floodplain and their mortgage company demands that they now get 
flood insurance, and they may be 10 years into their policy, 
businesses that cannot locate in the business district because 
they cannot afford the policies, the community hit hard by the 
recession, unable to fund the private certification process. 
That is assuming that all they have to do is get the 
certification, but the expectation is, well, the world has 
changed and now you are going to have to do X, Y, and Z to 
change your levee, which is a huge additional cost on top of 
the certification itself.
    I just want to make sure that this incredibly important 
issue for economic development and the success of our 
communities is making it to your ears and that you are out 
talking to the communities that are affected and understanding 
it firsthand.
    Mr. Fugate. Senator, yes. In fact, our Region X 
Administrator actually was the former State Director and knows 
many of these issues. I personally dealt with Lake Okeechobee 
when the systems around that were not certified and we had to 
deal with the flood insurance premiums for rural agricultural 
communities. That is why I think our plan to move forward is to 
look at the existing structures and map those structures. If 
you are familiar with--unless they were accredited, we would 
not look at the existing structures in determining that risk, 
and we are moving----
    Senator Merkley. Let me interrupt you there, because I was 
one of the Senators that advocated fiercely for that change. I 
do praise you for responding to our pleas on behalf of our 
communities. But let me give you an example of a community in 
my State, the community of Warrenton. Warrenton was in a 
situation of having to adopt the new flood zone before your 
change of policy, and so--and they had to do that because 
people could not afford flood insurance without adopting the 
new flood zone policies, or the new flood determinations, but 
they are now in the situation of--that plan did not take into 
account existing structures because it happened before you 
changed the policy. I praise you for changing the policy.
    But how about for these communities that did not benefit 
from what is really a more accurate appraisal of flood risk? 
Can it be possible to go back and rework with those communities 
that were unfortunately hit a little before the change in 
policy?
    Mr. Fugate. Absolutely, Senator. As we go through our 
process of doing the internal review and now, I think in about 
30 to 45 days, we are going to put this out to the external 
stakeholders for comment as we go forward with a rule, once we 
are able to implement the rule, we will go back and work with 
communities to update their maps based upon the new process. So 
it is not--it will not go as fast as I think many communities 
want, but it will go back and look at those communities where 
they did not have a certified levee and give us the opportunity 
to remap based upon the existing structures.
    Senator Merkley. So I think that is great news and thank 
you. Do you anticipate, for example, for a community like 
Warrenton, just using it as an example, is that a year out or a 
couple years out, and is there a price tag associated with it?
    Mr. Fugate. Senator, could I respond back in writing on 
what--we are still going through the methodology to get that 
through the peer review and then go to the external 
stakeholders. I think when we have that, that will be about a 
50-day process, and as we get the comments back, we will have 
to adjudicate and see. My staff feels like we have got the 80 
percent solution, but we want to make sure we did not get 
unintended consequences or miss things.
    But I would like to respond back in writing, that once we 
have the rule, what our time line would look like to come back 
and remap and what those costs would look like as far as 
resource availability.
    Senator Merkley. I would appreciate that, and I understand 
it is a complicated process and they are trying to address it 
in a thorough manner and that would be very helpful.
    In terms of the role of certification, the Corps has 
continued to play a role when there is a Federal structure 
involved, and I can assure you that we have been working with 
our communities to try to make sure we know about every Federal 
structure that could possibly trigger this policy. But is the 
current policy the one from here into the future, or just as 
Senator Vitter noted, kind of the walking away from the role of 
certification, is there a chance to walk back into that role 
and embrace it in a more wholehearted fashion?
    Mr. Fugate. Again, I will defer to the Corps of Engineers, 
but we do work very closely with them over the certification 
process, those that are still federally managed. I think this, 
again, is going to be a resource issue, in that how do we pay 
for or maintain the levees that are not Federal and understand 
that that is a tremendous burden and a cost for many local 
communities.
    Senator Merkley. Thank you.
    Chairman Johnson. Senator Johanns.
    Senator Johnson. Thank you, Mr. Chairman. Thanks for being 
here.
    I have just a couple of, really, quite specific questions 
that I would like to run by you. As you know, the State where I 
am from, the State of Nebraska, is bordered on the East side by 
the Missouri and we are now in this ramp-up where a historic 
amount of water is headed into the State, beyond anything the 
levees have ever had to endure, in fact, about twice as much 
water.
    There appears to be three events involved that cause this 
issue. Event number one was rain in Montana, a historic amount 
of rain. Event number two, of course, is snow melt. Event 
number three is the release that necessarily has to occur by 
the Corps of Engineers to avoid dam failure.
    As I understand the role relative to flood insurance 
policy, is you have to have it in place 30 days prior to the 
event. So how do you judge in this case when that 30 days 
starts to run?
    Mr. Fugate. That has been a very challenging question, is, 
does the flood event start when we start seeing actual damages 
or is it because we know the event is coming. I will ask, 
Senator, to respond in writing, because there are some very 
specific things that we had to go through to determine when 
does a flood occur by the legal definition and when is that 
incident period.
    The challenge is that is when we stop writing policies. The 
reality is, even if people purchase the policies, if they flood 
inside the 30-day period, they are not going to be covered. 
This really gets back to when would we stop writing policies 
because there is a flood event or we are in a flood situation. 
But I would ask that we respond back in writing with specific 
details of how we go through that, because it does involve 
measuring certain things and going out and sending out 
adjusters to look at what is going on.
    Senator Johnson. OK. If you could do that, I would really 
appreciate it, because we have many people, probably not just 
in Nebraska but all along the river system, that have this 
problem.
    The second question probably is no less challenging. In a 
situation where you have the Corps come in and they certify a 
levee, and as a result of that, people are in the floodplain, 
they are out of the floodplain, people find themselves out of 
the floodplain and they do not need flood insurance for their 
mortgage, they are not worried about the flooding situation, 
and all of a sudden caught in this historic situation again, 
what happens to those people? What if they were to--are they 
treated any differently? Can they buy flood insurance? What is 
the situation for them?
    Mr. Fugate. Up until the point where a flood is occurring 
and we are still providing flood insurance, they can purchase 
flood insurance. If the flooding occurs outside of their 
purchase window, the first 30 days, they would have flood 
insurance protection. But this gets back to a very common issue 
we face, and that is even though you are not in the 1 percent 
or greater risk, it does not mean you will not flood.
    And the reality is, if you leverage all the individual 
assistance programs that FEMA provides to a homeowner in an 
even where there is a flood, the Governors request the disaster 
declaration, and the President has granted individual 
assistance, it is a little less than $30,000.
    So what happens to people is they end up losing everything. 
They cannot cover their mortgage. They cannot replace their 
home. And it generally, for many people in the middle class, is 
their most significant personal holding, and they are totally 
unprotected without flood insurance.
    And again, this gets back to the root issue of as people 
who do not have flood insurance, whether it is required or not 
as part of their mortgage, are flooded, even when we provide 
Federal assistance, we do not make people whole, and it is, 
again, a program that was designed to prevent those kind of 
losses, but because people are oftentimes misinformed about 
their risk that they are not required to purchase it, 
therefore, they do not flood or do not need it, they find out, 
unfortunately, and we see this time and time again, where it is 
not only the impact of the flood, it is the financial impacts 
that many time are very difficult to recover.
    Senator Johanns. I will just wrap up with this, Mr. 
Chairman. This is a tragic situation because the average person 
just simply would not go out and buy a flood insurance policy 
if no one is advising them that it is necessary. If they are 
not in a 100-year floodplain and the banker is not requiring it 
on the mortgage, et cetera, the average person would look at 
the cost of it and say, ``Why would I?'' And then you have the 
historic event, and they are just flat out of luck.
    I guess what I would say to you, if you could get back with 
me on the issue I have raised, I would appreciate it, because 
this water is headed our way now, and next week I think we 
reach that maximum level of discharge by the Corps. And then I 
think it holds there into August, maybe all through August. I 
am going to guess I am going to have to get to know you a lot 
better in the months ahead, and probably a lot of other 
Senators will, too.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman.
    First, thank you, Administrator Fugate. And before I get 
into the substance of my remarks, I want to thank you for being 
always responsive. We have had, you know, unfortunately, a 
number of disasters in my State during your tenure, and you 
have always been there and your folks have always been there, 
and I appreciate the hard work they do.
    As you know, we have a huge issue on Long Island. It is one 
of the most important issues that Long Island faces. And what 
has happened is that people whose homes have never been 
flooded, who are as much as 5 miles inland, are being told that 
they need flood insurance, and it costs them up to $3,000. And 
these are middle-class people. This is not a farm community or 
a community by a river. These are suburban blocks. And they are 
befuddled. It is what makes people hate Washington, because 
they say, ``I am being mandated to pay $3,000 when I have never 
had a flood and I am not near any crick, any stream, any 
water.''
    And so we looked into this, and it is tens of thousands of 
people. This is not a few idle homes. And we looked into this, 
and what we found was FEMA used information gathered by the 
Army Corps in Suffolk County, where there has not been as much 
of a problem--small--to draft Nassau County's flood maps. And 
they raised the level as to how high the house had to be above 
sea level. And, you know, when you do that in a relatively flat 
place, Long Island--I mean, I cannot imagine a storm that would 
flood things 5 miles inland from Long Island Sound or the 
Atlantic Ocean. If it is, we have got a lot more trouble than 
this.
    But they used the wrong map to save money. That was what 
was told to us privately. Instead of doing a remapping in 
Nassau County, population 1.4 million, so I am sure it is--you 
know, it is not a small, little area. And Nassau has unique 
geography. It has different coastal and tidal characteristics 
than Suffolk County. It should have been subject to a separate 
study.
    When people hear this, imagine, you are a homeowner, you 
are making $60,000, $70,000 a year, which is probably the 
average income in New York. That is not high, as you know, 
because our expenses are higher and our homes are higher. And 
you are told that you have to pay $3,000 because you might be 
flooded, and no ifs, ands, or buts, you can imagine people's 
reaction.
    So what I am asking is two things: first, that--the best 
science was clearly not used in Nassau County, to take a county 
30 miles away and say we are using that--will you support 
starting the remapping process over so we can get an accurate 
look at Nassau County? It is just not fair to use Suffolk 
County's data. No one revealed that to us. We found that out 
ourselves, but the Army Corps has confirmed it.
    Mr. Fugate. Senator Schumer, we will work on the Corps. We 
have new updates for other parts of that basin, and we are 
responding back in writing to your request, and we are going to 
outline how we are going to address the issue as we go in and 
do more of the studies that are going to include other areas as 
well as the area that you have mentioned. So we are working on 
that. We will have a response back----
    Senator Schumer. You mean other areas in Nassau or other 
areas in general?
    Mr. Fugate. Other areas in general in that basin, and we 
are going to take advantage of that to actually focus on the 
areas you have identified.
    Senator Schumer. The whole area by Valley Stream, the 
40,000 houses.
    Mr. Fugate. Yes.
    Senator Schumer. And will I be happy with this letter?
    [Laughter.]
    Mr. Fugate. Unable to say, sir, but it will be responsive, 
and we will continue to work with you.
    Senator Schumer. OK, because I am not going to be happy 
unless we really deal with this problem. OK? All right.
    Second, while we are waiting to deal with the problem--and 
I am glad you said something is going to be done--FEMA rightly 
decided to extend eligibility for the PRP, the preferred risk 
policy, so that the people do not get the jump for 2 years. 
Could you please address if we can extent that beyond the 2 
years until we get a fair adjudication of what is happening in 
Nassau County? Because it may not be solved within 2 years, 
extending the PRP, which, as I understand it, is totally in 
FEMA's discretion.
    Mr. Fugate. Again, we have that request. We are working 
with our chief counsel to respond to that to determine if we 
can do that.
    Senator Schumer. Well, what would be the reason you could 
not?
    Mr. Fugate. I would have to defer back to our chief counsel 
to make sure that as we go forward we are giving an accurate 
answer.
    Senator Schumer. OK. Well, look, I feel very strongly about 
this, and, you know, I am prepared to do whatever it takes 
around here to get fair treatment for these 40,000 people, 
because they have not been treated fairly by FEMA. I do not 
blame you, but to save a million bucks and use a different 
place and graft it onto Nassau County and then tell so many 
people that they have to pay so much more in a place that has 
never had a flood in the history--you know, since our known 
history, 5 miles inland, with no streams, no cricks, no rivers, 
no bays, we have got to do something about this.
    Mr. Fugate. I understand, Senator.
    Senator Schumer. Thank you.
    Chairman Johnson. Senator Kirk.
    Senator Kirk. Thank you, Mr. Chairman.
    I will be much easier on you. You did a hell of a job in 
Illinois, and we had quite an inundation, and I just checked 
with my team in southern Illinois. High marks. Very high marks.
    I also want to thank you for working with me and Jerry 
Costello on this policy of not recognizing any levee at all. 
Your letter was detailed. You are working on it. I very much 
appreciate the comeback.
    I want to talk more generally about the program. My 
understanding is you are about $18 billion in the hole right 
now?
    Mr. Fugate. Yes, sir.
    Senator Kirk. And we have this policy--the program has been 
rolling since 1973. We have this policy of repetitive loss, 
which is now a third of all your losses. Any way we can just 
not reauthorize this, kind of like three strikes and you are 
out, rather than having the Federal taxpayer getting taken to 
the cleaners over and over again?
    Mr. Fugate. Again, I defer to this body. It is, again, on 
the one hand, yes, we do have repetitive loss properties. We 
have to ask the question: How long do we continue to subsidize 
that risk? But then we have the situation where we get the 
request from the same body to provide that assistance?
    Senator Kirk. I notice in this hearing everybody is sort of 
asking you for money, but you have lost quite a bit of money. 
And if you were a private sector entity you would not have the 
constraints that you have now which require you to lose money.
    Mr. Fugate. One of the options--and, again, oftentimes a 
preferred course is to buy out those properties so they do not 
flood in the future. And this is done in partnership with State 
and local governments. Where we have done buyouts successfully, 
some of this recent flooding we have had has been less severe 
because homes that previously flooded had been bought out. But 
it again points out: What is the appropriate level to subsidize 
risk? And how long should that risk be subsidized before we say 
it is no longer going to be managed that way?
    Senator Kirk. And I worry that Government always makes the 
wrong decision because Congress pressures it to lose money as 
opposed to a private entity, which, you know, clearly would not 
write the policy after the third loss.
    What about sunsetting prefirm? Certainly with the House 
bill, at least we are making the decision on vacation homes, et 
cetera. What about sunsetting the whole thing so we can finally 
have the map determine the risk?
    Mr. Fugate. I would look at it as for those that could 
afford it, it would be a shock and somewhat painful, but it 
would not result in them defaulting or losing their homes. I 
think there are real issues with lower-income and fixed-income 
people that a sudden increase in premiums, as much as several 
thousand dollars that they had not budgeted for, would be 
extremely detrimental.
    So I would look at how do we do this for those that can 
afford it, and should we look at some way to continue to 
support those that this would create a hardship that could 
actually result in them losing their home or their ability to 
stay in their community?
    Senator Kirk. We just had news across the wire about an 
hour ago that Treasury has now said that our debt is now going 
to exceed our national income this year rather than 3 years 
from now. So the question is: Since we have been underwriting 
these guys since 1973, perhaps it might be the time to stop.
    Mr. Fugate. This is the body that can make that 
determination, sir.
    Senator Kirk. You are with me. And then how about 
sunsetting the grandfathering? The Senate made this decision in 
its legislation.
    Mr. Fugate. Again, the program will go as it is directed. 
This was a request that was put in to minimize the impacts as 
the new maps came out and provide that grandfathering. 
Certainly this is something this body can do. I would caution, 
however, the unintended consequences of which could result in 
impacts to those that cannot afford this, and it may be causing 
adverse risk that we did not anticipate.
    Senator Kirk. The problem is we are subsidizing people 
building and investing in floodplains and then getting wiped 
out periodically.
    Mr. Fugate. I would suggest that those that want to build 
new structures in high-risk areas, it would be better if they 
were assuming the full risk and not the taxpayers. But I am 
concerned about the existing communities that are there already 
and what that could do to local economies if we price people 
out of their homes because of the insurance cost.
    Senator Kirk. I think there would be a growing concern, Mr. 
Chairman, on this Committee that the program be allowed to 
recover its own costs.
    I think that Congress is actually the problem, not you. The 
direction I am hearing you want to take is that we would be far 
more sound in the running of this program if we allow you to 
make these decisions, and for a program that is a significant 
drag on the Treasury, it seems like operating it in that way, 
as we just heard the news this morning that our debt has 
exceeded our national income, might be the way to go.
    Mr. Fugate. Well, another thing, Senator, is you start 
moving to more actuarially based, as how do we encourage the 
private sector to take on some of this risk. I think we are 
going to still have the highest risk properties as some form of 
Federal program. But as we move to looking at how to engage the 
private sector, I think we can distribute and manage that risk 
better in a private sector market than just looking solely at 
one that we are trying to administer within the Federal 
Government.
    Senator Kirk. I just would hope that maybe we could give 
you one overarching authority saying notwithstanding any other 
of the directions we have given you, you have overarching 
authority to waive the requirements of Congress so that the 
program can be run without cost to the taxpayer. Thank you.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Fugate, what happens if this program ceases to exist, 
we let it lapse? Tell me what happens in the real estate 
market.
    Mr. Fugate. What would happen is you would have both the 
Federal Government and any hope of getting the private sector 
back into underwriting mortgages walk away from all properties 
at flood risk. This is what happened in the 1960s when the 
private sector determined that they would no longer cover flood 
as a risk. It put the financial institutions of this country 
and, more importantly, the taxpayer at an uncovered risk that 
is in--I would not even fathom to guess what the trillions of 
dollars of exposure looks like on flood. But what happens there 
is this is a hazard that currently the Federal Government is 
the primary provider of that coverage. Without that, those 
people that live in the highest-risk areas may not be able to 
receive financing for their homes, and I think you would end up 
in a situation where the exposure would be so great that the 
original intent of this program to protect the mortgages would 
come back and it would, I think, eviscerate the housing market 
even more than we have seen.
    Senator Menendez. Which would be an enormous body blow to 
this economy that is already struggling to recover. So with 
that as a premise, it seems to me like we need to act, so then 
the question is what do we do.
    Let me ask you, you know, in March, in my home State of New 
Jersey, the Governor filed a request for a Federal disaster 
declaration. FEMA denied it on the basis that minimum uninsured 
losses impacting individuals and families took place. But isn't 
that, in essence, a perverse incentive--or disincentive? I 
mean, the reality is, it seems to me, that at a time when we 
are trying to encourage communities and individuals that it is 
in their best interest to participate in the program, does it 
make sense to penalize communities that have been proactive and 
successful in getting their residents to purchase insurance?
    Mr. Fugate. Being the FEMA Administrator where we 
administer the individual assistance programs that would have 
come to bear for the uninsured, but also running the insurance 
company, I feel that way many days. But I also recognize that 
our FEMA programs will not make people whole. Even if they had 
gotten a declaration, the most we are going to provide to a 
homeowner, if they qualify for everything, which is very 
unlikely, would not even begin to cover their mortgage or 
replace their homes. Most recently, last year in the Tennessee 
floods where all the damage was flood related, the average 
amount that we provided to a family was less than $7,000. So 
going the individual assistance route in lieu of flood 
insurance has not worked, and although----
    Senator Menendez. I agree with you on that. But the 
question is: Here are communities that, for the most part, have 
accelerated their participation in the Flood Insurance Program, 
yet they get punished for those who do not have the flood 
insurance, and certainly that would certainly be helpful to 
them to have assistance to be able to meet the challenge in 
their families. And yet, you know, so those communities that do 
not participate to the level that many in New Jersey do, they 
get the benefit. The communities that do participate get a 
negative. It seems to me to be a perverse incentive, you know, 
or disincentive.
    Mr. Fugate. Senator, this is the one hazard that that 
situation exists. The----
    Senator Menendez. Let us talk about another hazard. With 
billions of dollars spent each year on disaster assistance, 
much of which is going to people in communities who are 
uninsured, do you believe that it would be cost efficient to 
provide vouchers to help low-income families afford flood 
insurance, especially those who are now faced with all new 
flood maps and, you know, encountered in this set of 
circumstances?
    Mr. Fugate. That is one option, Senator, we have looked at, 
as we try to move to more actuarially based and continue to 
increase participation for low-incomes in a voucher system. The 
question would be: Is that going to be sustainable? Because if 
we do it for the first year, what about the out-years? I think 
if it is something where either we do vouchers or we do some 
sort of adjustment based upon the income to continue some level 
of participation and protection, those are desired outcomes. 
And, again, it would have to be something to sustain.
    What we do right now in our FEMA programs is if you do have 
flooding and you do get individual assistance, we require you 
to purchase flood insurance for the first year, and then you 
have to maintain it for future years. We will oftentimes go 
back to a community 3 or 4 years later where there is a flood 
and they have discontinued their coverage because they either 
did not want to or could not afford to continue to pay for 
flood insurance.
    Senator Menendez. It seems to me that we need to do 
something to help those individuals now caught in this set of 
circumstances and yet do not have the wherewithal, certainly at 
the start where they are facing premium shock.
    Last, I was a mayor at one time, and, you know, the nature 
of a mayor's resources is their ratable base, for the most 
part. In our effort to eliminate severe repetitive loss 
properties, shouldn't we be considering a way of incentivizing 
in those communities that face--this is about a third of all of 
the flood insurance plan claims are made about 1 percent of 
these types of properties. Shouldn't we be looking at how we 
maybe work to offset some of that ratable loss in a way that 
still would be an enormous savings to the program but would 
incentivize mayors to say, OK, let me take this property off 
the ratable base?
    Mr. Fugate. It would be another way of encouraging that. 
Our current buyout programs, one of the limiting factors that I 
hear from my peers at the State and local level is a cost 
share, and particularly in trying to buy out properties to get 
those properties out of those rating systems, is, you know, how 
much money we have, how many properties can we buy out, and how 
do we factor that into those ratings.
    Senator Menendez. But the buyout--my last point, Mr. 
Chairman. The buyout program is about how much money will it 
cost to buy the property, but there will be many municipalities 
that will look and say, well, I am going to lose all those 
ratables and, therefore, going to be resistant. When a third of 
all of your claims end up being 1 percent of those repetitive 
losses, it seems to me that it makes economic sense to figure 
out how you incentivize eliminating as much as possible of that 
1 percent of repetitive loss properties. So we look forward to 
working with you on this.
    Chairman Johnson. Senator Moran.
    Senator Moran. Thank you, Mr. Chairman.
    Administrator, thank you. Two days in a row of your 
testimony. It has become even more exciting as the day goes on. 
I appreciate the conversation that I have heard. I would like 
to ask you to include me in the letter that you apparently are 
going to send to Senator Johanns in regard to in-progress 
flooding. That is an issue for us along the northeaster border 
of Kansas. The Missouri River creates our border.
    Also, I wanted to see if you had any sense that there is 
any need to address what I see as perhaps a bias against rural 
disasters in regard to a disaster declaration and FEMA's 
assistance. We have a number of instances in which because of 
its rural lower property values, smaller population, the 
tornado or the flood is just as damaging to the folks who are 
affected by that, but we do not reach the threshold necessary 
for a Presidential declaration. Just recently one of our 
counties, Clay County, had 100 percent of their roads damaged 
by a flood, but the value will not meet that. Redding, Kansas, 
tornado, very low property values, a small community, almost 
totally devastated, but, again, will not meet the threshold. We 
are not looking for expanding the cost to FEMA, but I want to 
make certain that--or to the taxpayers. I do want to make 
certain that we do not have a formula that unnecessarily 
excludes folks who happen to reside in rural America. Any 
thoughts about that?
    Mr. Fugate. Yes, sir. Coming from Florida, which many 
people think is only big cities or South Florida, I come from a 
rural part of the State with small rural communities. However, 
the Stafford Act and the request from a Governor is judged 
against a State and the population. And so it does put a 
disadvantage to smaller communities, the theory being the State 
does have the resources in many cases, if it is a small impact, 
to support those communities. So it does look at the impact to 
the State. It looks on a per capita State basis. And then we 
look at the per capita impacts within those communities. And we 
have taken into account and do look at the severity of impact 
of what it looks to a local community, particularly in 
determining at a Governor's request what counties to include in 
the initial declaration. But it does look at the State and the 
State resources versus just looking at the community that was 
impacted.
    Senator Moran. Let me make sure I understand what you told 
me. When you say you look at the community and the damage per 
capita, is there a way to override that State--in our case it 
is $1.31 per capita--and receive that designation?
    Mr. Fugate. There are times when the severity or the 
intensity of an impact would not reach a State per capita, but 
it would warrant a decision to support a declaration. Again, 
this is why FEMA does the write-ups and works with the State, 
but ultimately this is the President's determination. But there 
have been times where we have had such an intensity of impact 
in a community that you did not meet your State thresholds, but 
the impacts locally were so catastrophic to warrant that 
assistance.
    Senator Moran. It is my experience that in at least many of 
those small rural communities they have the least amount of 
preparation, expertise, responsibility as compared to a larger 
community that has more professional ongoing planning and 
response to that kind of disaster. I would welcome the chance 
to explore that issue myself further, and with your help. I 
would welcome your help.
    In the idea of saving some money, one of the things that 
made some sense to me, you talk about in your testimony the 
importance of the affordability of coverage, and I am 
interested in knowing what it would take in order for premiums 
to be escrowed, similar to property taxes or homeowners 
insurance. Could that help better manage the issue of 
affordability? And do you have the authority to escrow 
payments?
    Mr. Fugate. Senator, I am going to respond in writing to 
that because there is another piece of that that we are 
exploring and we have been asked to look at. But how to build 
this into--just like your other insurances, your property 
taxes, into your payment, rather than this be a separate bill 
that comes up and is due all at once.
    We have also looked at and have been asked to look at 
quarterly payments. I think we are--I am principally in favor 
of looking at making this fit the other insurance models and 
fitting the escrow model, but also allowing people to do 
quarterly payments so long as people understand they just do 
not buy a quarter when they think they are going to flood. They 
buy a year's worth of insurance. They are going to make 
payments against that and they are not just buying a quarter's 
worth.
    So we are looking at how to do that. I will ask to respond 
back in writing. But, again, if you can build this into the 
recurring costs of mortgages and treat this more like we do 
other types of insurance where people may want to buy this as a 
separate policy. Right now it is a lump sum, so we are looking 
at how to provide this as a similar process that is used for 
other types of policies.
    Senator Moran. If you concluded that this was an 
appropriate opportunity, do you have the authority to allow 
escrow or quarterly payments?
    Mr. Fugate. We are working on that, and we will respond 
back in writing what we can and cannot do.
    Senator Moran. Thank you, Administrator.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman, and thank 
you, Director. I want to thank you, first of all, for your 
assistance last year for the floods in Rhode Island. I was 
repeatedly stopped by my constituents who went out of their way 
to commend FEMA for their efforts and for not just doing the 
job but going above and beyond, so thank you for that. I think 
that ethic begins at the top, so thank you very much. Well 
done.
    A lot has been discussed about mapping. Your risk map 
program is designed to ensure that by 2014 the goal of 80 
percent of the Nation's flood hazard data or new updated data 
are deemed valid. My sources indicate we are at about 55 
percent at the end of 2012, so how do we in 2 years go from 55 
to 80 percent, particularly with constrained budgets?
    Mr. Fugate. Senator, we are not.
    Senator Reed. OK.
    Mr. Fugate. To be honest. In looking at where we are having 
to make targeted reductions in our budget, we have looked at 
reducing funding for map modernization. But we are not stopping 
map modernization. But it will take longer to complete the 
work.
    Senator Reed. And how does that play out now when--for 
example, my colleague Senator Schumer was talking about issues 
in his part of the country. We have areas which are not in 
flood zones, and then some that should be, et cetera. How does 
that play out on the ground like today as flooded rage through 
the country? I would think that the maps would be sort of the 
first place you would want to--the first priority, because then 
you can decide who must have insurance, who should not have 
insurance, and right now that is all based upon in many cases a 
lot of 35-year-old data from the U.S. Geological Survey.
    Mr. Fugate. Again, Senator, it is not an easy choice, nor 
is it a preferable choice. I think that the best data we have--
and, again, part of this has been oftentimes challenges to the 
data we have produced, having to go back and validate that, and 
oftentimes a restudy at the request because data--the outcomes 
were not what people thought it should be. And so that 
increases the cost. But I do agree. The best way to start is 
always to know what your risks are and to have accurate maps, 
not only for the purposes of insurance but, more importantly, 
for zoning and development so we can make better and wiser 
choices that we build in places that have the least amount of 
risk and we mitigate against a risk where we know the hazards.
    Senator Reed. Has there been any discussion or thought 
about trying to develop a joint enterprise to do this with the 
private sector, with State governments, with county government 
who I would think also have a vested interest in starting with 
good data, not writing policies on data they know is wrong?
    Mr. Fugate. We do that, and speaking from my experiences in 
two cases where I know this was done successfully, one was in 
North Carolina in the aftermath of Hurricane Floyd where they 
actually were able to utilize mitigation dollars from FEMA in 
the aftermath of a disaster to produce very high resolution 
flood maps. My experience is in Florida where we were mapping 
coastal communities to get higher resolution maps for storm 
surge, and then applying that for future map development. But I 
think you point out a key issue. Much of what we are doing is 
establishing what are the digital elevation maps. There is a 
significant economic advantage as we build, whether it is flood 
insurance, whether it is highway, whether it is water 
management districts at State or local programs, to be able to 
integrate all this digital elevation data into a national 
atlas, not o you does it provide us the tools for flood 
insurance, it is a significant economic tool to have the best 
available data for people planning and looking at future 
growth, construction, all the way through to agriculture.
    So I am firmly committed that as we do this mapping, the 
baseline data, as much as we can either leverage what other 
people have done or we can fill in gaps, so we are working more 
with the interagency of the Federal programs to make sure that 
we are identifying where we are doing mapping, other people are 
doing similar work, and making sure we can maximize our 
investment.
    Senator Reed. Again, a final point on this, and I agree, 
these are very difficult judgments that you are making. You 
have been given this responsibility, and you are providing a 
general good, a social good that lots of other people depend 
upon, and if they could be encouraged--and, in fact, could see 
the wisdom that they could--it would make sense for them to 
participate to help us, and not just localities and States but 
private entities. And with technology today, the ability to map 
things from the sky and to do it quite accurately and to--you 
know, I think that might be an approach that would take some of 
the burden off of you, which you have had to historically. But, 
once again, let me conclude by thanking you for the great 
effort last year in Rhode Island.
    Mr. Fugate. Thank you, Senator.
    Chairman Johnson. I would like to thank our witnesses for 
being here today to contribute to our NFIP reauthorization 
discussion. The NFIP has an important mission: to aid in 
disaster mitigation and recovery. Today's discussion will 
assist us as we chart a sustainable future for the program. 
This hearing is adjourned.
    [Whereupon, at 11:36 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

               PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON

    Today, the Committee meets to examine the reauthorization of the 
National Flood Insurance Program. Currently, constituents from my home 
State of South Dakota are dealing with some of the worst flooding that 
the State has ever seen. When I was back in South Dakota last week, I 
spent some time talking to homeowners and business owners in the 
communities that are anticipating some of the worst damage. While they 
are working hard to minimize harm to people and property, they are 
understandably concerned about short-term displacement and long-term 
recovery. I will do my best to see that they, along with our neighbors 
and fellow Americans who have had their lives turned upside down by 
devastating storms, are promptly provided with the disaster relief that 
they need.
    I would like to also applaud Administrator Fugate and his staff at 
FEMA for how they have responded to the flooding in my State so far. I 
hope that the quick response that we saw during the recent southern 
storms continues when addressing the ongoing flooding in South Dakota 
and around the country.
    The NFIP was created to help communities limit damage and speed 
recovery from flooding disasters. However, it now faces several 
challenges to its long-term viability, including an $18 billion debt to 
the U.S. Treasury.
    Over the past year, we have also faced several lapses in the NFIP. 
As many stakeholders have noted, lapses have detrimental effects on 
both the insurance and housing markets. This program, which provides 
over $1.2 trillion in coverage, needs certainty. It is my hope to 
provide this through a long-term extension.
    As the people of South Dakota and others have seen firsthand, 
flooding is responsible for more damage and economic loss than any 
other type of natural disaster. It affects people across the Nation, of 
both parties, which is why I believe that in 2008 the Senate was able 
to come together across the aisle and pass a bipartisan reauthorization 
bill by an overwhelming vote of 92-6. Unfortunately, in 2008 we were 
not able to come to an agreement with the House.
    The recent flooding has made it clear that Congress must 
reauthorize and reform the NFIP which is set to expire this year on 
September 30th. As we move ahead, I hope that we can once again come 
together and pass a bipartisan bill that will build a sustainable 
future for the program and American citizens.
                                 ______
                                 
            PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY

    Thank you, Mr. Chairman.
    The National Flood Insurance Program was established in 1968 and 
was designed to reduce the burden on taxpayers stemming from Federal 
disaster relief for floods. By providing flood insurance for properties 
in high risks areas, it was hoped that insurance premiums could be used 
to cover the costs of flood damage.
    Since Hurricane Katrina, however, the Program has struggled to 
remain financially viable. In fact, since early 2006, the GAO has 
targeted the Flood Insurance Program as ``high risk'' because of its 
mounting debt and the structural flaws. Today, the program is nearly 
$18 billion in debt and has problems even servicing that debt.
    Unfortunately, as the GAO has shown, the program's debt is only one 
of many difficulties facing the flood insurance program. Every aspect 
of the Program must undergo significant revision for it to survive and 
continue on a sustainable path.
    During the 109th Congress, this Committee approved unanimously, and 
the Senate overwhelmingly passed, legislation that, while not perfect, 
addressed many of the core deficiencies of the program. That 
legislation would be a good starting point for this Committee as we 
move toward reauthorizing the National Flood Insurance Program.
    As we begin this process, I believe several issues deserve a close 
examination by the Committee. First, we should examine the relationship 
between the Program and the Write Your Own insurance companies. 
According to the GAO, Write Your Own companies may be receiving 
excessively high reimbursements and bonuses from the Program. The GAO 
recommended that the Write Your Own program have more transparency and 
accountability. This is something we should pursue.
    The Committee also should examine the types of properties the flood 
insurance program is covering to ensure that its resources are spent 
effectively. For example, the Congressional Budget Office has 
determined that 12 percent of the homes covered under the program are 
worth more than $1 million. We must ensure that the Program requires 
wealthy participants to pay the full costs of their insurance.
    The Committee should also examine the Program's map modernization 
effort. The map modernization process has been ongoing for several 
years and is crucial for the long-term success of the program. Updated 
maps are important for two reasons. First, they warn developers and 
homeowners about the risk of developing or living in a floodplain. 
Second, they ensure that participants are paying fair prices for flood 
coverage.
    Some communities have called into question the validity of the maps 
and others have argued that they have been excluded from the mapping 
process. Community participation is crucial, but this process needs to 
take place rapidly to ensure that the risk is accurately reflected and 
homeowners and communities are fully informed. Many of the existing 
maps are several decades old and do not accurately reflect the costs 
and risks of living within a floodplain.
    I also would like to see a simple definition of the phrase 
``actuarially sound'' in any bill to reform the Program. This simple 
act will clearly State our intent to make this program self-sustaining.
    Finally, I believe this Committee should consider ways to privatize 
portions of this program. We should transfer risk from the Program to 
the private sector to the maximum extent possible.
    If we are able to accomplish these objectives, we may finally 
achieve the original purpose of the flood insurance program; to reduce 
the escalating cost of flooding to taxpayers.
    Thank you, Mr. Chairman.
                                 ______
                                 
      PREPARED STATEMENT OF SENATOR ROGER F. WICKER OF MISSISSIPPI

    Thank you, Chairman Johnson and Ranking Member Shelby, for holding 
this hearing on the reauthorization of the National Flood Insurance 
Program. I appreciate the opportunity to testify before the Committee 
this morning, and I commend you for taking this first important step 
toward reforming NFIP this session of Congress.
    Less than 1 year ago I came before this Committee and testified in 
support of modernizing and reauthorizing the National Flood Insurance 
Program. Last year, NFIP lapsed three times before the Senate 
authorized a 1-year extension. As you know, that extension expires this 
September.
    Another program lapse is entirely avoidable, and we should not 
allow that to happen. Similarly, another short-term extension of a 
flawed program would be unacceptable to me, as I believe it would be to 
most Members of the Senate. I urge my fellow Committee Members to enact 
a multiyear reauthorization and in the process fundamentally reform 
this program.
    The National Flood Insurance Program is the source of protection 
from flood risk for most Americans. Nationwide, 5.6 million NFIP 
policies were in effect last year. Lapses and short-term extensions of 
the program create uncertainty and unnecessary burdens for property 
owners who depend on NFIP. Lapses also drive up the cost of 
administering the program and interrupt economic activity, including 
purchases of homes and other properties that require proof of flood 
insurance prior to closing. In speaking with Mississippians, it is 
clear that a long-term reauthorization with targeted reforms is 
necessary for coastal communities to prosper.
    Though most Americans who need flood insurance rely on NFIP, the 
program itself has become insolvent and remains nearly 18 billion 
dollars in debt. Without appropriate reform, modernization, and an 
extended reauthorization, our Nation and the American taxpayers face 
serious consequences when--and it is only a question of when--the next 
big natural disaster occurs.
    In my testimony of last year, I outlined specific reforms that 
would help put the NFIP back on a sustainable trajectory. These 
included:

  1.  Improving enforcement by FEMA and lenders with respect to those 
        required to purchase and maintain flood insurance.

  2.  Charging rates that are actuarially sound and offering meaningful 
        premium reductions for mitigation improvements.

  3.  Updating FEMA's flood insurance maps so that those in flood-prone 
        areas are aware of the risk and obtain proper insurance 
        coverage.

    Perhaps the largest threat facing NFIP, and the one responsible for 
the vast majority of its current debt, is that of major hurricanes 
making landfall on our coasts. In 2005, hurricanes Katrina, Rita, and 
Wilma impacted a wide swath of the United States. According to the 
Congressional Research Service, NFIP accrued approximately $17 billion 
in debt from flood claims caused by these storms alone.
    It has been 6 years since Hurricane Katrina devastated the Gulf 
Coast. While we have made significant progress in rebuilding our 
communities and businesses, for many Mississippians recovery is still 
not complete. One of the greatest impediments to our efforts is the 
lack of affordable property insurance. The availability and 
affordability of wind insurance is crucial in any State where there is 
coastal exposure. For vast numbers of property owners, private 
insurance coverage for wind damage has not been available on the Gulf 
Coast since the 2005 hurricane season.
    Hurricanes present a unique problem for coastal property owners 
because damages can be caused by multiple perils, including high winds 
and devastating storm surges. Currently, homeowners cannot purchase a 
single insurance policy to cover all hurricane-related risks. Wind 
losses are covered by private insurers or State-run wind pools, while 
coverage for flood damage is largely backed by the Federal Government 
through NFIP.
    Many homeowners who suffered ruinous property damage from Hurricane 
Katrina were forced to go to court to determine which insurer was 
responsible for damage in wind-versus-water disputes, even when they 
had appropriate coverage. Other property owners failed to purchase 
flood insurance because they relied on outdated Federal flood zone maps 
that indicated they were not at risk for flooding. When their property 
was damaged by the storm, many insurance adjusters concluded that 
property damage had been caused by water alone and denied legitimate 
claims altogether.
    In 2007, the Government Accountability Office issued a report which 
called for greater oversight of wind and flood damage determinations. 
In that report, GAO found that claims information collected by NFIP did 
not allow FEMA to effectively oversee damage determinations and 
apportionments after hurricane events.
    In the words of the GAO, `` . . . for a given property, FEMA's 
ability to assess the accuracy of payments for damage caused only by 
flooding is limited because NFIP does not know what portion of the 
total damages was caused by wind and what portion was caused by 
flooding.'' The report continued, ``because both homeowners and NFIP 
policies can be serviced by a single Write Your Own private insurer, a 
conflict of interest exists during the adjustment process.''
    To help resolve these issues, I recently introduced the Consumer 
Option for an Alternative System to Allocate Losses Act, or the COASTAL 
Act. This legislation, S. 1091, addresses several problems that arose 
in the aftermath of Hurricane Katrina. Those problems include:

    Disputes and costly litigation between consumers and 
        insurers over wind-versus-water claims.

    Inherent conflicts of interest that can arise when the same 
        claims adjuster assesses damages that are and are not covered 
        by his employer.

    Lack of oversight with respect to the adjustment process 
        and claims paid by NFIP.

    The COASTAL Act is a commonsense approach to addressing these 
problems. This legislation would use data currently collected by the 
National Oceanic and Atmospheric Administration (NOAA) and other 
participating entities to allocate property damage following 
significant storms.
    Under the COASTAL Act, a formula would be established that utilizes 
storm information provided by NOAA and its partners, combined with 
structural information for each property, to allocate losses caused by 
high winds and storm surges from hurricanes. This alternative loss 
allocation system would be based on the timing, location, and magnitude 
of wind speeds and storm surges before, during, and after a major storm 
impacts the coastline of the United States.
    Only properties that are completely destroyed by a hurricane, 
leaving little but foundations behind, would qualify for this 
alternative loss allocation system. ``Slab'' cases, as they are 
commonly know, have the greatest uncertainty, because there is little 
to no evidence left to make an accurate adjustment using current 
practices.
    The COASTAL Act is by no means a silver bullet for all of the 
problems associated with flood insurance and NFIP. However, this 
legislation is a fair and objective way to provide more certainty to 
the slab claims process, which is a very costly piece of the greater 
flood insurance problem.
    The advantage of my proposal is that it is based on activities that 
NOAA already carries out. Extensive storm data related to winds and 
storm surges is currently collected throughout each named storm that 
threatens the coastlines of the United States. This is done primarily 
for purposes of doing a better job of informing emergency managers of 
imminent threats. I would emphasize that the COASTAL Act does not 
create a new Government program--rather, it adds further utility and 
purpose to existing Federal efforts.
    I believe this proposal will provide more structure in the 
marketplace, which should increase the availability of insurance and 
competition while driving down premiums over time. It is also my belief 
that this system will help us hold insurance companies accountable for 
covered losses, as has proven necessary in some cases, rather than 
forcing taxpayers to foot the bill through the deeply indebted NFIP.
    A year ago I held an insurance roundtable in coastal Mississippi to 
hear the concerns of those still recovering from Hurricane Katrina. 
There is no question that one of the most difficult obstacles to 
recovery from previous storms and preparing for future events has been 
the cost and availability of insurance.
    NOAA's hurricane outlook for 2011 indicates an active Atlantic 
season. Congress must take the initiative now to put the National Flood 
Insurance Program on a sustainable path forward. I will continue 
working with my colleagues on the Committee to pass a reauthorization 
bill that can be signed into law before the end of the fiscal year, and 
I urge all Members to join in this effort.
    Thank you.
                                 ______
                                 
                 PREPARED STATEMENT OF W. CRAIG FUGATE
           Administrator, Federal Emergency Management Agency
                              June 9, 2011

Introduction
    Good morning Chairman Johnson, Ranking Member Shelby, and 
distinguished Members of the Committee. My name is Craig Fugate, and I 
am the Administrator of the Federal Emergency Management Agency (FEMA). 
It is an honor to appear before you today on behalf of FEMA to discuss 
the National Flood Insurance Program (NFIP).
    The NFIP serves as the foundation for national efforts to reduce 
the loss of life and property from flood disasters, and is estimated to 
save the Nation $1.6 billion annually in avoided flood losses. By 
encouraging and supporting mitigation efforts, the NFIP leads our 
Nation in reducing the impact of disasters. In short, the NFIP saves 
money and, more importantly, lives. While the NFIP has experienced 
significant successes since it was created more than 40 years ago, 
there are a number of challenges currently facing the program. The most 
significant challenge is balancing the program's fiscal soundness with 
the affordability of flood insurance. The NFIP must continue to offer 
affordable insurance that will properly identify those properties at 
risk and provide them adequate coverage, while reducing the need for 
taxpayer-financed disaster assistance.
    In my testimony today, I will provide a brief history and overview 
of the NFIP and discuss critical changes FEMA has made to the program 
over the years. I will also discuss the recent efforts of FEMA's NFIP 
Reform Working Group, which is developing policy recommendations for 
comprehensive NFIP reform for the Secretary of the Department of 
Homeland Security. It is important to note, however, that the 
Administration has not taken a position on the preferred course of 
action for NFIP reform and that these are currently draft proposals 
from the NFIP Reform Working Group.
    Congress has been a valuable and important partner in all of our 
NFIP efforts, and we appreciate your attention to this important 
matter.

Overview of the National Flood Insurance Program
    The NFIP is designed to insure against, as well as minimize or 
mitigate, the long-term risks to people and property from the effects 
of flooding, and to reduce the escalating cost of flooding to 
taxpayers. Flooding can occur along river banks, or result from 
weather-related coastal hazards, such as hurricanes, storm surges, or 
tornadoes. More than half of the U.S. population now lives in coastal 
watershed counties or floodplain areas. Flooding is the most costly and 
prevalent natural disaster risk in the United States.

History of the NFIP
    Major flood disasters in the United States in the 1920s and 1930s 
led to Federal efforts to protect lives and property from flooding. In 
1936 Congress enacted the Flood Control Act to reduce the overall risk 
of flooding, but there were still significant at-risk communities that 
lacked insurance. In the 1950s, it became evident that private 
insurance companies could not provide flood insurance at an affordable 
rate. At that time, the only Federal relief available to flood 
survivors was disaster assistance through the Federal Disaster 
Assistance Program. In 1968, Congress established the NFIP to make 
affordable flood insurance available to the general public, and to 
protect communities from potential damage through floodplain 
management, which is the implementation of preventive measures to 
reduce flood damage.
    When Tropical Storm Agnes struck the Eastern seaboard in 1972, many 
communities were either unaware of the serious flood risk they faced or 
were unwilling to take the necessary measures to protect residents of 
the floodplain. Very few of the communities affected by the storm had 
applied for participation in the NFIP. Even in participating 
communities, most owners of flood-prone property opted not to purchase 
flood insurance. Instead, they chose to rely on Federal disaster 
assistance to finance their recovery. As a result, Congress enacted the 
Flood Disaster Protection Act of 1973 to establish a mandatory flood 
insurance purchase requirement for structures located in identified 
Special Flood Hazard Areas (SFHAs) that have a federally backed 
mortgage.
    The next year, Congress enacted the Disaster Relief Act, which 
contained several preparedness and mitigation provisions to reduce 
disaster-related losses. Later, the National Flood Insurance Reform Act 
of 1994 established the Flood Mitigation Assistance Program, which 
provided cost-shared funding for States and communities to develop 
mitigation plans and implement measures to reduce future flood damages.
    The NFIP, with the certainty of the risk that it assumes, requires 
mitigation actions that aim to break the cycle of repeated disaster 
damage and reconstruction. To mitigate against repeated losses and 
damage to properties associated with flooding, Congress established two 
programs in the Flood Insurance Reform Act of 2004: the Severe 
Repetitive Loss program; and the Repetitive Flood Claims program.
    Today, more than 21,000 communities in 56 States and territories 
participate in the NFIP, resulting in more than 5.6 million NFIP 
policies providing over $1.2 trillion in coverage. To directly respond 
to the flood-risk reduction needs of communities, FEMA has produced 
digital flood hazard data for more than 88 percent of the Nation's 
population. The NFIP floodplain management standards that each 
participating community is required to enact can reduce flood damages 
in newly constructed buildings by more than 80 percent.
    Prior to 2003, more than 70 percent of FEMA's flood maps were at 
least 10 years old. These maps were developed using what is now 
outdated technology; and more importantly, many maps no longer 
accurately reflected current flood hazards. Over the last 8 years, 
Congress has provided over $1 billion to update and digitize our 
Nation's flood maps so we better understand the risks that our Nation 
faces from flooding. Since the start of FY2009, we have been 
implementing the Risk Mapping, Assessment, and Planning (Risk MAP) 
program, which not only addresses gaps in flood hazard data, but uses 
that updated data to form a solid foundation for risk assessment and 
floodplain management, and to provide State, local, and tribal 
governments with information needed to mitigate flood-related risks. 
Risk MAP is introducing new products and services extending beyond the 
traditional digital flood maps produced in Flood Map Modernization, 
including visual illustration of flood risk, analysis of the 
probability of flooding, economic consequences of flooding, and greater 
public engagement tools. FEMA is increasing its work with officials to 
help use flood risk data and tools to effectively communicate risk to 
citizens, and enable communities to enhance their mitigation plans.
    This past fiscal year, the NFIP reduced potential flood losses by 
an estimated $1.6 billion and increased the number of flood insurance 
policies in effect by 47,992. FEMA also initiated 600 Risk MAP projects 
affecting 3,800 communities and addressed their highest priority 
engineering data needs, including coastal and levee areas.
    As the Agency moves forward with our mapping program, we remain 
mindful of the challenges that flood mitigation efforts can pose for 
many families and communities. To that end, FEMA has used the 
flexibility it has under the NFIP to implement several important 
reforms that recognize these challenges. The most significant of these 
reforms are (1) the establishment of Scientific Resolution Panels and 
(2) the extension of eligibility for Preferred Risk Policies.

Scientific Resolution Panels
    Flood hazards are constantly changing. For that reason, FEMA 
regularly updates Flood Insurance Rate Maps (FIRMs) to reflect those 
changes. However, when affected residents challenge revisions to the 
FIRMs with conflicting technical and scientific data, an independent 
third-party review of the information is available to ensure the FIRMs 
are accurate and credible.
    FEMA's Scientific Resolution Panel (SRP) process, established in 
November 2010, provides an independent third party to work with 
communities to ensure the flood hazard data depicted on FIRMs is built 
collaboratively using the best science available. A community, tribe or 
political entity that has the authority to adopt and enforce floodplain 
ordinances for its jurisdiction can request that FEMA use the SRP when 
conflicting data are presented.
    The SRP is composed of technical experts in engineering and 
scientific fields that are relevant to the creation of Flood Hazard 
Maps and Flood Insurance Studies. Based on the scientific and technical 
data submitted by an NFIP community and FEMA, the SRP renders a written 
recommendation that FEMA either deny the community's data or 
incorporate it in part or in whole into the FIRM. For an appeal or 
protest to be incorporated, the community's data must satisfy the NFIP 
standards for flood hazard mapping. The SRP process is reflective of 
the value FEMA places on the importance of community collaboration to 
create accurate and credible flood maps.

Preferred Risk Policy
    In 2003 FEMA began using appropriated funds to implement a 
nationwide initiative to update our flood maps. This effort has 
resulted in digital maps replacing the previous paper inventory, and in 
maps that more accurately reflect today's flood risk. As a result of 
mapping modernization, many buildings that previously were identified 
in low-risk areas have been mapped into high-risk Special Flood Hazard 
Areas (SFHAs). The flood risk is real, and those with federally backed 
mortgages find themselves subject to a statutory flood insurance 
purchase requirement. At the same time, mapping modernization has 
removed approximately the same number of structures from the SFHAs as 
it has added.
    While the changes resulting from map modernization provide a more 
accurate reflection of a property and a community's flood risk, FEMA 
recognizes the financial hardship that a new SFHA designation may place 
on individuals. Consequently, effective January 1, 2011, FEMA began 
extending eligibility for its lowest-cost flood insurance policy--the 
Preferred Risk Policy (PRP)--for two additional policy years for 
individuals newly mapped into an SFHA. Previously, PRP eligibility was 
for 1 year only.
    Extension of eligibility for the PRP should help to ease the 
financial burden on affected property owners in this difficult economic 
environment. With this change, property owners should also have 
adequate time to understand and plan for the financial implications of 
the newly communicated flood risk and the mandatory purchase 
requirement. Finally, this 2-year extension provides more time for the 
affected communities to upgrade or mitigate flood control structures to 
meet regulatory standards and reduce flood risks. This reduces the 
financial impact on residents and businesses in the long-term while 
making communities safer and stronger.

NFIP Reform Working Group
    The NFIP has successfully reduced flood risks across the United 
States since its inception in 1968. Evidence of its success can be seen 
in the more than 21,000 participating communities, more than 5.6 
million flood insurance policyholders, a modernized flood hazard data 
inventory, and a suite of incentives driving risk reduction across the 
Nation. Clearly, the program has improved the flood-resistance of 
existing and new construction through building standards, and has 
helped individuals and businesses recover more quickly from flooding 
through the insurance process.
    However, after 42 years of program operation, concerns about the 
program remain; and after more than a decade of seeking input, 
identifying issues, and undergoing studies, FEMA believes that the time 
has come to undertake a critical review of the NFIP. As Members of this 
Committee and others in Congress consider NFIP reform, the Department 
of Homeland Security (DHS) and the Administration is prepared to assist 
those efforts as appropriate.
    In 2009, I asked my staff to begin a comprehensive review of the 
NFIP. This review has involved three important phases designed to 
elicit policy recommendations and engage a broad range of stakeholders, 
including floodplain managers, emergency managers, lenders, the 
insurance industry, the environmental community, Federal agencies, and 
private nonprofit organizations. With so many diverse interests, 
stakeholder engagement has been a critical foundation of the review 
process.
    Phase I of the NFIP review effort began in November 2009, with a 
listening session designed to capture and analyze stakeholder concerns 
and recommendations. The session included more than 200 participants 
and resulted in nearly 1,500 comments and recommendations from 
stakeholders.
    Phase II began in March 2010, when FEMA formally established the 
NFIP Reform Working Group, tasked with identifying the guiding 
principles and criteria for potential proposals to reform the NFIP. 
This internal working group comprises a cross-section of FEMA's NFIP 
staff. As a means to conduct the analysis, FEMA chose a participatory 
policy analysis framework to guide the NFIP review effort. This Phase 
II effort incorporated the recommendations and themes resulting from 
the NFIP listening session and Web comments. The NFIP Reform Working 
Group concluded this phase in May 2010 and released a final report 
entitled ``NFIP Reform: Phase II Report.'' The results of both Phases I 
and II are now available on FEMA's Web site.
    As part of Phase III, which is ongoing, the NFIP Reform Working 
Group is reviewing a comprehensive body of work offering a critique of 
the NFIP, including reports by the Government Accountability Office, 
the Congressional Research Service and the DHS Office of the Inspector 
General; testimony before Congressional Committees; proceedings of 
various policy meetings; policy papers published by industry, advocacy 
groups and professional associations; and scholarly works. We have been 
reaching out to other Federal agencies as well. For example, we have 
solicited ideas from the Federal Interagency Floodplain Management Task 
Force, a group of 12 Federal agencies brought together to promote the 
health, safety, and welfare of the public by encouraging programs and 
policies that reduce flood losses and protect the environment.
    Based on this research and stakeholder input, the NFIP Reform 
Working Group drafted a number of policy options for deliberation and 
public comment. In December 2010, FEMA held two public meetings and 
initiated a public comment period in order to solicit input from 
stakeholders on the policy options. Public input from these efforts 
served as a source for the refinement of the policy alternatives. Over 
150 stakeholders attended the public meetings and we received 84 
additional comments on specific policy options.
    The NFIP Reform Working Group has identified several important 
issues that Congress may wish to address in the context of reform. They 
include, but are not limited to, actuarial soundness and program 
solvency, cost and affordability of flood insurance, mandatory purchase 
requirements, accuracy of mapping, and economic development and 
environmental protection. I would like to briefly address each of these 
issues.

Actuarial Soundness and Program Solvency
    Current subsidies reflect the challenge to implementing the NFIP 
under the legislative mandate that flood insurance ``is available on 
reasonable terms and conditions to persons who have need for such 
protection.'' \1\ While the current program collects more than $3 
billion in premium revenue annually, estimates indicate that an 
additional $1.5 billion in premium revenue is foregone due to the 
current subsidized rate policy.
---------------------------------------------------------------------------
     \1\ 42 U.S.C. 4001(a).
---------------------------------------------------------------------------
    This annual premium shortfall has at times required FEMA to use its 
statutory authority to borrow funds from the Treasury. These funds were 
used to pay flood damage claims to policyholders. Although payments 
have been made to reduce this obligation, $17.75 billion in debt 
remains and FEMA is unlikely to pay off its full debt, especially if it 
faces catastrophic loss years. The NFIP review effort is exploring 
fiscal soundness by analyzing inherent program subsidies and examining 
potential methods to further reduce the loss of life and property.

Mandatory Purchase Requirement, Affordability, and Cost
    The cost of an NFIP policy and the affordability of flood insurance 
are topics of frequent discussion. In some communities, the 
introduction of updated flood hazard mapping results in new 
requirements for the purchase of NFIP policies. These premiums 
represent an unbudgeted and often unanticipated expense to property 
owners. To some, the insurance is unaffordable.
    While FEMA has implemented some measures to address affordability 
concerns--including the Preferred Risk Policy--the program offers no 
means-based test that prices premium to income level. Affordability 
concerns are explored in the NFIP review effort with a variety of 
measures examined, ranging from credits and vouchers to high-deductible 
policies.

Accuracy of Mapping
    When a new and more accurate map creates or expands a flood hazard 
area based on the latest science and information on flood risks, 
property owners newly added to this area, and thus required to purchase 
an NFIP policy, are understandably concerned. In some instances, this 
concern leads to questions about the scientific credibility of our 
mapping process. As noted above, we have created Scientific Resolution 
Panels to resolve these questions. And while FEMA is committed to 
working closely with communities to develop the most accurate flood 
maps possible, the current ``in or out'' nature of the SFHAs (one is 
either in an SFHA or not) has left the program with a perceived 
credibility problem, as there is no gradation of risk identified within 
a flood zone.

Economic Development and Environmental Protection
    The impact of the NFIP on economic development is another matter of 
debate among stakeholders. Areas prone to flooding may have unique 
resource advantages such as proximity to waterborne transport, as well 
as environmental or recreational value. However, these advantages, 
which may be revenue-positive for a property owner or community in the 
short-term, may become liabilities during a severe flooding event. As 
written by the Association of State Floodplain Managers: ``[l]and use 
decisions are made by communities and tend to be based on local short-
term economic factors in the form of community growth and resultant 
increases in the local tax base. These decisions often favor using 
floodplains for economic development, with the fact that the area is 
subject to flooding being a much lower priority in the decision.'' \2\ 
The challenge of balancing economic development with floodplain 
management and risk reduction is explored in Phase III of the review 
effort.
---------------------------------------------------------------------------
     \2\ Association of State Floodplain Managers whitepaper, 
``Critical Facilities and Flood Risk''; November 10, 2010.
---------------------------------------------------------------------------
    Of course, these are not the only near-term issues that 
comprehensive NFIP reform should address. The NFIP Reform Working Group 
is examining other issues, which include certification of levees, 
properties that significantly drain the NFIP through repeated losses, 
subsidies, insurance ratings, building standards, and incentives and 
disincentives for mitigation.

NFIP Reform Policy Alternatives
    In January 2011, FEMA's NFIP Reform Working Group completed the 
refinement of policy alternatives and began the policy evaluation 
phase. The Working Group is now in the analysis phase, with a third-
party policy analysis organization performing both quantitative and 
qualitative analyses of the policy alternatives to identify each 
policy's strengths and weaknesses. The policy options are intentionally 
provocative and designed to represent the broadest range of policy 
options. The four policy alternatives moving forward to the evaluation 
phase each represent a unique policy theme. I would like to briefly 
discuss each policy option. The Administration has not taken a position 
on the preferred course of action for NFIP reform. These are currently 
draft proposals from the NFIP Reform Working Group. At this time, I 
view our role as helping to facilitate a needed conversation on 
identifying an effective path forward.

Community-Based Insurance
    The NFIP uses two mechanisms for implementing the floodplain 
management, mapping, and insurance elements of the program. States and 
communities administer floodplain management requirements, including 
permitting and regulating land use. Communities also adopt Flood 
Insurance Rate Maps. However, the insurance element of the program is 
administered by ``Write Your Own'' insurance companies that participate 
in the program or by FEMA directly. Thus, while communities issue 
permits for construction in the floodplain, policyholders bear the cost 
of insuring against flood risk through the payment of an annual flood 
insurance premiums. Community land-use decisions do not account for the 
full cost of flood risk.
    Based on what we have heard from stakeholders, we are exploring 
community-based flood insurance, whereby risk assessments would be 
performed on individual buildings and the insurance premium payment 
would be made by the community. As part of this option, the Federal 
Government would continue to back flood insurance contracts in exchange 
for the adoption and enforcement of minimum floodplain management 
standards and would provide an assessment and calculation of flood 
risk. The sum in dollars of the risk assessment for all buildings in 
the community would constitute the required premium. Incentives could 
be structured to encourage communities to implement flood mitigation 
measures in order to reduce their overall premium assessment.

Privatization
    The NFIP was created in 1968, in part because of the absence of any 
substantive means, by insurance or otherwise, to mitigate the risk of 
flood hazards on the private insurance markets. Many hurdles stood in 
the way at the time: areas prone to flood hazards and the likelihood of 
flooding had not been identified; building practices and codes that 
mitigate the flood hazard were neither known nor enforced; and the 
financial risk of insuring properties with the potential for large 
catastrophic losses posed an unmanageable threat to the solvency of 
insurers.
    In the more than 40 years since NFIP was created, the landscape has 
changed: flood risk has been digitally mapped and identified for 88 
percent of the population; private and public sector modeling tools are 
available to model riverine and coastal flooding; the 21,000-plus 
communities participating in the NFIP have adopted building codes and 
practices to mitigate flooding; and the insurance and financial markets 
have developed a variety of means to spread risk from traditional 
reinsurance to more recent innovations of catastrophe bonds, risk 
markets, and financial derivatives.
    Historically, the private insurance market has taken the position 
that flood is either uninsurable or prohibitively expensive. With that 
in mind, in January 2011, we brought in Chief Executives from several 
Write-Your-Own companies to discuss the optimal balance in flood 
coverage between the private and public sectors. This preliminary 
discussion served to initiate the conversation with the private flood 
industry to better understand what's possible in the future. We will be 
continuing the dialogue started in this session with a second meeting 
this fall.

Federal Assistance
    Under the Federal assistance option, we are exploring a new 
framework for flood loss reduction in which the Federal Government 
would provide financial assistance through all Federal flood management 
programs only in communities in which specific flood mitigation and 
preparedness measures have been enacted. Failure of a community to 
enact such measures would result in a significant reduction in Federal 
flood-related disaster assistance, ineligibility for pre- and post-
disaster grants for floodplain relocation, and could include 
limitations for flood control works.
    In this option, the program could create a rating system similar to 
the NFIP's Community Rating System. The community rating could 
correspond to a cost-share structure for Federal flood disaster and 
mitigation programs. Communities with higher ratings could be given 
more favorable cost-share arrangements, whereas those with lesser 
rating could receive a significantly reduced cost-share.

Optimization of Current NFIP Structure
    The NFIP optimization policy option outlines potential enhancements 
to the existing program to address programmatic weaknesses and current 
challenges while optimizing the existing achievements, strengths, and 
benefits of the program. The options for modification address many 
areas of the program such as Pre-FIRM subsidies, grandfathering, rating 
freedom, repetitive loss properties, coverage limits, mandatory 
purchase, assistance to low-income citizens, floodplain management 
standards, levees, flood hazard data, mitigation programs and grants, 
natural and beneficial functions of floodplains, and the NFIP debt.
    These four policy proposals present a broad spectrum of the options 
available to enact comprehensive NFIP reform, but they are not the only 
ones. All policy options, however, acknowledge that even an extremely 
successful flood mitigation effort cannot eliminate flood risk. 
Flooding will continue to cause economic loss, which begs the question: 
Who should bear that loss? The NFIP Reform Working Group heard varying 
opinions on this matter, which are reflected in the four draft policy 
options. Economic loss from flood could be borne by local economies, 
charitable organizations, individuals who experience the flood loss, 
taxpayers through disaster relief and individual assistance programs, 
or the private insurance market.
    The nature of the NFIP demands that it be looked at holistically 
rather than piecemeal; changing one facet impacts other aspects of the 
reform process. A successful outcome of NFIP reform will include a 
multiyear reauthorization of the NFIP to provide program stability, and 
a reform proposal that addresses short term issues; considers expert 
judgment and best practices; establishes the long term program 
direction; and incorporates the incremental reforms necessary to 
achieve that target State.

Conclusion
    The NFIP helps communities increase their resilience to disaster 
through risk analysis, risk reduction, and risk insurance. It also 
helps individual citizens recover more quickly from the economic 
impacts of flood events, while providing a mechanism to reduce exposure 
to flooding through compliance with building standards and encouraging 
sound land-use decisions.
    While the NFIP has been an extremely successful program through its 
42 years of existence, we know we can do better. Through the NFIP 
Reform Working Group, we have engaged stakeholders of various 
disciplines from across the Nation to help us guide the NFIP review 
effort. We look forward to sharing the findings from this ongoing 
effort with you as we continue to work together to ensure a strong 
NFIP.
    Thank you again for the opportunity to appear before you today. I 
am happy to answer any questions you may have.

       RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN JOHNSON
                      FROM W. CRAIG FUGATE

Q.1. The mandatory purchase requirement is one important method 
for communicating risk to homeowners. What coordination are you 
having with the banking regulators to ensure that banks notify 
borrowers of their flood risk and maintaining their coverage?

A.1. The enforcement of the mandatory flood insurance purchase 
requirements is the responsibility of the Federal regulatory 
agencies, and FEMA has taken a variety of measures to assist 
the regulators in this responsibility.

    The Mandatory Flood Insurance Purchase Guidelines, 
        compiled and published by FEMA, has served as a 
        valuable resource to regulators, lenders, and consumers 
        for over 25 years.

    FEMA regularly consults with the individual 
        regulatory agencies, Government Sponsored Enterprises, 
        Federal agency lenders, the Federal Financial 
        Institutions Examination Council (FFIEC), and lender 
        trade associations. This includes resolution of 
        specific problems, and mutual review of documents, 
        guidance, and regulations.

    FEMA operates a telephone response center that 
        answers questions from the public on all matters 
        relating to the NFIP, including the details of the 
        mandatory purchase requirements, where they apply, why 
        they are important, and how to satisfactorily comply 
        with them.

    FloodSmart, the NFIP's marketing and information 
        service, besides producing educational and 
        informational materials for lenders and the public, 
        provides a Web site for the public to submit inquiries 
        to the NFIP. A large number of these inquiries are from 
        lenders, insurance agents, and borrowers asking about 
        all aspects of the mandatory purchase requirements.

    FEMA conducts lender training both instructor-led 
        and via webinar to ensure that lenders understand the 
        flood insurance purchase requirements and the resources 
        available to them in carrying out their 
        responsibilities.

    FEMA has recently established a Lender Work Group, 
        composed of lenders, insurance agents, Federal 
        regulators, flood zone determination companies, and 
        FEMA to identify the obstacles to effective enforcement 
        of the mandatory purchase requirements.

    The requirement to purchase flood insurance for certain 
high-risk properties is a mandate that by statute is 
implemented by the Federal lending regulators through the 
lenders they oversee to the homeowner applying for a mortgage. 
FEMA can, and does, assist in this implementation process, but 
the FEMA role must necessarily be one of providing technical 
guidance, educational materials, informational brochures, and 
technological support. FEMA has done all that and will continue 
to do so.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                      FROM W. CRAIG FUGATE

Q.1. Administrator Fugate, this year has proven to be one of 
the worst in recent memory for disastrous floods. The Army 
Corps of Engineers has had to take the extraordinary action of 
flooding certain communities to save others. Many of the 
communities that have been flooded were located behind levees, 
flood walls, and dams. As a result, many people living in these 
areas did not have flood insurance.
    Please comment on the risks that exist for communities that 
are located behind levees, flood walls, and dams and whether 
there should there be a mandatory purchase requirement for 
people living in these residual risk areas.

A.1. FEMA supports the mandatory purchase of flood insurance 
for areas behind structural flood protection systems. These 
areas represent a higher risk than standard X zones, and the 
structural flood prevention systems provide a false sense of 
security to those who reside there. FEMA suggests that there be 
further study before dams are included in this requirement. 
There are existing dam safety programs that deal with mapping 
of dam failures. The nature of the risk below dams is different 
from the risk behind levees. Dams serve many purposes besides 
flood control and the area below a dam would not necessarily be 
in the natural 100-year floodplain, if the dam were not there. 
The term ``residual risk area'' is not clear. FEMA would 
characterize the issue as whether areas would be in the SFHA 
were it not for the existence of a levee or other structural 
flood protection system. This area describes the ``natural 
floodplain.''

Q.2. Nearly 50 percent of the people who are required to have 
flood insurance do not actually purchase flood insurance. This 
low participation rate exists in spite of the fact that there 
is a mandatory purchase requirement for federally backed 
mortgages. The GAO, among others, has pointed out that both 
FEMA and banks do a poor job of enforcing the flood insurance 
requirement.
    What steps has FEMA taken to bolster its enforcement of the 
participation requirement?
    Does FEMA need additional tools or does Congress need to 
take specific action to ensure that banks are doing their job, 
and, if so, what action does FEMA recommend?

A.2. The enforcement of the mandatory flood insurance purchase 
requirements is the responsibility of the Federal regulatory 
agencies, and FEMA has taken a variety of measures to assist 
the regulators in this responsibility.

    The Mandatory Flood Insurance Purchase Guidelines, 
        compiled and published by FEMA, has served as a 
        valuable resource to regulators, lenders, and consumers 
        for over 25 years.

    FEMA regularly consults with the individual 
        regulatory agencies, Government Sponsored Enterprises, 
        Federal agency lenders, the Federal Financial 
        Institutions Examination Council (FFIEC), and lender 
        trade associations. These discussions include 
        resolution of specific problems, as well as mutual 
        review of documents, guidance, and regulations.

    FEMA operates a telephone response center that 
        answers questions from the public on all matters 
        relating to the NFIP, including the details of the 
        mandatory purchase requirements, where they apply, why 
        they are important, and how to satisfactorily comply 
        with them.

    FloodSmart, the NFIP's marketing and information 
        service, besides producing educational and 
        informational materials for lenders and the public, 
        provides a Web site for the public to submit inquiries 
        to the NFIP. A large number of these inquiries are from 
        lenders, insurance agents, and borrowers asking about 
        all aspects of the mandatory purchase requirements.

    FEMA conducts lender training both instructor-led 
        and via webinar to ensure that lenders understand the 
        flood insurance purchase requirements and the resources 
        available to them in carrying out their 
        responsibilities.

    FEMA has recently established a Lender Work Group, 
        composed of lenders, insurance agents, Federal 
        regulators, flood zone determination companies, and 
        FEMA to identify the obstacles to effective enforcement 
        of the mandatory purchase requirements.

    The requirement to purchase flood insurance for certain 
high-risk properties is a mandate that by statute is 
implemented by the Federal lending regulators through the 
lenders they oversee to the homeowner applying for a mortgage. 
FEMA can, and does, assist in this implementation process, but 
the FEMA role must necessarily be one of providing technical 
guidance, educational materials, informational brochures, and 
technological support. FEMA has done all that and will continue 
to do so.
    As discussed above, the purchase of flood insurance on 
certain high-risk properties is implemented through the Federal 
lending regulators to the lenders. We are not in a position to 
make specific recommendations regarding the policing of banks 
penalties against lenders who show a pattern or practice of 
noncompliance with flood insurance statutes and regulations.

Q.3. Administrator Fugate, FEMA has adopted a new policy for 
mapping provisionally accredited levees. Previously, FEMA did 
not consider nonaccredited levees when developing new 
floodplain maps. This increased the flood insurance rates paid 
by communities located behind nonaccredited levees. Recently, 
FEMA has said that it will begin considering certain, 
provisionally accredited levees in flood maps.
    Please discuss FEMA's change in policy and how FEMA plans 
to determine the level of protection provided by provisionally 
accredited levees.
    How will FEMA ensure that these levees will be brought up 
to the required protective levels within a reasonable time?

A.3. FEMA is currently developing a new levee policy that 
addresses the analysis and mapping of nonaccredited levees. 
This new policy will be finalized in the next few months. The 
new policy does not impact provisionally accredited levees or 
the modeling and mapping of accredited levees. The provisional 
accreditation is a designation used for levees that are not 
currently accredited, but are expected to become accredited in 
an agreed upon timeframe once appropriate documentation is 
provided.
    The responsibility for ensuring that these levees will be 
brought up to the required protective levels is beyond FEMA's 
purview and expertise. FEMA's responsibility lies wholly in 
adequately reflecting the known flood hazard in the vicinity of 
the levees, regardless of the level of protection provided by 
the structure. Through FEMA's Risk MAP program and additional 
engagement with the impacted communities, FEMA will help the 
community to increase flood risk awareness and take additional 
steps toward action to reduce risk. These mitigation steps can 
come in many forms, including structural means and also options 
like relocation, elevation, etc.

Q.4. There has been a lot of focus on the Map Modernization 
efforts that FEMA has undertaken over the past several years. I 
understand that you have worked through many of the initial 
issues you encountered in updating the maps and introducing 
them into the communities. However, there are still those who 
wish to delay the implementation of the maps.
    I would like to hear about the efforts made to involve the 
communities in the process. I understand that there is an 
appeals process if communities do not believe that FEMA has 
used the most appropriate data or their data is incorrect, but 
how closely does FEMA work with the community as it develops 
and updates the maps? That is to say, is it a collaborative 
process?

A.4. Community involvement was an important component of Map 
Modernization. However, lessons learned in Map Modernization 
have helped to inform how community engagement should be 
improved, and these improvements have been incorporated into 
the vision for Risk Mapping, Assessment, and Planning (Risk 
MAP).
    During Map Modernization, communities were engaged in the 
mapping process mainly through planning, reviewing, and 
providing comments on preliminary Flood Insurance Rate Maps 
(FIRMs) and Flood Insurance Study (FIS) reports. In an effort 
to obtain all relevant information and ensure accurate study 
results, FEMA usually held two meetings for community officials 
and other interested parties: a Scoping Meeting and a Final 
Meeting/Open House.
    The initial coordination activities between FEMA and 
individual communities included an evaluation of the needs and 
the available funding to establish the scope of the study. 
During this process, community officials usually met with FEMA 
and other agencies at a Scoping Meeting to determine the 
appropriate areas of concentration for the mapping project. 
Once the flood study was complete, which may have taken several 
years, the community was sent copies of the preliminary FIRM 
and FIS report to review. After a 30-day review and comment 
period, a Final Meeting and public Open House was scheduled by 
FEMA's Regional Office staff and community officials to review 
the preliminary FIRM and FIS. The Final Meeting was usually 
held with community officials only to review the FIRMs and FIS; 
the Open House was usually open to the public. They were often 
held on the same day.
    Unless significant technical concerns were raised before or 
during the Final Meeting and Open House meeting, FEMA would 
then begin a 90-day appeal period, which only applied when Base 
Flood Elevations (BFEs) were either revised or newly proposed. 
BFE notices were published in a local newspaper on two 
different dates, usually within a week of each other, and a 
notice was also published in the Federal Register. The 90-day 
appeal period began on the date of the second publication in 
the local newspaper. During the appeal period, property owners 
and other citizens in the community would have the opportunity 
to submit technical and/or scientific data to support an appeal 
of the proposed BFEs. When the 90-day period was complete and 
any appeals were resolved, the new FIRM and FIS report would 
move towards finalization.
    Starting in 2010, FEMA also implemented Scientific Review 
Panels (SRPs) for communities and other stakeholders to use if 
FEMA's resolution of an appeal was not satisfactory. To be 
considered for the SRP, the data must be submitted during the 
90-day appeal period, resulting in different flood hazards than 
those proposed by FEMA. Also, the community must consult with 
FEMA for a minimum of 60 days following the end of the appeal 
period. If activated, the SRP consists of a panel of five 
independent reviewers from the scientific and engineering 
communities. This panel reviews the engineering data, the 
preliminary FIRM and FIS, and any appeal presented by the 
community, then provides a written report with its decision and 
rationale to FEMA and the community within 150 days. The SRP's 
decision will become the recommendation to the FEMA 
Administrator, who will make the final determination. The SRP 
process is managed by the National Institute of Building 
Sciences, a nonprofit organization independent of FEMA.
    FEMA has implemented other changes as well. Community 
engagement is critical to Risk MAP's success. Through targeted, 
consistent outreach throughout a project, FEMA will work to 
make it easier for people and communities to reduce their 
vulnerability to flood risk. Some of the lessons learned in Map 
Modernization that have been addressed in Risk MAP are:

    Map Modernization Scoping Meetings were often held 
        after FEMA had already decided on a mapping project 
        scope. If new information was uncovered at the Scoping 
        Meeting, it may not have been able to be incorporated 
        into the mapping project since the project had already 
        been funded. For Risk MAP, FEMA has completely revised 
        the Scoping Process (now referred to as Discovery) to 
        include better coordination with communities watershed-
        wide, to broaden the types of stakeholders that are 
        engaged, and to begin discussions about flood risk 
        earlier in the process. Risk MAP's Discovery Process 
        will include coordination with communities on the 
        project scope to a much larger extent than in the past. 
        FEMA will not walk into a Discovery Meeting knowing the 
        scope of the project. In fact, if it is determined 
        after Discovery that a project is unwarranted, a 
        project will not be initiated. If a project is 
        warranted, FEMA will work with communities to determine 
        and finalize the scope, and those decisions will be 
        documented in a project charter or memorandum of 
        understanding that all parties will sign.

    Communities were often not engaged thoroughly in 
        the time between the Scoping Meeting and the release of 
        the preliminary FIRM and FIS, which, for some Map 
        Modernization studies, was a period of several years. 
        The long period of time and other issues (for instance, 
        staff turnover at the community) often resulted in 
        surprise and confusion once the preliminary FIRMs and 
        FIS were issued. Also, during the time the preliminary 
        FIRM and FIS were being prepared, changes to the scope 
        may have occurred. If these scope changes were not 
        communicated to the communities, the preliminary FIRMs, 
        once issued, resulted in backlash from communities. In 
        Risk MAP, communities will be engaged throughout the 
        project timeline, including while the data is being 
        collected and the flood risk products are being made. 
        Changes to scope will be coordinated with communities. 
        Risk MAP projects may also include a Flood Risk Review 
        Meeting at the Regional Office's discretion. Prior to 
        the release of the preliminary FIRM and FIS, this 
        meeting is held after the engineering data has resulted 
        in draft flood risk assessments and other flood risk 
        visualizations, such as depth and velocity grids, a map 
        showing areas of mitigation interest, and other 
        products that have not been included in Map 
        Modernization.

    The products of Map Modernization (FIRMs and FIS 
        reports) are regulatory products that are used in part 
        to determine flood insurance purchase requirements. 
        This often leads to a discussion between homeowners, 
        communities, and FEMA regarding who is ``in or out'' of 
        the flood zone. Discussions regarding the consequences 
        of flooding to a community, flood depths and 
        velocities, evacuation routing, warning systems, 
        mitigation planning, and reducing flood risk are lost 
        in this often contentious debate. For Risk MAP studies, 
        a much more robust offering of flood risk products and 
        assistance to communities will be available. In 
        addition, Risk MAP projects will include a Resilience 
        Meeting, which is a meeting that occurs before the 
        preliminary FIRM and FIS are released and is focused on 
        building local capacity for implementing priority 
        mitigation activities within a watershed. Discussions 
        will focus on understanding the flood risk that exists 
        in the watershed, planning for that risk, and 
        communicating that risk to citizens. While ``in/out'' 
        discussions will likely always exist, FEMA is 
        attempting to refocus the discussion on mitigating and 
        communicating the flood risk.

    Currently, appeal periods are only initiated when 
        BFEs are revised or newly proposed. No appeal period is 
        initiated when a flood zone without BFEs is newly 
        mapped or revised, or when flood zone delineations 
        change based on new topographical information and 
        become larger or smaller. This has resulted in backlash 
        from communities that did not receive an official 
        appeal period and felt that they were therefore not as 
        integral to the mapping process as communities who 
        received official appeal periods. A new interpretation 
        of the regulatory underpinnings of the National Flood 
        Insurance Program will result in a revised policy to 
        provide the same due process currently provided to 
        changes in BFE determinations to other changes in flood 
        hazard information on the FIRM, including the addition/
        modification of approximate floodplain boundaries and 
        the regulatory floodway, and the redelineation of 
        existing detailed floodplain boundaries.

    The Risk MAP community engagement approach has several 
guiding principles, which, together with the specific changes 
described above, will help to enhance FEMA's community 
engagement strategy:

    Engage communities early and often.

    Agree upon and document project outcomes and 
        responsibilities.

    Coordinate with other programs operating within the 
        same community.

    Engage associations to provide a third-party 
        perspective.

    Leverage local media and use language that people 
        understand.

Q.5. A key issue underlying the current program is the lack of 
information provided to citizens regarding their true risks of 
flooding. While subsidized rates provide a certain sense of 
false security, the lack of easily understandable information 
provided to individuals living in high risk areas is another 
contributing factor.
    Please discuss FEMA's efforts in introducing the new maps 
and how it may differ today from when FEMA first began 
introducing the new maps. Please also discuss how your efforts 
ensure that individuals get the information they need to truly 
understand their risk.

A.5. Risk Mapping, Assessment, and Planning (Risk MAP) provides 
communities with flood information and tools they can use to 
enhance their mitigation plans and take action to better 
protect their citizens. Through more precise flood mapping 
products, risk assessment tools, and planning and outreach 
support, Risk MAP strengthens local ability to make informed 
decisions about reducing risk.
    In an effort to ensure the individuals get the information 
they need to truly understand their risk, Risk MAP focuses on 
products and services beyond the traditional Flood Insurance 
Rate Map (FIRM) and works with officials to help put flood risk 
data and assessment tools to use, effectively communicating 
risk to citizens and enabling communities to enhance their 
mitigation plans and actions. For example, FEMA will produce 
Flood Depth and Analysis Grids, and Flood Risk Assessments. 
Flood Depth and Analysis Grids help communities better 
understand their flood hazard and risk in mapped floodplains 
since it displays a depth of flooding for specific events. In 
addition, Flood Risk Assessments will be provided to help guide 
community mitigation efforts by highlighting areas where risk 
reduction actions may produce the highest return on investment.
    FEMA delivers these products and services in Risk MAP 
through a more robust community engagement strategy. The 
community engagement approach in Risk MAP outlines a series of 
important ``touchpoints'' that occur during each project from 
the time FEMA plans for a project through a series of community 
meeting and any necessary map updates. The following provides 
the guiding principles being used for the community engagement 
approach:

    Engage communities early and often.

    Agree upon and document project outcomes and 
        responsibilities.

    Coordinate with other programs operating within the 
        same community.

    Engage associations to provide a third-party 
        perspective.

    Leverage local media and use language that people 
        understand.

    Community engagement is critical to Risk MAP's success. 
Through targeted, consistent outreach throughout the Risk MAP 
timeline, FEMA works to make it easier for people and 
communities to reduce their vulnerability to risk.

Q.6. The Flood Insurance program provides critical assistance 
to 5.5 million families and businesses. It also provides a 
framework of responsible floodplain management, requiring 
safer, more environmentally sound development that limits 
Americans' flood risk.
    Given that many communities may be hesitant to take more 
drastic measures to mitigate flood risk due to economic 
development concerns, what steps does FEMA take to ensure that 
communities participating in the program are active partners 
rather than just partners on paper?

A.6. FEMA provides extensive technical assistance to 21,500 
NFIP participating communities. FEMA places a significant 
emphasis on providing training to local floodplain managers. 
During these training sessions, communities are encouraged to 
adopt and enforce higher floodplain management standards that 
go above and beyond the minimum NFIP criteria. Information is 
provided on the overall flood loss reduction benefits, as well 
as the significant flood insurance discounts associated with 
safer construction. FEMA and its State partners conduct 
hundreds of these training sessions every year. FEMA partners 
with the Association of State Floodplain Managers (ASFPM) and 
its 14,000 members in an effort to communicate and outreach to 
NFIP communities. FEMA provides funding for ASFPM's annual 
national conference where approximately 1,500 State and local 
floodplain managers attend. FEMA also provides funding for the 
Associations Certified Floodplain Manager's (CFM) program 
whereby local officials meet minimum standards and receive the 
CFM credential.
    We are pleased to see that many communities participating 
in the National Flood Insurance Program are acutely aware of 
their risk to flooding and choose to voluntarily implement 
floodplain management practices that exceed Federal minimum 
standards. These communities implement floodplain management 
programs designed to address their unique local flooding 
characteristics. The National Flood Insurance Program's 
Community Rating System (CRS) recognizes communities that 
implement these higher standards and provides discounts on the 
cost of flood insurance, commensurate with the reduced risk. 
Flood insurance premium discounts are provided in 5 percent 
increments to policyholders according to a define program of 19 
floodplain management activities. The CRS is a voluntary 
program that has been in place since 1990. Eleven hundred and 
sixty four communities have joined the CRS. Interest in the CRS 
is steadily growing with approximately 30 new communities 
joining each year. Sixty seven percent of all flood insurance 
policies are located in communities that participate in the 
CRS.
    Additionally, FEMA provides financial assistance to help 
communities mitigate. FEMA has five Hazard Mitigation 
Assistance (HMA) grant programs that FEMA can utilize to 
provide funds to State and local communities to reduce the loss 
of life and property from future disasters. For example, the 
Hazard Mitigation Grant Program (HMGP) provides grants to 
States and local governments to implement long-term hazard 
mitigation measures after a major disaster declaration. The 
purpose of the HMGP is to reduce the loss of life and property 
due to natural disasters and to enable mitigation measures to 
be implemented during the immediate recovery from a disaster. 
FEMA's Hazard Mitigation Assistance (HMA) grant programs 
provide funds to assist States and communities implement 
measures that reduce or eliminate the long-term risk of flood 
damage to buildings, manufactured homes, and other structures.
    The Pre-Disaster Mitigation Program is a nationally 
competitive program that provides funds to States and 
communities, including Tribal governments, for hazard 
mitigation planning and implementation of mitigation projects 
prior to a disaster event. The PDM Program provides Applicants 
with an opportunity to raise risk awareness and reduce disaster 
losses through cost effective hazard mitigation activities.
    The effectiveness of FEMA's mitigation projects has been 
repeatedly confirmed, such as in two independent studies 
commissioned by Congress. One study, conducted by the National 
Institute of Building Sciences in 2005 reported that for every 
$1 spent on various mitigation activities, $4 in response and 
recovery costs are saved. In September 2007, the Congressional 
Budget Office evaluated the Pre-Disaster Mitigation Program and 
found that for every $1 spent on mitigation projects, losses 
from future disasters are reduced by $3. FEMA's mitigation 
programs have allowed FEMA to work with its State and local 
partners to reduce the possibility of property damage, personal 
and commercial hardship, as well as long lasting monetary 
burdens.

Q.7. The GAO has highlighted that in its ``ongoing work 
examining FEMA's management of the NFIP . . . FEMA does not 
have an effective system to manage flood insurance policy and 
claims data, although investing roughly 7 years and $40 million 
on a new system whose development has been halted.''
    Why were the investments made in these critical operational 
systems subsequently halted?
    What steps has FEMA taken since this time to put in place a 
more effective management system?

A.7. At a TechStat session held on November 23, 2010, OMB and 
DHS reviewed the National Flood Insurance Program Information 
Technology System and Services (NFIP ITSS) and identified areas 
of concern, including questions regarding system functionality 
and documentation completeness. DHS elected to terminate the 
investment amid concerns that overall software quality could 
not be validated and that an independent evaluation indicated 
that the user needs may not be met.
    FEMA developed a path forward to improve the management and 
governance, and the plan was presented to the DHS CIO, DHS OIG, 
and GAO. This path forward revisited the Executive Steering 
Committee (ESC) membership and added a Chairman and Deputy 
Chairman. The ESC Charter was revised as well. A Program 
Management office was established as part of the FEMA Office of 
the Chief Information Officer, and a Program Executive and 
Deputy Program Manager have been hired.

Q.8. Administrator Fugate, it is my understanding that FEMA has 
created a new category of ``grandfathered properties'' for 
homes that have been mapped into riskier areas. These 
grandfathered properties enjoy taxpayer-subsidized flood 
insurance rates.
    Please discuss how the newly ``grandfathered'' category 
works.
    Is it a permanent category?
    If not, please detail how these ``grandfathered'' 
properties will move towards rates that more accurately reflect 
their actual risk?

A.8. Under the law, statutory grandfathering allows taxpayer 
subsidized premiums only to insurance policies covering 
buildings constructed before a community adopts its initial 
Flood Insurance Rate Map (FIRM) upon entry in the Regular 
Program of the National Flood Insurance Program (NFIP).
    Under the law, Post-FIRM properties must be actuarially 
rated. Because Pre-FIRM buildings were constructed before the 
existence of NFIP building requirements, the subsidized 
premiums, while discounted, can often be higher than Post-FIRM 
actuarially rated policies. Thus, a Pre-FIRM policy may be 
actuarially rated if the actuarial premium for the specific 
type of building is less than the subsidized premium. However, 
each class of Post-FIRM rating must be actuarially sound under 
the law.
    Administrative grandfathering is distinct from statutory 
grandfathering. Administrative grandfathering involves creating 
a class of actuarially rated policies that share common traits. 
Under the rules of the NFIP, administrative grandfathering 
provides an option to use the flood zone of Base Flood 
Elevation (BFE) from a previous Flood Insurance Rate Map (FIRM) 
after a map revision if using the older rating data is more 
favorable than using the data from the current FIRM. This type 
of grandfathering has been employed since the early 1980s. FEMA 
has implemented no program that increases taxpayer-subsidized 
flood insurance rates, which would be illegal.
    Under administrative grandfathering rules, regardless of 
the application date, buildings constructed after a community's 
initial entry into the Regular Program of the NFIP may be 
insured based on rating that uses the flood zone and BFE in 
effect on the date of construction if the older data allows a 
more favorable premium than the current FIRM data. Also under 
administrative grandfathering rules, any building may continue 
to be insured (renewed) based on rating that uses the flood 
zone and/or BFE used to rate the initial application, if this 
data is more favorable than a subsequent map revision. In order 
to consider a non-SFHA flood zone in the rating using the 
administrative grandfathering rules, buildings constructed 
before a community's initial entry into the NFIP (when no FIRM 
was effective) needed to be insured by an application submitted 
before the building was newly mapped into the SFHA.
    In the past, the NFIP's Preferred Risk Policy (PRP) was 
only available to properties actually determined to be outside 
of the Special Flood Hazard Area (SFHA) on the date of 
application. The PRP cannot be grandfathered. Older buildings 
constructed before the community's first FIRM needed to be 
insured under the PRP before a property became newly mapped 
into an SFHA. Upon renewal after the building was newly mapped 
to an SFHA, the property remained eligible for administrative 
grandfathering to the zone reflected on the PRP (an X zone). 
While a standard X-zone rate is higher than a PRP, it is 
typically lower than the premium calculation using the SFHA. A 
standard X-zone rated policy, while more expensive than a PRP, 
is less expensive than a subsidized policy offered under 
statutory grandfathering.
    On January 1, 2011, FEMA implemented the 2-Year PRP 
Eligibility Extension, which allows the application to be rated 
under the PRP for up to 2 years after a building is newly 
mapped into the SFHA. A slight increase in premiums to the 
entire PRP class nationwide made this extension actuarially 
sound. This extension also allows older building to be eligible 
for administrative grandfathering when the policy is converted 
from a PRP to a standard rated policy. If standard X-zone 
rating under administrative grandfathering is less expensive 
than the premiums available through statutory grandfathering, 
those property owners who purchased a PRP within 2 years of map 
revision will be eligible for the standard X-zone rating.
    This is not a permanent category because individual 
policies qualify for this further PRP eligibility for only 2 
years. Any further extension of PRP eligibility (such as a 
longer duration than 2 years) would need to be offset by a 
corresponding increase in the PRP premium. Thus, any further 
extension of PRP eligibility to those currently ineligible due 
to a higher risk of flooding will lead over time what is called 
``adverse selection.'' As more and more high risk properties 
are added to the class, the premiums correspondingly rise. As 
the premiums rise, those at lower risk drop out. We have seen 
this occur with administrative grandfathering applied to 
standard-rated policies. Currently, almost all standard X-Zone 
rated policies are nonbasement properties that were once 
considered outside of the SFHA, but are now mapped in the SFHA, 
or repetitive loss properties. The premiums for a standard X-
Zone policy are typically three to four times higher than the 
PRP. This residual book of business, as a class, is actuarially 
sound.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                      FROM W. CRAIG FUGATE

Q.1. You have indicated that the current budget will not allow 
FEMA to meet its Risk MAP objective of ensuring that 80 percent 
of the Nation's flood hazard data are new, updated, or deemed 
still valid by 2014.
    Based on the funding rate in the FY2012 request, when will 
FEMA meet its goal?
    What are the implications of delay?

A.1. FEMA will meet the goal of ensuring that 80 percent of the 
Nation's flood hazard data are new, update or deemed still 
valid by 2020. FEMA will defer the total number of Risk MAP 
project starts in FY12 and future years. We evaluated the 
proposed funding level during the development of the budget 
justification for FY12, assuming that future year funding would 
be at the same level (adjusted for inflation) as FY12. FEMA 
used a life cycle cost model to predict the extended time to 
2020. The assumptions within the model include: the 
prioritization strategy established for Risk MAP, program fixed 
and variable costs, currently identified flood hazard updated 
needs, an estimate of additional flood hazard data that will be 
validated during the current national assessment, and an 
estimate of how quickly flood hazard data that is currently 
valid will be invalidated by physical, climatological and 
engineering methodology changes. While this slower pace of 
production impacts the currency of the Flood Insurance Rate 
Maps, we believe that this pace is justified given the current 
Federal budget constraints.

Q.2. Until last year, when FEMA established new standards to 
ensure appropriate topographical data in mapping, the U.S. 
Geographical Survey's topographical data set was often the 
default for updating flood maps. GAO reported last year (FEMA 
Flood Maps, GAO-11-17) that despite the fact that it is on 
average 35 years old, USGS's data had been used for mapping in 
many high risk areas because it was less costly.
    Can you describe the data FEMA will rely on going forward 
and the efforts you are undertaking to ensure that appropriate 
data (not just the cheapest) is used to update flood maps?

A.2. FEMA intends to obtain high-quality elevation data. FEMA 
will manage elevation data used for Risk MAP as part of its 
Engineering Library system that houses all the supporting data 
used for Risk MAP. FEMA will also work with USGS to integrate 
Risk MAP elevation data with other national elevation data 
resources to make the data more widely available and easier to 
use.
    High-quality elevation data will not only increase the 
quality of the flood hazard maps but will also aid in 
developing risk assessment data, assist in developing 
actionable mitigation plans, and improve credibility, all of 
which help to achieve the overall mission of reducing the 
impact of disasters on lives and property. Furthermore, the 
data will result in a substantial increase in the public's 
awareness of risk--one of Risk MAP's operational goals--which, 
in turn, drives citizens to take actions toward mitigating 
risks. More information on FEMA's elevation data strategy and 
collaboration with other Federal agencies can be found in 
FEMA's ``Risk Mapping, Assessment, and Planning (Risk MAP)--
National Digital Elevation Acquisition and Utilization Plan for 
Floodplain Mapping'', dated July 2010, available at http://
www.fema.gov/plan/prevent/fhm/rm_main.shtm#4. 
    FEMA specifications for elevation data are aligned with the 
USGS to maximize partnerships and data utility. The 
specifications for FEMA's highest risk areas are the same as 
USGS accuracy specs. The new standard establishes minimum 
accuracy requirements for all risk levels, that vary based on 
the risk and terrain. ``Best available data'' is no longer 
acceptable if it does not meet the minimum standard.

Q.3. FEMA has indicated it will spend $80 million between 2010 
and 2013 to secure new topographical data--something it has not 
done in the past due to its concerns about cost.
    Does FEMA plan to maintain that commitment?
    Who is (and who should be) responsible for securing the 
appropriate data for each map update--FEMA or local 
governments?
    What other funding and technical assistance, if any, are 
provided to States and communities to help them develop their 
own capacity to assist in mapping updates?

A.3. In FY2011, FEMA plans to spend $20 million to acquire 
elevation data. High-quality elevation data form the foundation 
for increasing the quality of the flood maps, aid in developing 
risk assessment data, and assist in developing actionable 
mitigation plans based on improved hazard data. The lower 
funding requests in future years outlined in the President's 
Budget will spread the elevation data investment over a longer 
period of time. FEMA is committed to high quality elevation 
data and still believes it to be a prerequisite for any updated 
flood hazard analysis.
    The National Flood Insurance Program is a partnership with 
more than 21,500 communities across the country. While FEMA 
makes the significant investments, communities often have 
additional data to contribute (through their Planning 
Departments, Watershed Councils, Stormwater Agencies, etc.). So 
while FEMA does not require local contributions of data, we 
encourage collaboration with the local agencies that have the 
expertise and supporting data.
    In recent years, the Appropriations Committees have 
directed FEMA to prioritize map production funding for those 
partners that provide a cash match. While this has been 
successful, it is not the sole basis for funding future 
studies.
    FEMA has a Cooperating Technical Partners (CTP) program. 
The CTP Program allows communities, regional agencies, State 
agencies, universities, and Tribal Nations that have the 
interest and capability to become active partners in the FEMA 
Flood Hazard Mapping program. Eligible regional agencies 
include: watershed management and flood control districts, 
regional planning councils, councils of governments, and 
regional offices of State agencies.
    Specifically, our partners benefit because:

    The data used for local permitting and planning is 
        also the basis for the NFIP map, facilitating more 
        efficient floodplain management.

    The CTP Program provides the opportunity to 
        interject a tailored, local focus into a national 
        Program; thus, where unique conditions may exist, the 
        tailored approaches to flood hazard identification may 
        be taken.

    The partnership mechanism provides the opportunity 
        to pool resources and extend the productivity of 
        limited public funds.

    CTP Program-related activities may be funded based on 
FEMA's priority of mapping needs and the availability of FEMA 
funds for mapping. If FEMA funds are available, the Partner 
will receive funds through a Cooperative Agreement. Each FEMA 
Regional Office will determine how much of its annual mapping 
budget will be allocated to mapping activities under the CTP 
Program. The Cooperative Agreements awarded for mapping 
activities under the CTP Program are intended to supplement, 
not supplant, ongoing mapping efforts by a Partner, whether it 
be a community, regional agency, or State agency.

Q.4. Mapping is a collaborative effort and FEMA relies on 
Federal and nonfederal partners.
    Please comment on how you are working with other Federal 
agencies, such as USGS, NOAA, and the Army Corps on mapping.
    What data and assets are these agencies providing to 
support mapping and are these complementary efforts being 
properly funded?
    Can you comment on how FEMA is working with the private 
sector and how it is using new technology to improve the 
accuracy and usability of maps?

A.4. FEMA has close working relationships with an array of 
Federal agencies, including NOAA, the U.S. Army Corps of 
Engineers, and the USGS. While we each have our own statutory 
missions, there are clear areas of congruence as we better 
understand flood risk in the Nation. Specific attention is 
given to how we can leverage investments across the agencies 
and not duplicate spending. For the USGS, this is done through 
a relationship (documented in an MOU) at Headquarters. For the 
USACE, this is done through relationships at Headquarters as 
well as Region to District collaboration. The USACE efforts are 
enhanced by FEMA's participation with the Silver Jackets 
initiative where States convene all the Federal agencies in 
their area to focus on flood risk management. Over the past 
year, FEMA has been engaged in a joint Task Force with the 
USACE and the Office of Management and Budget to specifically 
address levee mapping concerns across the country. NOAA 
coordination is done with the specific offices.
    FEMA collaborates with the USGS on elevation data and 
hydrology. FEMA collaborates with NOAA's National Weather 
Service for river gage data and the Ocean Service for coastal 
gage data, the Coastal Services Center on data sets and 
community outreach, and the Climate Service on climate change 
data. FEMA also coordinates with Geodetic Survey for geodetic 
control and survey standards and best practices.
    The majority of flood hazard engineering, production, map 
finishing, and delivery is done by private sector contractors 
with oversight from FEMA SMEs. These mapping partners are adept 
in Geographic Information System (GIS) technologies, which are 
used throughout the mapping process.
    FEMA provides flood hazard data that the private sector 
incorporates into tools they develop. A good example of this is 
the Web Map Service (WMS) of the National Flood Hazard Layer 
that can be viewed with Google Earth or any other application 
that uses this protocol. Mobile applications have recently been 
developed by private industry that tie our flood data from this 
service into devices such as iPhones and Android phones.
    FEMA works closely with ESRI, a major GIS software and 
services provider, through the Enterprise License agreement 
managed by the Geospatial Management Office. ESRI conferences 
are also important events to keep up with current trends and 
private sector offerings from the geospatial sciences sector.
    FEMA's emphasis has been to focus on data, and more 
recently, data services. The emphasis on data services allows 
private sector to add value to FEMA data in making it available 
to the public while reducing cost to FEMA for distribution of 
this data. We are currently working on a strategy to more 
directly address external solution providers to help them 
better communicate risk to end users with our data. This 
includes not just traditional flood data, but other Risk MAP 
data as well.

Q.5. There have been legislative efforts to delay the adoption 
of new maps in order to forestall the designation of Special 
Flood Hazard Areas.
    What are the consequences to the program and society if we 
delay the initiation of map updates and the adoption of new 
maps?

A.5. FEMA has a statutory requirement to expeditiously identify 
and disseminate information regarding flood prone areas in the 
Nation (42 USC 4002(b2)). Timely and accurate flood hazard 
information provides the basis of sound decision making in 
communities and with individuals. Over the past 7 years, the 
updating of flood hazard maps has shown changes in the Special 
Flood Hazard Areas. These changes are driven by changes in the 
built environment throughout the watershed and by additional 
data regarding storms and water flow. Over the past 7 years, on 
average as many structures have been removed from the Special 
Flood Hazard Areas as have been placed in them through the 
updated analyses. These shifts continue to make the maps 
current and ensure their accuracy. Further, the structures at 
the greatest risk are identified and the public can take the 
appropriate actions to mitigate or buy down their risk through 
flood insurance.
    Delaying maps means that FEMA, in some instances, has 
analyses that demonstrate that some homeowners currently 
required to buy flood insurance should not have that mandatory 
requirement--thus their insurance, should they choose to keep 
it, would be significantly cheaper. In other instances, FEMA 
has analyses that clearly show an area at high risk, yet that 
information is withheld. In this latter instance, homeowners 
may be unaware of their risk (most homeowners become aware of 
their status from their banks after the Flood Insurance Rate 
Map goes into effect). If an intervening flood event occurs in 
the community, many of those who should have had flood 
insurance will not. In the absence of flood insurance, very 
limited resources are available for individuals to recover.

Q.6. In response to a request from 29 senators, you announced 
in March that FEMA would temporarily withhold issuing Letters 
of Final Determination for communities whose levees do not meet 
accreditation requirements in order to allow time for FEMA to 
develop new methodologies that will more accurately reflect the 
flood risk in areas impacted by these levees.
    When will FEMA complete the development of these 
methodologies? Can you provide an estimate for the cost of 
developing and applying these new methodologies? How will FEMA 
pay for these efforts without compromising other mapping 
objectives?
    How will these methodologies be implemented in communities 
where Final Determinations have already been issued?

A.6. Regarding the timeline, see above. Regarding the 
implementation for communities where Final Determinations have 
already been issued, see above.
    Regarding your question about the costs to develop and 
apply the new methodologies, these costs estimates are under 
development. As we refine and finalize the new methods, we will 
be developing more detailed cost estimates and, moreover, 
assessing overall cost impacts to the Risk MAP program. 
Further, as part of this effort we are concurrently assessing 
the impacts of implementing these new methodologies to Risk MAP 
program objectives within projected funding levels.

Q.7. Can you provide an estimate of the percentage of 
properties in Special Flood Hazard Areas that maintain flood 
insurance policies?

A.7. Based on our research, FEMA estimates that approximately 
24 percent of the properties in Special Flood Hazard Areas 
(SFHA) purchase flood insurance policies. The retention rate 
for SFHA properties in FY2010 was approximately 67 percent.

Q.8. It is my understanding that the Federal Government holds 
easements for properties in the Morganza Floodway and that the 
Morganza Spillway has been operated twice since it was built in 
1954, flooding these properties twice in less than 50 years.
    How are properties in the Floodway classified on FEMA's 
flood maps? To what extent are Army Corps inundation maps and 
scenarios integrated into FEMA's flood maps?
    As a general rule, how are Army Corps data, including 
inundation maps and scenarios, used in developing FEMA flood 
maps?

A.8. FEMA's Flood Insurance Rate Maps (FIRMs) currently show 
the entire area behind the spillway within the Special Flood 
Hazard Area. The USACE inundation maps and mapping scenarios 
are not incorporated into the FEMA FIRMs, although the 
inundated area is reflected as within the Special Flood Hazard 
Area.
    The USACE utilizes inundation maps for these flood control 
structures as an operational component to plan controlled water 
releases. If the water level reaches a predetermined height 
above the spillway, the inundation maps show how the flood 
control structure will function, operate, and reflect the areas 
that would be flooded as a result of a particular scenario. 
This information allows emergency management staff at a 
Federal, State, and local level to prepare for initial response 
and recovery activities prior to the event. FEMA's FIRMs 
reflect a flood hazard for a specific statistically probable 
flood event, which is the 1 percent annual chance flood event. 
While these two products seem similar, their uses are 
different. The USACE's inundation maps are intended to provide 
operational information for a particular structure and FEMA's 
FIRMs reflect flood risk based on statistical probability. 
Generally, FEMA maps do not consider the operational aspects of 
any spillway but FEMA does account for the unimpeded flow above 
the spillway for the 1 percent annual chance flood event.

Q.9. Can you comment on the data that private insurers of large 
commercial properties use in evaluating flood risk and how 
those practices can be utilized in the National Flood Insurance 
Program?

A.9. Over the last 5 years insurers and reinsurers of large 
commercial properties have begun to utilize more sophisticated 
techniques to evaluate the flood risk for individual buildings 
and for portfolios of buildings. Generally, those techniques 
start with FEMA's D-FIRMs, although the insurers typically 
require more detailed information than is provided on the 
FIRMs, particularly for areas outside of FEMA's defined 
floodplains. They use various additional sources of data to 
enable them to make probabilistic calculations of flood risk. 
Those other sources include the USGS Digital Elevation Model, 
satellite imagery, USGS river gauge data and various types of 
models for storm surges caused by hurricanes and other ocean 
storms. FEMA is interested in following those developments, and 
the mapping and actuarial components of FEMA have met with a 
number of insurance company developers of flood risk models to 
better understand their techniques.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
                      FROM W. CRAIG FUGATE

Q.1. I would like to thank you for changing your ``without-
levees'' mapping method in response to our letter, and would 
also like to thank you for the commitment you made at the June 
9 hearing to remap areas that were already done with the 
``without-levees'' method. Communities such as Warrenton, 
Oregon, that have already adopted the less scientifically sound 
maps must pay for costly flood insurance policies while they 
wait for these areas to be remapped. Could you provide 
information on the timeline for the remapping and also any 
anticipated costs that will fall on local communities during 
the remapping?

A.1. FEMA anticipates that the new methodologies will be 
completed during the Fall of 2011. While FEMA wants to move 
pending mapping activities forward as expeditiously as 
possible, we also believe it is imperative to follow a 
deliberate, collaborative approach to develop quality methods 
and guidance and allow for consideration of public comments 
before finalizing the new methodology. Therefore, FEMA has 
established a multidisciplinary team of experts made up of 
representatives from FEMA, the U.S. Army Corps of Engineers, 
academia, and the engineering industry to evaluate the 
available science and develop new levee analysis and mapping 
methodologies suitable for the National Flood Insurance 
Program. To provide independent, objective input, an 
Independent Scientific Body made up of recognized experts 
convened by the National Institute of Building Sciences is 
reviewing and providing comments on the new methodologies. 
Further, because of the importance of these new methods to 
communities with levees, in the coming months we will conduct 
focus groups of community officials and levee boards across the 
Nation. Finally, FEMA will make the methodologies available for 
public review and comment. Once these reviews have been 
completed and feedback addressed appropriately, FEMA will issue 
new guidance for analyzing and mapping levee systems under the 
NFIP. At that time, FEMA will review impacted studies and be in 
contact with affected communities regarding the next steps in 
the mapping process.
    As opposed to the current practice of using a single 
``without levee'' approach for analyzing and mapping 
nonaccredited levees, FEMA is developing a suite of 
methodologies. For each flood protection levee, FEMA will 
collaborate with the community and/or levee owner to select 
from this suite the best method for analyzing and mapping the 
levee that balances the need for accuracy, detail, and 
precision against the available mapping budget. Factors that 
will be important in selecting the appropriate method include 
levee system characteristics; flooding parameters; 
vulnerability of buildings, infrastructure, etc., within the 
area protected by the levee; and quality and availability of 
data necessary to perform analyses. The suite of methodologies 
is specifically being designed to accommodate communities that 
are unable to provide any data or analyses to the mapping 
effort. However, because FEMA must operate within the fiscal 
constraints of its available budget for flood studies and 
mapping, communities or levee owners that are willing and able 
to contribute data and/or perform analyses will be more likely 
to receive more detailed analytical methodologies. Frequently 
this data will already be in the possession of the community or 
levee owner and, thus, the community or levee owner will be 
able to contribute to the analysis and mapping effort at little 
or no additional cost.
    At this time it is difficult to determine when projects 
placed on hold pending new guidance will resume. However, our 
commitment to Congress places a great deal of importance on the 
Levee Analysis and Mapping Project, and appropriately, FEMA is 
aggressively working to meet this commitment. FEMA's priority 
when we implement the new methodologies will be to apply them 
to the nearly 250 ongoing studies that have been placed on hold 
pending development of the new levee analysis and mapping 
methodologies.
    Where Final Determinations already have been issued (such 
as in Warrenton, Oregon), FEMA is developing its plan to 
retroactively apply the new methodologies. While the details of 
that plan are still being developed, retroactive application of 
the new methodologies will depend upon the available funding 
and almost certainly will require several years to accomplish. 
Thus, our plan will include a multiyear prioritization and 
sequencing component. Any community or levee owner wishing to 
revise the NFIP maps using the new procedures faster than the 
time frames afforded through the FEMA-funded study queue will 
have the option to submit the necessary data and analyses in 
support of a map revision request under the provisions of 44 
CFR 65.

Q.2. Some of my constituents have complained about the policy 
of grandfathering in rates for properties that obtain flood 
insurance prior to the issuing of new maps. Their concern is 
that neighbors, who are active in local politics or who have 
been alerted by their insurance companies, know that they can 
save money by obtaining flood insurance before the new maps are 
adopted. However, others don't receive word and end up paying 
much higher premiums for the same flood risk. If FEMA is going 
to award these discounts, it is important to make sure everyone 
has a fair chance to benefit. What steps is FEMA taking to 
better communicate with property owners about these rate 
options?

A.2. FEMA's National Flood Insurance Program (NFIP) issues 
updated flood maps in communities to help residents understand 
their current flood risks and enable them to make informed 
decisions to address those risks. When local flood maps change, 
individuals newly mapped into a high-risk zone may be required 
to carry flood insurance because of the heightened risk they 
now face. The NFIP recognizes the potential financial burden 
that this may cause and offers significant financial savings, 
through the NFIP's grandfathering provision and recent 
Preferred Risk Policy extension, to help residents stay 
protected at a reasonable more affordable cost. To ensure that 
individuals across the country understand, and take advantage 
of these cost saving options, the NFIP engages in regular 
outreach to communicate about map changes and flood insurance 
options.
    FEMA's Federal Insurance and Mitigation Administration 
actively tracks communities that are releasing new flood maps 
and provides a range of materials on map changes and their 
impact on flood insurance requirements and costs at community 
meetings. FEMA's information and on-the-ground assistance not 
only helps residents understand map changes and insurance 
implications, it also provides the practical guidance needed to 
help citizens take advantage of cost saving options that come 
into play when local risks change.
    Recognizing the broad impact of map changes on communities 
nationwide, the NFIP has developed, and regularly distributes 
and promotes, a suite of fact sheets, tools, and materials that 
help explain ways to save on coverage through the 
grandfathering rule when it issues new flood maps at the local 
level. We distribute these materials at a host of conferences 
and stakeholder meetings nationwide and they reside on FEMA's 
FloodSmart Web site (www.floodsmart.gov), enabling widespread 
access to, and application of this important information.
    The NFIP has also recently expanded eligibility for its 
lower-cost Preferred Risk Policies (PRP). To raise awareness of 
this new program, which launched in January 2011, the NFIP 
sponsored extensive insurance agent trainings to help them 
counsel customers on the new option and distributed a series of 
fact sheets, backgrounders, and frequently asked question (FAQ) 
documents to help residents take advantage of these new, 
significant savings.
    The NFIP also continually encourages flood insurance 
protection in moderate- to low-risk flood areas and offers 
discounted rates to ensure that residents in these areas make 
the right choice and obtain dependable protection. PRPs start 
at just $129 per year and offer the same level of protection as 
a standard flood policy. To promote PRPs to eligible residents 
and encourage affordable coverage, the NFIP distributes monthly 
direct mailings detailing the availability of this reduced cost 
option and regularly promotes information and materials on PRP 
to agents, local leaders, and floodplain officials to help them 
educate residents about how they can effectively stay protected 
for a modest investment. The NFIP has run a national broadcast 
television spot to promote the PRP with consumers and placed 
PRP-related online banner advertisements on various Web sites 
throughout the country.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                      FROM W. CRAIG FUGATE

Q.1. During the February 18, 2011, conversation with FEMA's 
Jonathan Wescott, the request was made by St. Tammany Parish to 
allow a ``Partial Map Adoption.'' Subsequent conversations with 
FEMA Project Managers have assured communities that this is 
being considered and a feasibility study is under 
consideration. However to date, only one community in St. 
Tammany Parish (Mandeville, Louisiana) has been given verbal 
notice that FEMA will allow their Community Based Maps to be 
published (municipality only).
    What is the status of the feasibility study to allow 
``Partial Map Adoption'' for the rest of the Parish?
    Will the same contractors, who created the preliminary 
DFIRMs that are currently under Appeal by St. Tammany Parish, 
be allowed to participate in this process?
    Has a budget been proposed for this study?
    Is there funding available for the feasibility study to 
allow Partial Map Adoptions?

A.1. FEMA evaluated the possibility of a partial map adoption 
for the unincorporated areas of St. Tammany Parish. However, 
due to the configuration of the map panels as it related to 
panels affected by levees, along with a need to ensure flood 
hazards match along map edges, complicated community compliance 
issues, and the lack of a good location to segment the maps, 
partial map adoption was not a feasible approach for the 
unincorporated areas of St. Tammany Parish. Furthermore, at a 
recent meeting with Mandeville and St. Tammany Parish 
officials, Parish officials agreed that a partial map for 
unincorporated areas would present significant permitting and 
enforcement issues. Region 6 has not been approached by any 
other incorporated communities within the Parish to look at 
moving forward with a community based map.
    The current contract expires at the end of September. The 
intent is for the current contractors to resolve all appeals 
unrelated to the areas affected by levee guidance and coastal 
structure guidance and to complete the community based map 
process for the City of Mandeville to maintain continuity. At 
that point the study will be put on hold until the new levee 
guidance is finalized.
    For the City of Mandeville's community based maps, the 
contractor anticipates submitting for Quality Review at the end 
of September with a final Letter of Final Determination 
sometime towards the middle of December. Additional contracting 
mechanisms are being explored to extend the current contractor 
long enough for the contractor to finish the Mandeville 
Community Based Map.
    There is adequate funding available to complete partial map 
adoption for the City of Mandeville. There is uncertainty on 
the budget needs to complete the remainder of the study for St. 
Tammany Parish as it will be affected by FEMA's new approach to 
analyzing and mapping unaccredited levees.
    No, additional funding will have to be secured for any 
further investigation into the feasibility of additional 
community based maps.

Q.2. In FEMA's response to the February 3, 2011, Senate letter, 
FEMA states they will respond to congressional and local 
criticism by terminating the ``without levees'' practice. They 
will work to formulate a new methodology that takes into 
account lesser protection levels (i.e., ``give credit for 
partial protection'' to uncertified/decertified levees and 
coastal structures).
    Has FEMA begun work on the proposed ``New Approach'' to 
address uncertified/decertified levees, Coastal Structures and 
Coastal Levees?
    Will FEMA solicit input on the Coastal Levee Guidance 
procedures during their development? If not, why not? 
Communities are more familiar with the situation on the ground 
and have had years of experience dealing with their levees.
    Will there be any changes to the FEMA guidelines on the 
treatment of nonlevee coastal structures? These structures are 
very important in Louisiana for reducing flooding and providing 
partial protection.
    Will FEMA develop guidelines for the treatment of coastal 
restoration projects, such as mash creation and barrier island 
restoration, in the floodplain mapping? The principle of the 
Multiple Lines of Defense, the basis for Louisiana's coastal 
planning, assumes that restoration projects will be credited 
with some flood protection benefits.
    Will the same contractors, who created the preliminary 
DFIRMs that FEMA has agreed to withdraw, be used to remodel 
DFIRMs in this ``New Approach''?
    Remodeling depends upon obtaining additional funding. Has 
FEMA proposed a budget for the remapping effort? Will the 
proposed budget be made publically available?
    FEMA expects all mapping efforts to be delayed by months, 
not years; however, remapping is dependent upon funding AND 
completion of the NEW Coastal Levee Guidance. Is there any 
information on the timing of a Federal Register notice?
    FEMA has stated that they will solicit for public comment 
on this new methodology for Coastal Levee Guidance. Will these 
comments be made available to the public?
    Will FEMA allow adequate time for public review and comment 
once the ``New Approach'' is proposed?
    What is the status of the Science Review Panel with respect 
to the treatment of coastal structures and levees in the 
mapping effort?
    Have any communities entered into this phase of Appeal? 
Will their concerns be made available to the public and/or 
other communities who are in DFIRM Appeal with FEMA?

A.2. Work has begun on the proposed new approach to address 
uncertified levees, including coastal levees. However, the 
ongoing effort to update FEMA's methodologies for the treatment 
of uncertified levees in flood hazard mapping for the NFIP is 
specific to levees. New methodologies for the treatment of 
nonlevee coastal structures, which are not analyzed using the 
``without levees'' practice and not covered by 44 CFR 65.10 
certification standards, are not being developed at this time.
    Yes, FEMA will welcome comments on coastal levees as part 
of this new approach.
    See response to first bullet. It should be noted however 
that current guidelines allow for evaluating the partial 
protection that may be afforded by nonlevee coastal structures 
that are expected to fail during a base flood. This is 
accomplished by utilizing an appropriate failed structure 
configuration in the overland wave modeling.
    FEMA does not currently have guidelines specifically 
addressing the treatment of the coastal restoration projects 
mentioned above in an NFIP flood study. However, that does not 
mean that the effects of these types of projects cannot be 
reflected on the FIRM. FEMA uses highly detailed topographic 
and bathymetric data and information about land use and 
vegetative cover in the development of its flood models and 
resultant hazard mapping. Completed coastal restoration 
projects typically alter the topography and/or bathymetry in 
the vicinity of the project. The effects of these alterations, 
including any changes to the vegetation present at the site, 
can be incorporated into the FIRM at any time after the project 
completion. In situations where these projects impact Base 
Flood conditions FEMA encourages communities to provide the 
information needed to update the maps to reflect the effects of 
these projects within 6 months of it becoming available in 
accordance with NFIP regulations (44 CFR 65.3).
    Yes, where it makes sense to do so and in coordination with 
impacted communities.
    FEMA is currently performing an analysis of costs 
associated with the new levee approach.
    FEMA will publish a notice for a public review period in 
the Federal Register.
    Comments will be analyzed and grouped into themes. The 
major themes of the comments may be posted to the FEMA Web page 
for the Levee Analysis and Mapping Project (LAMP).
    At this time, no community has requested a Scientific 
Resolution Panel (SRP) to review data relevant to coastal 
structures or levees in the mapping effort. However, FEMA is 
utilizing the SRP to convene an Independent Scientific Body, 
comprised of technical and scientific experts, to review and 
comment on the proposed new approaches for depicting the flood 
risk associated with nonaccredited levee systems. The proposed 
approaches account for the treatment of coastal levees that 
cannot be accredited.
    At this time, two communities have requested an SRP and 
were eligible in accordance with the guidance provided publicly 
in Procedure Memorandum No. 58, entitled ``Implementing the 
Scientific Resolution Panel Process.'' Both are currently in 
the SRP process, and their concerns are publicly available at 
the following Web site: http://www.floodsrp.org/panels/.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR COCHRAN
                      FROM W. CRAIG FUGATE

Q.1. Administrator Fugate, as you know, we have been very 
clearly reminded over the past couple of months that a lot of 
valuable real estate in the Mississippi River Valley is 
protected from flood waters by the world's best levee system. 
Having intimately experienced Hurricane Katrina and the recent 
floods, we take seriously the need of the National Flood 
Insurance Program to accurately reflect risk to the public. 
However, Senators from all over the Nation are hearing from 
their constituents regarding FEMA's Map Modernization efforts.
    Do you share my view that there are practical changes we 
can make to FEMA policy that might mitigate some of the 
concerns of communities without adversely affecting risk 
identification or the solvency of the NFIP?

A.1. FEMA is committed to reforming the National Flood 
Insurance Program. Specifically:

    In January 2011, FEMA's NFIP Reform Working Group 
        completed the refinement of policy alternatives and 
        began the policy evaluation phase.

    The evaluation was conducted through the Spring in 
        cooperation with Keybridge Research, a independent 
        policy analysis firm.

    The evaluation involved both a qualitative and a 
        quantitative assessment of each of the policy 
        alternatives and identified each policy's strength and 
        weaknesses.

    The Working Group has recently received the initial 
        findings of this assessment and have found that no 
        single idea prevails but that there are strengths in 
        each of these areas that could be combined to form a 
        holistic reform package.

    The Working Group has been asked to continue 
        working through the summer.

Q.2. What consideration does FEMA give to ongoing flood control 
projects when remapping an area? Is it prudent to remap an area 
when there is a reasonable amount of certainty that the flood 
risk of that area may change dramatically very soon due to the 
completion of a flood control repair project? Wouldn't you then 
have to use more Federal resources to map that area again in 
order to keep up with flood risk?

A.2. FEMA coordinates with communities as new flood control 
projects are built or older infrastructure is repaired or 
upgraded. In our experience, many construction projects 
encounter delays, and FEMA is concerned about a possible 
flooding event in the interim.
    For projects in progress, FEMA has an available remedy. In 
accordance with 44 CFR 61.12, FEMA may issue adequate progress 
determinations for flood protection systems (i.e., levee 
systems) construction or restoration projects involving Federal 
funds that may significantly limit the area of a community that 
will be included in the identified Special Flood Hazard Area 
(SFHA). The SFHA is the area that will be inundated by the 1 
percent annual chance flood. Such projects reduce, but do not 
eliminate, the risk of flood to people who live and work behind 
levee systems and to the structures located in these levee-
impacted areas. The Chief Executive Officer of the community or 
other responsible community official may request that FEMA make 
an adequate progress determination for a construction project 
and revise the effective FIRM to designate the SFHA in the 
impacted area as Zone A99.
    In all cases, FEMA works to expeditiously update the flood 
hazard depiction upon completion of the project.

Q.3. Do you believe communities who contribute constructive 
scientific data to the remapping process should be compensated 
for their troubles? Why should communities in some cases have 
to expend local funds to prove that the Federal Government got 
it wrong?

A.3. The NFIP is a partnership with local communities, and 
identifying flood hazards is not the sole responsibility of 
FEMA. In a resource constrained environment, FEMA must make 
sound investment decisions. FEMA is committed to the accuracy 
of all our Risk MAP products. The additional data rarely is 
about demonstrating that the draft FEMA product is wrong; 
usually the scientific data brings higher resolution to the 
product. We view such enhancements as a mutually beneficial 
contribution from the local partner.
    FEMA strives to provide data and information at a 
resolution sufficient to meet NFIP objectives of reducing 
future flood risk and ensuring a sound means upon which to 
fairly price flood insurance.

Q.4. What is your flood insurance adoption rate among those who 
are required to participate in the NFIP?

A.4. Ninety-seven percent of the 2,103 communities adopted the 
Flood Insurance Rate Map (FIRM). Only 73 communities did not 
adopt the FIRM and were suspended from the NFIP.

Q.5. What are your assessments of the performance of the 
Mississippi River and Tributaries System during this ongoing 
historic flooding? How do the successes of this system affect 
your level of confidence in the risk reduction capabilities of 
our Nation's flood control infrastructure?

A.5. FEMA does not evaluate the specific performance of flood 
control systems. The U.S. Army Corps of Engineers along with 
the Mississippi River Commission provide oversight and 
management of the Mississippi River and Tributaries System.

Q.6. Should it be the policy of the United States that people 
not live behind levees?

A.6. Water is an integral part of the American society; water 
sustains life and moves commerce. While there is always a risk 
of flooding for businesses and homes behind levees and those 
affected must know their risk, FEMA leaves it to local 
communities to make wise land-use decisions about flood 
control.
              Additional Material Supplied for the Record

      PREPARED STATEMENT OF SENATOR RICHARD J. DURBIN OF ILLINOIS

    Chairman Johnson and Ranking Member Shelby, thank you for this 
hearing on the reauthorization of the National Flood Insurance Program. 
I appreciate the opportunity to share my views on this program with the 
Committee.
    Discussion of reauthorization of the NFIP could not be more timely 
for Illinois. Today, hundreds of people in Southern Illinois are 
cleaning up after flooding from the Ohio and Mississippi Rivers 
inundated the region this April and May. President Obama has declared 
21 counties in the southern part of my State Federal disaster areas. I 
am grateful that both Federal individual and public assistance will be 
made available there, and I will continue to do all I can to ensure 
that the affected communities have the help they need.
    The National Flood Insurance Program is the primary Federal 
resource available to help people and communities recover from flood 
damage. The program expires on September 30th of this year. There are 
many challenges to its reauthorization, not the least of which is its 
estimated $18 billion debt. The program should be reworked to be more 
actuarially and fiscally sound.
    We need to update our perception of weather patterns. In Illinois, 
the frequency of what once were considered 100- and 500-year flood 
events suggests we need to adapt to a more realistic expectation of 
flooding frequency and severity. This means accounting for evolving 
flood zones, through a fair and accurate flood mapping process.
    As flood maps are updated, the people who live in newly mapped 
flood zones have to adapt to the cost of mandatory insurance. The 
program should take into consideration efforts that are made by 
communities to shore up protections against flood events. Today, when a 
community learns it will be mapped into a flood zone, no consideration 
is given to account for that community's efforts to bolster its levees. 
Instead, residents of the newly mapped zones must purchase insurance, 
even while paying to bring their levees back up to the standard of 100-
year flood protection.
    This is exactly what happened in Metro East, Illinois, where most 
people have never experienced a flood. The community received a double 
whammy when it learned the levee no longer meets the 100-year flood 
protection standard and that it was being mapped as a flood zone. The 
community began collecting revenues to help repair their levee. Because 
they are proactive in addressing the infrastructure, residents feel 
that the requirement to purchase flood insurance does not make sense. 
For communities like Metro East that are investing in their levee and 
that have not had a flood, we should be reasonable about the mandatory 
insurance requirement. The Flood Insurance Program should fairly and 
accurately reflect communities' risk, while taking into account efforts 
underway to guard against a major flood.
    I commend the Committee for addressing the challenges facing the 
flood insurance program's reauthorization. I look forward to seeing the 
bipartisan measure being developed by the Committee and am happy to 
help in any way I can to see it passed.
    Thank you.

STATEMENT SUBMITTED BY THE NATIONAL ASSOCIATION OF REALTORS'











































    REAUTHORIZATION OF THE NATIONAL FLOOD INSURANCE PROGRAM--PART II

                              ----------                              


                        THURSDAY, JUNE 23, 2011

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:06 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. I would like to call this hearing to 
order.
    This is the Committee's second hearing to examine the 
reauthorization of the National Flood Insurance Program. At our 
first hearing on June 9, we had a good discussion of this topic 
with FEMA Administrator Craig Fugate. Today, we are joined by a 
panel of experts and stakeholders who will share their 
perspectives on reauthorization.
    The Flood Insurance Program was created to help communities 
limit damage and recover more quickly. Flooding is responsible 
for more damage and economic loss than any other type of 
natural disaster. I need to look no further than my own home 
State for a reminder of this, as we battle historic flooding 
along the Missouri River in South Dakota. South Dakotans have 
shown tremendous hard work and community spirit in this fight, 
but are understandably concerned about the road ahead. I want 
to state again that I will do my best to get them the help they 
need now and when the water recedes.
    Despite the Flood Insurance Program's importance, it now 
faces challenges to its long-term viability. Over the past 
year, we have also had several disruptive lapses in the NFIP. I 
hope we can provide greater certainty to the program through a 
long-term extension with much needed reforms.
    This recent flooding is another reminder that Congress must 
reauthorize the NFIP before the upcoming September 30 
expiration date. As I said during our previous hearing, I hope 
that we can once again come together and pass a bipartisan bill 
that will build a sustainable future for the program and 
American citizens. I look forward to hearing from our witnesses 
on this subject.
    Senator Shelby is not here, but I will now open it up to 
all Committee Members who wish to give an opening statement. 
Before that, I ask unanimous consent for the record to remain 
open for 7 days for additional statements and questions.
    Does anybody want to give an opening statement? Senator 
Johanns.
    Senator Johanns. Mr. Chairman, as you know, our normal 
practice is to let the Chair and Ranking Member speak. I do 
have an opening statement, but I am guessing all of my 
colleagues would like to get to the witnesses. We have a long 
panel here. I am willing to submit my opening statement for the 
record and just call it good and get ready to hear from the 
witnesses.
    Chairman Johnson. Anybody else?
    [No response.]
    Chairman Johnson. With that, I would like to introduce 
today's panel. Before I begin, I would like to note that we 
have invited several additional organizations representing the 
insurance industry to submit written testimony for the 
Committee today. I will submit additional statements from the 
Property Casualty Insurers Association of America, National 
Association of Mutual Insurance Companies, American Insurance 
Association, and the Independent Insurance Agents and Brokers 
of America, and others into the record. I encourage my 
colleagues on the Committee to review this testimony.
    Now, I will introduce today's panel. Our first witness 
today is Ms. Orice Williams Brown, who is the Director of the 
Office of Financial Markets and Community Investment at GAO. 
Ms. Brown has led extensive reviews of the National Flood 
Insurance Program and is no stranger to this Committee. I would 
like to welcome her back.
    Mr. Chad Berginnis is the Associate Director of the 
Association of State Floodplain Managers. He has spent over 15 
years in floodplain management, hazard mitigation, and land-use 
planning at the State and local levels and in the private 
sector.
    Mr. Adam Kolton is the Executive Director of the National 
Advocacy Center at the National Wildlife Federation, and is 
also testifying as a representative of the Smarter Safer 
Coalition.
    Mr. Barry Rutenberg is a home builder with more than 35 
years of experience in the building industry. He is currently 
the First Vice Chairman for the National Association of Home 
Builders.
    Mr. Travis Plunkett is the Legislative Director for the 
Consumer Federation of America, a nonprofit association of over 
280 organizations that advances consumer interests.
    Finally, we will hear from the Honorable Scott H. 
Richardson. Mr. Richardson has previously served as South 
Carolina's Insurance Commissioner as well as a State 
Legislator. He is currently a partner in Richardson and Ritchie 
Consulting.
    Welcome, everyone. Ms. Brown, please begin.

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

    Ms. Brown. Chairman Johnson and Members of the Committee, I 
appreciate the opportunity to participate in today's hearing on 
the National Flood Insurance Program. As you know, floods are 
the most frequent natural disasters in the United States, 
causing billions of dollars of damage each year.
    Congress originally created the National Flood Insurance 
Program to address the lack of readily available insurance for 
property owners and growing costs to the taxpayer for flood-
related disaster relief. This morning, I would like to share my 
thoughts about three issues: The program, possible reform 
options, and FEMA's management challenges.
    First, NFIP serves a vital role in providing protection 
against flooding to over 5.5 million policyholders nationwide. 
As you know, NFIP is one of 31 programs or issues designated by 
GAO as high risk in 2011. NFIP 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.
    Second, using the broad public policy goals identified by 
GAO in our past work on the role of the Federal Government in 
providing natural catastrophe assistance, I will share some 
thoughts on reforming NFIP. These broad goals include charging 
rates that reflect the risk of flooding, limiting costs to 
taxpayers, encouraging broad participation, and encouraging 
private sector involvement.
    As you know, successfully reforming NFIP will require 
tradeoffs among these often competing goals. For example, 
currently, nearly one in five policyholders does not pay a full 
risk rate and others pay grandfathered rates. Past reform 
efforts have included phasing out these rates. Phasing out of 
rates not only results in rates that reflect the risk of 
flooding, but also can help minimize costs to the taxpayers and 
could help encourage private sector participation. The tradeoff 
involves potentially losing some 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, vouchers, 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 goal of 
expanding participation in low-risk zones, in areas subject to 
repeated flooding, but have low penetration rates, among 
others.
    Encouraging private markets is one of the more difficult 
challenges because there is currently no broad-based 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 some of the risk. The 
private sector withdrew from the program because of the lack of 
flood risk data, maps, and relevant building codes. Given that 
these issues have largely been addressed, private sector 
involvement warrants consideration. FEMA has been reaching out 
to the industry to find ways to involve the private sector in 
the program, including exploring reinsurance and other ways to 
share risk.
    Third, beyond reforming the program, FEMA must take steps 
to improve its management of NFIP. In our most recent report, 
we found issues in strategic planning, human capital planning, 
intra-agency collaboration, records management, and information 
technology. While FEMA continues to make some progress in 
addressing certain areas, fully addressing these fundamental 
issues will be vital to the long-term operational efficiency 
and stability of the program.
    Finally, I would like to offer a few other areas that 
warrant consideration as the reform discussion continues, for 
example, mitigation programs and ways to make them more 
effective, including clarifying FEMA's authority to charge 
higher rates when property owners refuse to or do not respond 
to mitigation offers, or allowing FEMA to apply a surcharge 
when mitigation offers are refused; full-risk rates and whether 
catastrophic losses should be included; appropriating for any 
subsidies until the full-risk rates are fully phased in; and 
authorizing FEMA to map for all present flooding risk, 
including erosion.
    Thank you, Chairman Johnson and Members of the Committee. 
This concludes my oral comments and I am prepared to answer any 
questions at the appropriate time. Thank you.
    Chairman Johnson. Thank you.
    Mr. Berginnis.

     STATEMENT OF CHAD BERGINNIS, ASSOCIATE DIRECTOR, THE 
            ASSOCIATION OF STATE FLOODPLAIN MANAGERS

    Mr. Berginnis. Good morning. Today, our country is facing 
significant flooding. We have all paid attention to flooding 
that has occurred on the lower Ohio and Mississippi Rivers 
earlier this year, snow melt concerns in the Dakotas, and now 
much of the Western U.S. is being impacted by a combination of 
storm events and record snowpack. Levees are overtopping and 
critical infrastructure, including two nuclear power plants, 
are in this year's flood's devastating path. Of the 44 Federal 
Disaster Declarations in only the first 6 months of this year, 
31 are at least partially due to flooding.
    Chairman Johnson and distinguished Members of the 
Committee, I am Chad Berginnis, Associate Director of the 
Association of State Floodplain Managers. Our organization of 
over 14,000 members and 30 State chapters include State and 
local government officials, private sector companies, and other 
interested parties that are on the front line each and every 
day working to reduce flood losses.
    While the ASFPM believes that the NFIP has shown success--
since the inception of the program, it has paid nearly $37 
billion in claims--compliance with basic land-use standards of 
the NFIP now results in $2 billion in losses avoided every 
year, with buildings not constructed to NFIP standards having a 
likelihood of flooding five times higher than those built to 
those standards. Flood losses continue to increase, jumping 
from an average of $6 billion annually to nearly $10 billion 
annually in the most recent decade.
    To put these data in perspective, it is important to 
understand that the NFIP is one tool and one program among many 
that have an impact on flood losses in this country. The NFIP 
has shown tangible success and has had a significant impact in 
reducing flood losses, and the program has been in existence 
for 43 years and there is sufficient program knowledge and 
experience to improve it.
    Our written testimony contains 13 actionable 
recommendations that can be incorporated into an NFIP reform 
bill. These recommendations focus on a variety of longstanding 
and known issues, including fiscal solvency, hazard 
identification, hazard mitigation to deal with the built 
environment, and future challenges, such as sea-level rise. I 
am going to spend the balance of my time highlighting these 
recommendations.
    First, we must have an authorized ongoing national mapping 
program that addresses all the significant flood hazards. Here 
we are in 2011, 43 years into a program that insures $1.4 
trillion in property, and flood risk rating and hazard 
identification are based on mapping funds largely coming from 
user fees and, more recently, some dedicated appropriations, 
yet we do not have a long-term authorized program.
    Second, while land-use and building standards are necessary 
to ensure new development is resilient in the unbuilt 
environment, we must have equally strong mitigation programs to 
address existing risk in the built environment. We think 
Congress has been on the correct path since 1994, when it first 
recognized this issue and created programs within the NFIP to 
help existing at-risk structures, including repetitive loss 
properties. These programs will be increasingly important, 
especially if measures to create a more actuarially sound 
program compel property owners to mitigate their properties or 
face significantly higher flood insurance premiums. The Severe 
Repetitive Loss Program should be reauthorized, or better yet, 
could be reauthorized and combined with other existing flood 
mitigation programs for efficiency.
    There should be a balanced and rational resolution to the 
actuarial soundness and policy affordability issue. From a risk 
communication standpoint, a significant failure of the program 
is the policy premium bill, when sent to a policy owner, 
reflecting a cost that is significantly less than the true 
risk. We agree that the program needs to be more actuarially 
sound, and moving certain classes of properties to actuarial 
risk rating makes sense.
    In the last decade, when Congress has debated this issue, 
concerns have been raised about those who cannot afford the 
premium increase, yet the program subsidy continues to be based 
on data construction of building versus the ability of a 
property owner to pay flood insurance. Recent ideas in this 
area, such as means-tested voucher systems, have merit and 
should be explored.
    The purchase of flood insurance in residual flood risk 
areas should be mandatory. Even as this hearing is occurring, 
flooding is happening in areas behind levees and downstream of 
dams that are not mapped as flood hazard zones. Flood risk does 
not stop at the 100-year flood boundary.
    And finally, we think that the debt of the NFIP must be 
forgiven. FEMA has testified that the debt cannot be repaid, 
even if we hold our collective noses to do it. We would argue 
that the program simply worked as designed in the years when 
the debt accumulated.
    In closing, I am sad to report that the flood problem this 
year and in the future is going to get worse before it gets 
better. The Western snowpack has only begun to melt, and with 
hurricane season around the corner, we have a lot to contend 
with.
    That concludes my oral testimony. I will be happy to take 
questions. Thank you.
    Chairman Johnson. Thank you.
    Mr. Kolton.

STATEMENT OF ADAM KOLTON, EXECUTIVE DIRECTOR, NATIONAL ADVOCACY 
CENTER, NATIONAL WILDLIFE FEDERATION, ON BEHALF OF THE SMARTER 
                        SAFER COALITION

    Mr. Kolton. Good morning, Chairman Johnson, Ranking Member 
Shelby, and Members of the Committee. I am Adam Kolton and I 
direct the National Advocacy Center at the National Wildlife 
Federation. I am pleased to be here to speak on behalf of our 
four million members and supporters across the country, 47 
State affiliates. We commend you for having this series of 
hearings, especially in light of the record-breaking floods in 
the Mississippi and Missouri River basins and elsewhere in the 
country.
    I am also here today to speak on behalf of the Smarter 
Safer Coalition, which includes taxpayer and free market 
groups, insurance and reinsurance interests, housing advocacy 
groups, and other conservation groups. Mr. Chairman, I am sure 
you can appreciate that it is not every day that groups like 
the National Wildlife Federation finds itself in agreement with 
Americans for Tax Reform, but on this issue, we stand together.
    Our collective view is that the NFIP is broken and in 
desperate need of reform. Smarter Safer has collaborated on a 
reform proposal, which is included with my written testimony. 
Let me hit a few of the high points of those recommendations.
    First, we need more accurate scientifically valid flood 
risk maps. Accurate maps can help ensure that people understand 
the risk of where they live, that premium rates reflect risk, 
and to encourage risk reduction strategies. Without accurate 
science-based maps, the NFIP will not work and cannot be fixed. 
Smarter Safer proposes that Congress create a Technical Mapping 
Advisory Council similar to the version in the Committee's 2008 
reform legislation. The Council would develop new standards for 
flood insurance maps that would incorporate true risk, be 
graduated, and reflect realities on the ground, both manmade 
and natural. Such a council should include representatives from 
Federal agencies as well as experts with technical expertise in 
mapping natural and beneficial floodplain functions. The work 
of this Mapping Council can address many of the concerns raised 
by Members of this Committee, including what level of 
protection is afforded by existing structures, levees that are 
in place, the extent to which upstream issues are exacerbating 
downstream flooding, and ensuring that maps are scientifically 
valid.
    Second, rates must reflect actual risk. Currently, the NFIP 
insurance rates do not reflect actual risk of flood damage, 
effectively subsidizing floodplain development and encouraging 
properties to be located in harm's way. Smarter Safer 
encourages the Committee to move all rates to actuarial within 
a 5-year period. The Committee made a good start at this in the 
2008 bill. However, in light of recent conditions and the 
exploding deficit, we urge the Committee to move the entire 
program, including prefarm properties, to risk-based rates. 
Right now, million-dollar homes receive the same subsidies as 
properties valued at $100,000. That makes no sense.
    For those truly unable to afford rate increases, Smarter 
Safer does support means-tested subsidies, but that are not 
linked to the rate structure.
    Third, mitigation and risk reduction must be a central NFIP 
priority. It is imperative that NFIP finally fulfill one of its 
original stated goals, to encourage the mitigation of flood 
risks. This can be done by strengthening existing FEMA grant 
programs and improving incentives in the community rating 
system which rewards communities with lower insurance premiums 
in return for taking concrete steps to reduce flood risk. In 
addition, Smarter Safer believes FEMA should be encouraged to 
work directly with individuals for mitigation where communities 
lack the capacity to do so, and FEMA should prioritize Severe 
Repetitive Loss properties for buyout.
    Now, let me emphasize an important point. Every dollar 
spent on mitigation yields $4 in avoided--a return of $4 in 
avoided losses. These programs can pay for themselves, as CBO 
has noted.
    Now, two points of particular concern to the National 
Wildlife Federation. First, it is important to recognize that 
these are not normal times. The climate is changing and we are 
experiencing more intense storms, sea-level rise, and extreme 
flooding. According to NOAA, big storms seen typically once 
every 20 years will occur every 4 to 6 years by the end of this 
century. We are already seeing an upsurge in the number of 
heavy rainstorms and many other impacts.
    As this Committee looks to reform the NFIP, it is important 
that we look to the future and not in the rear-view mirror. We 
need to prepare America, and FEMA needs to plan for and factor 
in the increased risk the way private insurers and reinsurers 
already are.
    Second, nature's infrastructure, healthy intact wetlands 
and floodplains, is the best flood protection money can buy. By 
working to reconnect rivers with their floodplains where 
possible and discouraging development where intact floodplains 
exist, the NFIP, together with other Federal, State, and local 
programs, can provide some of the best possible flood 
protection. What is more, healthy floodplains sustain countless 
fish and wildlife species, improve water quality, and support 
hunting, fishing, and outdoor recreation opportunities. In 
short, any meaningful reform effort must ensure that the 
natural beneficial functions of floodplains are recognized and 
that building, dredging, filling, and walling off floodplains 
is prevented to the maximum extent possible.
    This is an historic moment. We are hopeful that the 
Committee can, on a strong bipartisan basis, move forward a 
comprehensive NFIP reform bill that better protects people, 
communities, and the environment all across the country. Thank 
you.
    Chairman Johnson. Thank you.
    Mr. Rutenberg.

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

    Mr. Rutenberg. Chairman Johnson, Ranking Member Shelby, and 
Members of the Committee, 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 for the National Association of Home Builders.
    NAHB commends the Committee for addressing reform of the 
NFIP Program. NAHB wants to make clear that we strongly support 
a 5-year program reauthorization. Builders see this as the best 
way to provide a steady foundation on which to build program 
revisions and ensure the NFIP is efficient and effective.
    For several years, the NFIP's short-term extensions have 
created a high level of uncertainty in the program, causing 
severe problems in an already troubled housing market. During 
these periods, there were delays or canceled closings due to 
the inability to get 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 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 and flexibility 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 their home lies in or 
near a floodplain. And longtime landowners and 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. This 
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 the 
constituents and consumers.
    Unfortunately, the losses and devastation suffered with the 
2004 and 2005 hurricanes has 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 the historic 
circumstances. The NFIP is not just about flood insurance 
premiums and payouts. It is a broad program that guides future 
development and mitigates against future loss. A financially 
stable NFIP is in all of our interests, and Congress's 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 rate 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 of the maps are not using updated data, and 
because of this, large discrepancies remain. We believe 
continued Congressional oversight is necessary. We commend the 
House bill's efforts to create the Technical Mapping Advisory 
Council and hope to see it in the law.
    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 type 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, as in the current House bill. Should 
Congress change the Special Flood Hazard Area from a 100-year 
standard to a 500-year standard, it would require more 
homeowners to purchase flood insurance and could impose 
mandatory construction requirements that increase cost, impact 
land use, and resale values. It could seriously diminish the 
value of long-time landowners in the agricultural field and 
others in their options. This would also affect FEMA by 
requiring modification 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, and NAHB looks forward to working 
with the Committee on this valuable program.
    Chairman Johnson. Thank you.
    Mr. Plunkett.

STATEMENT OF TRAVIS B. PLUNKETT, LEGISLATIVE DIRECTOR, CONSUMER 
                     FEDERATION OF AMERICA

    Mr. Plunkett. Good morning, Chairman Johnson, Ranking 
Member Shelby, and Members of the Committee. I appreciate the 
invitation to appear before you today to discuss how to reform 
and reauthorize the National Flood Insurance Program. I am 
Travis Plunkett. I am the Legislative Director at the Consumer 
Federation of America.
    The NFIP is in very deep trouble. Its mission is crucial, 
as we have seen recently by the devastating floods in the South 
and the Midwest, but it has been struggling financially for 
years and is failing to achieve an essential goal of this 
mission, and that is to protect home and business owners by 
achieving safe construction in the floodplains and by ensuring 
that flood insurance is actuarially priced to account for the 
full risk of the coverage that is offered.
    To fix the long-term structural flaws that are harming 
consumers and taxpayers, we recommend, first, that you use 
legislation reported out of the Committee on a bipartisan basis 
in 2007 as the starting point for improving and extending the 
program for no more than 2 years beyond its expiration this 
September.
    Second, we strongly suggest requiring the completion of a 
study within 18 months that would examine more far-reaching 
measures to either permanently correct the deep-seated flaws in 
the NFIP, such as getting private insurers to assume 
substantial flood risk, or to phaseout the program in a 
responsible manner and create effective, affordable 
alternatives.
    The third step in this process would be to enact 
legislation that addresses these broader recommendations.
    Why would a consumer group support reforms of the NFIP that 
will likely raise rates for some consumers? The answer is that 
underpricing of flood risk and poor management of the NFIP by 
FEMA subsidizes dangerous construction, threatens the safety 
and property of home and business owners, and often benefits 
those who need the assistance the least, affluent homeowners 
and builders.
    Look at what happened in Hancock County, Mississippi, where 
Hurricane Katrina hit ground. The average flood map, according 
to Bob Hunter, our Insurance Director's study, of the 76 flood 
maps that existed in that county, the average was 20 years old 
and ten feet too low in measuring the 100-year flood elevation. 
Many home and business owners were misled into building 
unwisely, or into not buying needed insurance, exposing the 
deeply flawed program's weaknesses in the most tragic way.
    The current patchwork of indiscriminate, counterproductive, 
and often hidden subsidies drains the NFIP of resources and 
should be phased out. Congress should use the money that it 
saves by eliminating these general subsidies to target aid to 
low- and moderate-income home and business owners who have 
difficulty affording flood insurance.
    Of particular concern to us right now is FEMA's management 
of the ``Write Your Own'' Program, in which private insurers 
offer flood policies but do not underwrite flood risk. This 
program overcharges taxpayers and is riddled with conflicts of 
interest. GAO studies have repeatedly demonstrated that these 
private insurers overcharge for administrative and claims 
settlement duties and that FEMA has mismanaged the program. An 
urgent task is to quickly fix the Write Your Own Program. It 
will reduce costs. It will allow the program to have more money 
for other, more important tasks, and it will benefit 
policyholders.
    The time has come for Congress to consider either far-
reaching, long-term changes to permanently fix problems in the 
program or to end the program. We would like to see a very far-
reaching study on a number of important questions. How do you 
encourage private insurers to take some or all of the existing 
flood risk? How do you end broad subsidies that 
disproportionately benefit the affluent? How do you provide 
low- and moderate-income policyholders more targeted assistance 
and increase the number of people buying flood insurance in 
flood-prone areas? How do you improve the flood maps and the 
construction in local communities?
    While GAO or other bodies are studying these long-term 
changes, we would urge the Committee to reauthorize the NFIP 
for no more than 2 years and take initial steps to reform it 
along the lines of the Senate Flood Insurance Reform and 
Modernization Act of 2007. The bill takes several very 
important steps to protect consumers and taxpayers, to increase 
market penetration of flood insurance, and to eliminate 
unjustified subsidies of the flood program. Thank you very 
much.
    Chairman Johnson. Thank you.
    Mr. Richardson.

STATEMENT OF SCOTT H. RICHARDSON, POLICY ADVISOR, THE HEARTLAND 
   INSTITUTE, AND PARTNER, RICHARDSON AND RITCHIE CONSULTING

    Mr. Richardson. Yes. Thank you, Chairman Johnson, Ranking 
Member Shelby----
    Chairman Johnson. Turn on your microphone.
    Mr. Richardson. I am sorry. I ought to know how to do that 
after 15 years in the legislature.
    [Laughter.]
    Mr. Richardson. Mr. Chairman, Ranking Member Shelby, and 
other Members of the Committee, thank you very much for this 
opportunity. I have written testimony, which I am going to 
digress from a little because what I am speaking to you about 
today is a more rifle shot part of this process that you are 
dealing with.
    But I also want to give two general statements as I talk 
about this process today, two thoughts that I think the members 
should always think about whenever you are dealing with 
insurance, and that is you must vote for whatever makes 
insurance more predictable and you must think to vote to what 
makes insurance more consistently available, and that is a huge 
issue with the flood program because it is inherently 
unpredictable, and it has been for the last 30 years, 
traditionally inconsistently available. So as you look forward 
in this process and the amendments that you consider over the 
next weeks and months, I would ask you to just take those two 
litmus tests and remember that every time you look at it.
    I am here today to talk about primarily Senator Wicker's 
amendment, which I very much appreciated. It is a subject I 
have been working on for several years, the problem of what we 
call indeterminate loss and how it affects the Flood Insurance 
Program, consumers, companies, and others, and I want to speak 
briefly and just tell you that I have been an insurance agent 
and broker for almost 30 years. I have been a legislator. I 
have been the Director of the Department of Insurance, so I 
have sort of a unique look at all of this from all sides and 
have been through hurricanes, experienced many of my customers 
in Hurricane Hugo and others. So I have seen nothing but 
concrete slabs where there were beautiful homes. I have been 
there on the ground and I know what can happen here.
    But the indeterminate loss problem is that which when you 
have a huge storm and you basically have no evidence to show 
you what was wind and what was water, you create a big problem, 
not only for the Flood Insurance Program, but for the whole 
insurance system. Insurance companies, it becomes unpredictable 
for them. They are selling a policy that legally has no flood 
insurance in it. You have State wind pools who have regulations 
that have very specific things that are in their policies and 
are not in their policies. You have a National Flood Insurance 
Program involved that covers only flood. And you have to mold 
these things together. So that blimp-eye view, I think, is 
important, and as the other panel members have mentioned many 
other aspects that become important to the flood, the mapping, 
the rating, and all of these things.
    But insurance, as we do this, the National Flood Insurance 
is a very, very important undergirding of the whole business 
system that we have in this country, from my point, especially 
on the coast. I mean, insurance itself is the real provider for 
why we can do things in a big way in this country that we could 
not do otherwise. Otherwise, if you had to pay cash for your 
car, for your house, for your office building, there would be 
very little done in this country. So I think we all have to, as 
we work toward this, get to my premise of it must be 
predictable and it must be consistently available.
    Now, going to the specific point, as I said, about 
indeterminate loss, this is a problem whereby we would create a 
system that we can--we have the scientific data to do so. We 
would create formulas in the special loss allocation system 
where when you do not have the evidence to do it, you will have 
extrinsic evidence. You will have scientific formularies that 
you can put into a statistical model that will tell you how to 
predict the loss. I think this is a huge deal.
    I know in Mississippi, many people in the reports said, 
well, it was only 2 percent of the things. Well, it might be 2 
percent of the total of the whole Katrina problem, for 
instance, but it could be 100 percent of the losses in a six-, 
eight-, ten-mile area. So be careful about using these 
percentages.
    But this is a very important component. It makes it more 
predictable. It would make the rates, in my opinion, lower for 
the insurance companies because they would not have to deal 
with the unpredictability of being forced to cover flood when 
they did not offer it. It would make the Flood Insurance 
Program more predictable, ratable. It would encourage 
participation in the Flood Program. And, of course, with the 
help of the State FAIR plans and wind pools, that would all 
work together.
    Now, there are others--I will take quickly--there are other 
things that we can talk about, all-in plans. Those have some 
things that have to be dealt with in trying to bring the 
private sector into that and make it available that they would 
be able to offer that, and I think there are some problems with 
that.
    But I see that I am out of time, and so I will respectfully 
stop. I have a lot of things I could say about and would be 
glad to take questions. Thank you so much.
    Chairman Johnson. Thank you.
    Ms. Brown, you have mentioned a number of challenges facing 
the Flood Insurance Program. Would you please give us your 
recommendations for the most important steps necessary to make 
the program financially sound and remove it from GAO's High-
Risk List?
    Ms. Brown. The efforts that it would take to get NFIP off 
the High-Risk List would have to come from Congress. They are 
the structural issues that need to be addressed. And then, 
also, there are a number of management challenges that FEMA 
would also have to address to get off the list.
    So in terms--I will start with FEMA. In terms of getting 
off the list, there are a number of criteria that we use to 
take a program or an agency off. We would look for commitment 
of management. We have started to see that commitment. We also 
would need to see identified action plans, so there would have 
to be an identification of root causes of the management 
challenges that they face. Then they would have to identify 
effective actionable actions that they would have to take. And 
part of that would have to do with addressing the many open 
recommendations that GAO has. I think--I did a quick tally this 
morning, and it is somewhere around 49 open recommendations 
that would need to be addressed.
    Chairman Johnson. Ms. Brown and Mr. Plunkett Ms. Brown, 
some have proposed a delay or phasing approach for setting 
insurance rates for homeowners in new high-risk areas. This 
clearly reduces the impact on homeowners, but are there any 
downsides to such an approach? What might the impact be on the 
fund and the taxpayer? Are there any potential unintended 
consequences for homeowners' receptions of risk?
    Ms. Brown. I think the same challenges that having 
subsidized rates also apply to grandfathered rates for those 
that are remapped into higher-risk areas. It does not make very 
clear that people are living in harm's way, is the biggest 
challenge, and that is one of the reasons that we cite in terms 
of making sure that people--that rates are moved to a more 
full-risk rate basis. The same goes for property owners that 
are remapped into higher-risk areas.
    We did work on specifically the impact of the grandfather 
rates on NFIP and we found that because FEMA was not tracking 
the number of properties that were actually grandfathered, they 
were not able to quantify the impact of those grandfathered 
rates on the program. So that is something that they are now 
beginning to track those rates, but it has to be factored into 
their calculation and their rate-setting process.
    Mr. Plunkett. Senator, there are several downsides. One, 
unsafe building will continue because people will not 
understand the flood risk that they are dealing with, or they 
will not purchase insurance if they are not mandated to do so.
    Second, the indiscriminate and disproportional subsidies, 
often to more affluent builders and homeowners, will continue. 
I would say those are the two top.
    Chairman Johnson. Mr. Kolton, Mr. Berginnis Mr. Kolton, in 
your testimony, you mentioned that you would like FEMA's maps 
to be more graduated rather than the current system of showing 
properties as simply in or out of the floodplain in order to 
give people better understanding of the risks. Administrator 
Fugate also mentioned this issue in his testimony before the 
Committee. When do you think FEMA will be able to provide this 
level of detail in its maps? What resources do you think they 
need in order to achieve this goal?
    Mr. Kolton. Thank you, Mr. Chairman. This is important that 
we look at the varying degrees of risk much in the way the 
private insurance market would for differences between, you 
know, like 10-, a 100-, a 75-year, 500-year floodplain. We 
ought to see those on the map. There are different degrees of 
risk and people need to understand what those risks are. In 
addition, the rates ought to reflect those risks. It is too 
simplistic to have an ``in or out'' 100-year floodplain 
approach, a 1-in-100 chance of flooding.
    In terms of resources, we believe that the mapping 
proposal, the technical mapping proposal is a good one and will 
provide much-needed assistance and bring expertise to assist 
FEMA as it moves forward with the process.
    Mr. Berginnis. In terms of the graduated risk issue, I 
think it is important to understand, at least in utility, the 
Flood Insurance Rate Maps that FEMA produces are the Nation's 
flood maps, yet we have flood hazard areas, such as dam failure 
inundation maps, or levee failure overtopping maps, other flood 
risk frequencies, such as the 500-year flood. A lot of those 
are not shown on those particular maps, yet those represent, 
those areas represent an area of inherently higher flood risk 
and inherently catastrophic flood risk should those defenses 
fail.
    And we also have, I think, today, there is at least a 
partial inventory of some of that mapping that is available. 
They just are not put on the Flood Insurance Rate Maps. Now, 
FEMA's new Risk Map Program, one of the things I think the new 
program is going to do is it provides what are called 
nonregulatory products, being the Flood Risk Map and Flood Risk 
Report, and at least the Flood Risk Map, in theory, should have 
the ability to show some of these other areas in terms of doing 
that.
    From a resource standpoint, one of the things that we think 
FEMA should be tasked with doing is really looking at the long-
term programmatic cost of what flood mapping should be. There 
was a shift in philosophy and products developed from map 
modernization to Risk Map, and in doing so, the Association of 
State Floodplain Managers thinks that the data being provided 
under Risk Map is good data, but it does change the cost 
calculus that would go into that.
    So we think that there should be a long-term estimate of 
the mapping cost. But I will say that we are very, very 
concerned about the significant reduction in mapping budget 
that has occurred this year, right as we are experiencing one 
of the most devastating flood years in recent times.
    Chairman Johnson. Ms. Brown, do you have any comment?
    Ms. Brown. No.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you. Mr. Chairman, I ask that my 
opening statement be made part of the record.
    Mr. Plunkett, you have been here many times on this same 
issue. I remember in 2005, 2007, you worked on this. Something 
that has been a problem for me always has been why should the 
American taxpayers subsidize these policies, or risk, for 
people who, a lot of them have second, third homes, knowing 
that they are in a risk area. Why should the other taxpayers 
pay for that?
    Mr. Plunkett. Senator, there is clearly an equity issue 
here.
    Senator Shelby. Mm-hmm.
    Mr. Plunkett. Obviously, there are people in floodplains 
who are going to have difficult affording----
    Senator Shelby. We understand.
    Mr. Plunkett. ----flood insurance, especially if it is 
priced the correct way, if it is actuarially priced. But to 
have others who can afford it subsidized actually drains 
resources that could be used to help the people who need it the 
most.
    Senator Shelby. In the Flood Insurance Program as we 
currently have, and we keep kicking the can down the road, it 
is basically, one, broken, and it is very flawed, is it not?
    Mr. Plunkett. We think the program is extremely flawed in a 
number of ways. It is not only essentially bankrupt, but it 
subsidizes unsafe construction. That puts people in harm's way. 
And there is very poor administration by FEMA of the program.
    Senator Shelby. Ms. Brown, why do only 50 percent of the 
property owners who are required to have flood insurance 
actually--why do they not have a policy?
    Ms. Brown. This is an outstanding and ongoing issue. GAO 
last looked closely at this issue about 9 years ago and found 
that, one, determining compliance with the flood insurance 
requirement is difficult to calculate. If you talk to bank 
regulators, we found that the bank regulators will generally do 
some limited sampling, determine it is not a compliance issue. 
If you talk to FEMA and other stakeholders, they look at the 
number of policies in force in Special Flood Hazard Areas 
compared to the number of new and existing mortgages and find 
that compliance is a problem. So I think it really is an issue 
of enforcing the requirement that currently exists, which is 
important to do.
    Senator Shelby. All right. So, basically, that begs the 
question whether FEMA and the bank regulators are doing their 
job. If they were doing their job, they would not have a 50 
percent insurance program.
    Mr. Plunkett. Senator, part of the issue of doing their job 
is the mapping.
    Senator Shelby. I know.
    Mr. Plunkett. If they were doing proper mapping, then 
people would know they were in harm's way.
    Senator Shelby. What happened to the mapping program that 
was going to go on just a few years ago and everybody was 
talking about? They were going to map to manage risk and tell 
people what floodplain they were in, the real risk that they 
assumed where they live.
    Mr. Plunkett. It is a very good question. Administrator 
Fugate, when he testified before you earlier this month, said 
that in 2003, I believe, it was 70 percent of the maps were 
more than 10 years old, but he did not provide information, 
current information as to how many of the maps are too old 
right now.
    Senator Shelby. Is part of the problem, Mr. Plunkett, 
dealing with people who would buy insurance or could afford 
insurance, is part of it the lack of information that they are 
really in a floodplain area or marginal area or what? Is that 
part of the problem, and does that go to mapping itself?
    Mr. Plunkett. Absolutely, Senator. It goes directly to 
mapping, and we saw the tragic consequences of that, especially 
during Hurricane Katrina.
    Senator Shelby. Mr. Rutenberg, in your testimony, you state 
that homeowners living in residual risk areas should not be 
required to purchase flood insurance. That is a disturbing 
statement to me. You state that requiring communities with a 
flood control structure to first purchase flood insurance 
raises, quote, ``real and powerful equity and fairness 
issues.'' This year has proven that even those communities with 
a flood control structure are not immune from flooding. My 
question is, if communities with flood control structures are 
not required to have flood insurance, does this leave them 
vulnerable to losses caused by floods like we have seen this 
year?
    Mr. Rutenberg. Senator Shelby, you raise an interesting 
point, but my personal experience with the Flood Insurance 
Program and floodplains in Florida has been that the newer 
homes and newer developments are being done with increasingly 
more stringent stormwater management systems. In my locality, 
we have to have all of our stormwater structures be prepared 
for an 18-inch storm event, which is 18 inches more than the 
existing one. So I think that we have questions as to how to 
integrate into existing as well as the new developments.
    Senator Shelby. Mr. Kolton, do you agree with him on that 
equity issue? Are there any issues of fairness and equity in 
not requiring these communities to have flood insurance?
    Mr. Kolton. Senator Shelby, we think it is desperately 
critical that people have flood insurance----
    Senator Shelby. Absolutely.
    Mr. Kolton. ----that are at risk. If they do not have flood 
insurance and a catastrophic event happens, they are not going 
to be made whole by the existing relief programs of the Federal 
Government. They will not be insured. So that is fundamental.
    Second, you can turn on your evening news and see levees 
being overtopped in North Dakota. We do not need to tell this 
Committee that just being behind a flood control structure does 
not mean you are protected. There are thousands of flood 
control structures across the country that are not providing 
adequate flood protection. People need flood insurance behind 
these structures.
    Senator Shelby. Quickly, Mr. Richardson, wind versus water 
debate, very, very important. We do not know--we have seen some 
studies that say if we include wind damage in all this, it will 
cost a heck of a lot of money. In your testimony, you wrote 
that the real issue with slab claims is that those contesting 
the loss allegation either did not have flood insurance or did 
not have adequate flood insurance. As a result, property owners 
sought higher payments from their wind insurance policies to 
cover the flood damage. If the real issue is inadequate flood 
insurance, would the standard loss allocation method that you 
propose actually change the outcome for most policyholders, and 
what would it do to the insurance fund, the actuarial soundness 
of a fund, if we included wind?
    Mr. Richardson. Well, we are talking about the whole 
ratings system, Senator.
    Senator Shelby. Yes.
    Mr. Richardson. What you are trying to do--I get back to 
what I stated in the beginning--is creating predictability. One 
of the things that has been mentioned here several times by 
panel members is that the rates become actuarially sound. I 
would be very careful with that if I were you, because if you 
think you have ever gotten 10,000 phone calls about a 
particular issue, you start charging actuarially sound rates 
right out of the chute, that would be problematic. I think it 
is a worthy goal. You need to get to that. But, frankly----
    Senator Shelby. Now, if you are not going to charge for the 
risk, who is going to be charged for the risk?
    Mr. Richardson. No, I think you should----
    Senator Shelby. You are not talking about charging the 
taxpayer----
    Mr. Richardson. No, sir, I am not. I think that is where 
you should go. But my point is, you have had a system for 40 
years that was not actuarially sound. You can create 
actuarially sound rates for new construction, because then 
someone can make the choice. Do they want to pay it or not. But 
we have millions of homes right now that we have to figure out, 
what do we do? How much can they stand? Is it a 5-year phase-
in? Ten-year phase-in? But the big issue is, if we make it 
actuarially sound, you will not need the NFIP.
    Senator Shelby. Absolutely.
    Mr. Richardson. You could basically phase this thing out by 
making----
    Senator Shelby. That would be my goal.
    Mr. Richardson. Exactly. Now, your question, well, that is 
not a bad goal, but you just need to be----
    Senator Shelby. I thought it would be a worthy goal, not a 
bad goal.
    Mr. Richardson. Well, it would be a worthy goal, 
absolutely. But on the indeterminate loss, one of the issues 
that we had not talked about is the value of the homes, because 
the flood insurance only provides certain limits, as you know. 
So the higher the values get, the more complicated the amount 
of insurance is, and whether it is flood, whether it is wind, 
and so forth.
    One panelist made the statement that we should make people 
purchase flood insurance in those zones. I totally agree with 
that. Either you buy it or you get no Federal assistance. Until 
the Federal Government quits giving people money for being 
irresponsible, then you are going to have a very low 
penetration of people that are going to buy it because there is 
no penalty for them. If they have no penalty and a Katrina hits 
and they get paid anyway, whether they have the policy or not.
    But in these systems, we have to have a melding of the 
Flood Insurance Program and the all other perils that are going 
to come by your carriers, and if you have a system that very 
specifically states who pays what--to give an example to you, 
let us say you had our Standard Loss Allocation System, and for 
a particular area, it said, OK, this was 60 percent wind and 40 
percent flood. If somebody did not have a flood insurance 
policy, they have got a problem with 40 percent of their claim. 
The insurance company is going to hand them the 60 percent of 
the money that was their problem. If they chose not to buy 
flood insurance, then they have got a 40 percent problem, as it 
should be. People will start saying, ``I have got to buy flood 
insurance or I am going to have a problem.'' That is how it 
takes care of itself. There are a lot of incentives in here to 
have a system that very predictably creates it.
    The other problem you have got, Senator, in your State, you 
had issues where you had--you could easily have 200 or 300 
homes and have 200 or 300 totally different outcomes on what 
the claim was. Now, I understand some houses are frame, some 
houses are brick and mortar and so forth. Some houses are flat 
on the ground, some houses are higher. All that should be taken 
into effect. But let us assume we had 100 houses. They were all 
flat on the ground. They were all frame. They were all 25 years 
old, et cetera, et cetera. Every one of those claims, 
theoretically, should be settled exactly the same.
    Chairman Johnson. Senator Reed.
    Senator Shelby. Thank you.
    Senator Reed. Well, thank you very much, Mr. Chairman, and 
thank you, the witnesses here. Great testimony.
    One of the issues we all seem to focus on is the flood 
mapping, which I would like to probe a bit further, and I want 
to thank Mr. Kolton for mentioning the Technical Mapping 
Advisory Council and the National Mapping Program. I think that 
was a--I helped contribute to that along with many of my 
colleagues here in terms of the 2008 legislation and I think it 
would be very useful if we could move that.
    But Mr. Berginnis, as I understand it, there is a choice of 
doing a detailed study or the approximate study, and as GAO has 
pointed out, the detailed study, as the name implies, is much 
more accurate, much more effective, and uses more reliable 
data. So who, from your perspective, who determines the type of 
study which should be undertaken to update a map?
    Mr. Berginnis. That study need is first determined at the, 
really at the State and local level. What happens in the 
mapping process is that FEMA first solicits from States and 
communities where those mapping needs are. For example, there 
could be an unincorporated little neighborhood area in a rural 
community that there is an acute need right there to have 
detailed mapping, but maybe on the rest of the water course, 
there is not. Then based on all of those mapping needs being 
evaluated at one time, you know, the reality is there is a 
mapping budget that has to be met, and I have not heard a 
situation yet where a mapping budget has been adequate enough 
to cover those.
    Senator Reed. And just----
    Mr. Berginnis. Sure.
    Senator Reed. ----the mapping budget is the local budget--
--
    Mr. Berginnis. It is----
    Senator Reed. ----or the FEMA budget or----
    Mr. Berginnis. It would be the FEMA budget on a per study 
basis in doing it. And so from there, then priorities are made 
and that do take into account State and local priorities, but 
also FEMA, I know, has some formulas in terms of designating 
mapping budgets that includes risk, the overall community risk 
and watershed risk and doing those kinds of things.
    Senator Reed. But it seems to me that because, as I 
understand it, they are--using approximate data is a lot 
cheaper than using a detailed study and there are budget 
pressures so that we have built in a disincentive to do some of 
the most specific detailed more accurate mapping. Is that----
    Mr. Berginnis. The--I am not sure it is as much of a 
disincentive as it is just a recognition of the realities of 
the mapping budgets. Again, the disparity between the need and 
the amount of money available is significant.
    Senator Reed. Right, but let me just pursue this one more, 
and that is, by and large, can you comment on--generally, FEMA 
is using, I would guess, approximations, if you look at their 
activities, rather than detailed mapping? Is that your 
impression, or is that----
    Mr. Berginnis. I think they are using a combination of 
both.
    Senator Reed. OK.
    Mr. Berginnis. The one thing I do want to mention about 
approximations----
    Senator Reed. Yes?
    Mr. Berginnis. ----that are interesting, I remember when I 
first started as a State official working with the flood maps 
in the early 1990s, the approximate maps were literally dots on 
a map. I mean, they were--and when I heard stories about how 
they were created, it really was not terribly technically 
sound.
    Today's approximate mapping, most of the mapping, if not 
all of it, actually has engineering models behind it now. So 
there are efficiencies even in the approximate mapping that 
make it better as a product than before.
    Senator Reed. I know Mr. Rutenberg wants to make a comment, 
but just a final point is that the new maps, are they--how 
effective are they incorporating all the different data sources 
that have come online--storm surge, coastal inundation, 
information from the Corps of Engineers, NOAA information? Is 
that being effectively factored into these maps or is that sort 
of still outside and not being used?
    Mr. Berginnis. Well, the process is good where it allows 
consideration of all those things, but actually incorporating 
all of those data into the maps is something that is not being 
done nearly as much as it should, and again, I think it goes 
back to the budget and cost of doing it.
    Senator Reed. Yes. But from your perspective----
    Mr. Berginnis. Sure.
    Senator Reed. ----incorporating that data would be helpful, 
useful, and provide more accurate----
    Mr. Berginnis. Oh, absolutely. Absolutely.
    Senator Reed. And then in my final few moments, Mr. 
Rutenberg, you had a comment. I do not want to cut you off.
    Mr. Rutenberg. Thank you, Senator Reed. I know my place. I 
am glad to wait.
    Senator Reed. Please.
    Mr. Rutenberg. One of the things that strikes me is that 
there is a lot of locally generated information which is not 
being used in deriving the FEMA maps, and some of it is very 
good and some of it is not, but you could have criteria to 
examine it. I know that when I did a development, I had to do--
my engineer's stormwater had to be checked by the city. It had 
to be checked by the county. We even hired an engineer. We paid 
the neighbor's engineer to review it. And this information is 
not included in the FEMA maps, as if those stormwater areas are 
not there. So some areas are good, some are not, but there is a 
potential savings for the Federal Government to get better maps 
quicker by utilizing local information that meets a certain 
standard. Thank you.
    Senator Reed. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman, very much, and 
thanks to all of our witnesses.
    My top goal in this work is to produce a full long-term 
reauthorization of the program. That is very basic, but I want 
to sort of step back to that basic issue. My observation 
experience, particularly coming from Louisiana, where we have 
and need a lot of this insurance, is that the stop-gap measures 
we have been passing, for instance, through last year, have 
been really detrimental to closings and to helping get the 
market going and get out of this recession, and that was 
extremely counterproductive last year, particularly when we had 
some gaps in the program, and I wonder if anyone like Mr. 
Rutenberg, who is certainly familiar with the real estate 
sector, could comment on that.
    Mr. Rutenberg. The gaps you are referring to are gaps in 
the program. I had a personal experience last year where we 
were building a home and we closed the construction on it in 
September and we were not supposed to have to do flood 
insurance and it was the changes. We then had to do flood 
insurance and then you have to pour the slab, do your survey, 
and then you have to go 30 days--60 days through a process 
which is including going back to the county, getting it done, 
send it in, and so it was, like, 60, 90 days late getting the 
first money out of the house.
    There are a lot of builders who have had to shut down 
construction. There are a lot of homeowners who could not close 
on loans, homeowners who cannot convey title. The gaps are very 
counterproductive, and the Realtors have mentioned it, as well.
    Senator Vitter. Thank you. Yes, sir?
    Mr. Richardson. Yes, Senator. I think you are right on 
point, and I would go back--I hate to sound like a broken 
record, but if you make the program 5 years, if you implement 
the science that we now have available to us that we did not 
have available to us in the 1960s when a lot of these maps and 
things were done, you are going to get more and more players as 
the rates become closer to being actuarially sound. You will 
have the private industry enter this market. Insurance 
companies will insure anything that is predictable and is close 
to or actuarially sound. They will do it.
    Senator Vitter. OK.
    Mr. Richardson. And so that is what you need.
    Senator Vitter. I do not want to cut you off, but I need to 
get to other questions----
    Mr. Richardson. That is what you need.
    Senator Vitter. ----but I appreciate it. So let me just 
underscore the point. We are coming out of a serious recession. 
We need every bit of growth we can get. We need every closing 
in sight. And so for us to work against that with short-term 
stop-gap measures, including lapses in the program, is just 
crazy. So I hope, whatever the nature of the bill, and I 
certainly have thoughts about that, we get a full long-term 
reauthorization.
    Second, I want to address this issue, I think sometimes 
there is this assumption that any expansion of limits or 
expansion of coverage under the program is directly counter to 
making the program fiscally sound, actuarially sound, and I do 
not think that needs to be the case. I think the devil is in 
the details. In particular, Ms. Brown, in your written 
testimony, you say that, quote, ``Increasing participation in 
NFIP and thus the size of the risk pool would help ensure that 
losses from flood damage did not become the responsibility of 
the taxpayer.'' Can we consider new aspects of the program, 
including higher coverage limits to account for inflation--we 
have not changed that since 1994--in a way, in an actuarially 
sound way that actually builds on that soundness and does not 
diminish it?
    Ms. Brown. Yes. We have looked at the issue of coverage 
limits and we found that, on average, most policies are well 
under the limit, and that is driven by a variety of factors. 
There are many properties that are under the $250,000 limit, 
and for properties that are well over the $250,000 limit, 
million-dollar homes, for example, there is often available 
excess flood insurance coverage that the private sector is 
willing to provide. So the issue of whether changing the limit 
will destabilize the program, it is not a clear-cut answer for 
that particular question.
    Senator Vitter. Mr. Rutenberg, do you have any thoughts 
about this?
    Mr. Rutenberg. No.
    Senator Vitter. OK.
    Mr. Plunkett. Senator, on that question, the Consumer 
Federation would agree that expanding coverage does not have to 
be at odds as long as it is actuarially--at odds with the 
financial stability of the program as long as the coverage is 
offered in an actuarially sound way. But you have got to 
eliminate some of the subsidies that occur, some of which are 
hidden, such as FEMA administratively grandfathering rates from 
old maps when new maps are developed.
    Senator Vitter. OK. So I just want to underscore this 
point. In fact, I would go further. It can increase 
participation in the program, which would help make the program 
more actuarially and fiscally sound, to have more realistic 
coverage levels and lines.
    Just a final quick point. I want to support my colleague, 
Senator Wicker's, proposal, and I think Mr. Richardson 
discussed this. I can tell you, in the Katrina experience, like 
he can, I cannot quantify it exactly, but I can tell you that 
the taxpayer was ripped off royally in many cases because of 
flood damage being pushed--excuse me, because of wind damage 
being pushed onto the flood side and to the taxpayer. That 
happened. It happened over and over and the taxpayer was left 
holding the bag. Mr. Richardson, do you have any follow-up on 
that?
    Mr. Richardson. Well, Senator, I think you are exactly 
right, and once again, we get back to the science. We have the 
tools to determine this right now. I see no reason why we would 
not. When we can catalog it and we know exactly, or as close as 
we could from scientific evidence, what is wind and what is 
water, why would you not do that and eliminate litigation? You 
eliminate--I know in your State and others, one of the big 
problems is the economy. If you have thousands of situations 
sitting there, waiting to be paid, and you cannot build a 
house, the gentleman here, the Home Builders do not build the 
homes, you do not get the taxes paid on the property, I mean, 
it compounds and creates a very unhealthy economic situation 
that could have been solved in 60 days, perhaps, instead of 6 
months, a year and 6 months, so----
    Senator Vitter. Thank you very much.
    Chairman Johnson. Senator Tester.
    Senator Tester. Yes, thank you, Mr. Chairman. I want to 
thank the panel for being here today. I very much appreciate 
all of your testimony. I have got a lot of questions and little 
time.
    I am going to start with you, Ms. Brown. You know very 
well, or maybe you do not, the Chairman talked about a high 
water year in South Dakota and the Missouri River drainage were 
creating to that. They are adding to it along the way. We have 
got historic flooding happening. Every one of you--almost every 
one of you talked about the actuarial soundness of the program 
and the program being upside down. Is there any estimate out 
there on how much more borrowing the Flood Insurance Program is 
going to have to borrow this year to take care of the historic 
flooding? Any estimates?
    Ms. Brown. No, none that we have seen. It really will 
depend on the claims, but it is a real risk. If this ends up 
being a very high flood year for NFIP, then it is very likely 
that they may have to borrow to actually pay their insurance--
--
    Senator Tester. OK. Well----
    Ms. Brown. ----their interest premium.
    Senator Tester. Got you. What would the impact on that 
additional borrowing have on this program?
    Ms. Brown. It would increase the debt that they owe to the 
Treasury.
    Senator Tester. OK.
    Ms. Brown. So it would further destabilize the program.
    Senator Tester. Actuarial soundness was something that, I 
mean, everybody wants to see. Everybody thinks it is very 
important, as do I. You talked about grandfathered rates. You 
talked about rates that mirrored the risk. If we are going to 
make the program actuarially sound so the taxpayer is not on 
the hook--and I will start with you, Ms. Brown, and anybody 
else can answer this, but make your answers as concise as 
possible--what kind of increase in rates are we looking at?
    Ms. Brown. They would be substantial.
    Senator Tester. Would they be 25 percent?
    Ms. Brown. Much higher than that.
    Senator Tester. OK. And what impact would that have on 
people's ability to insure? And I will kick it over to Mr. 
Plunkett. If rates went up by 25 percent plus, if they went up 
by 50 percent, possibly, what impact is that--I mean, you 
increase my insurance rates on my house by 50 percent----
    Ms. Brown. Hundreds.
    Senator Tester. ----I may have nothing.
    Mr. Plunkett. The next step, Senator, would be to use the 
savings and probably more to create a means-tested program to 
help people who cannot afford the new higher rates.
    Senator Tester. The ultimate goal here, though, is to get 
everybody involved in the program that we can get involved in 
the program, right? I mean, the ultimate goal is everybody, 
rich, poor, medium, everybody involved. We are running, what, a 
$16 billion deficit in the program right now, is that correct?
    Mr. Plunkett. Something like that.
    Ms. Brown. It is almost 18.
    Senator Tester. Almost $18 billion. Has anybody done the 
analysis on what the subsidies would be per year?
    Mr. Plunkett. Those are--we do not have a number, but we 
think it is a better way to run the program. It diminishes a 
lot of the distortions and the unintended consequences and the 
counterproductive building that we are talking about, and it is 
absolutely essential. I mean, you have to--if you are going to 
require flood insurance, you have to----
    Senator Tester. No disagreement.
    Mr. Plunkett. ----help people that cannot afford it do it.
    Senator Tester. But I think there is also agreement we want 
to take the taxpayers off the hook, and I am not sure we are 
doing that. Do you see what I am saying?
    Ms. Brown. In terms of a dollar amount on the current 
subsidy----
    Senator Tester. Yes.
    Ms. Brown. ----for the pre-FIRM, it is, by our calculation, 
we are talking maybe $1.6 to $2.1 billion a year.
    Senator Tester. OK. Go ahead.
    Mr. Berginnis. Senator, if I could add, and this is why the 
actuarial soundness issue cannot be dealt with apart from the 
other aspects in terms of having a robust mitigation program, 
so again, folks who may be paying those rates can at least have 
an alternative to actually do something to reduce the rates, 
and then, second, why a more recent idea, this idea of if there 
is going to be a subsidy, have it outside the program. Have it 
as a means-tested voucher.
    Senator Tester. I have got you. One of the things about 
mitigation, though, is I look at the pictures going up and down 
the Missouri right now, is that a lot of those levees that were 
meant to keep water away from people are now keeping water on 
people, and so mitigation is important, and I agree it is going 
to live in the middle of a forest, but on the other side of the 
coin, sometimes it works exactly the opposite when it comes to 
water.
    Mr. Berginnis. And that is actually a great observation and 
why mitigation has a lot of forms. There is structural, such as 
levees. But the nonstructural mitigation, such as individual 
house elevations, relocating areas out--just relocating folks 
outside of the floodplain in those----
    Senator Tester. I appreciate that. Yes, Mr. Rutenberg?
    Mr. Rutenberg. To that point, Senator, I think that you can 
have some incentives within the program. For example, if you 
were elevated above a certain point related to the floodplain--
--
    Senator Tester. Right.
    Mr. Rutenberg. ----then that would give you a deductible 
and that would become a good investment for someone who was 
building. There are some options there that could be free-
marketing good.
    Senator Tester. Very good, and I would love to hear those, 
and we will have a bunch of other questions directed, so I 
appreciate it.
    I have just one quick thing and then I am going to let you 
guys go. Senator Wicker does have a proposal on wind. You 
addressed it, Mr. Richardson. We are talking about actuarial 
soundness. Can you get insurance for wind at this point in time 
in the private sector?
    Mr. Richardson. Yes.
    Senator Tester. OK.
    Mr. Richardson. It is readily available.
    Senator Tester. Has there been any estimate, if wind is 
added to the flood program, what kind of increase, if we are 
going to make it actuarially sound, what kind of increase that 
is going to have on premiums?
    Mr. Richardson. I would say to you simply, why would you 
add something to a Federal program that is readily available in 
the private market? Do not go there.
    Senator Tester. OK, so----
    Mr. Richardson. Do not go there. It would blow the Federal 
program----
    Senator Tester. I do not want to do that. Maybe I will back 
up. I thought that was the proposal, is----
    Mr. Richardson. No, no, no----
    Senator Wicker. It is not in the proposal.
    Senator Tester. OK. Super. I was misinformed and I 
apologize, and you are absolutely right. You do not add it if 
it is available in the private sector.
    Once again, thank you all very much. I appreciate your 
testimony and your perspective.
    Chairman Johnson. Senator Wicker.
    Senator Wicker. Thank you, Mr. Chairman, for a balanced 
panel. I think so many issues have been raised that it 
demonstrates why this program has not been reauthorized up 
until this point, because it is so complicated.
    And, Senator Tester, thank you for raising that question. 
My proposal, which we are calling the COASTAL Act, would not 
add wind to the Flood Control Program. It is a scientific way 
of allocating the loss between wind and flood when both perils 
are involved and when there is nothing but a slab left.
    And in that regard, I would point out, Ms. Brown is here on 
behalf of GAO. In 2007, GAO said, for a given property, NFIP 
does not know how each peril contributed to the total loss. GAO 
does not know and NFIP does not know how much was contributed 
by wind and how much was contributed by water. The GAO report 
goes on to say, or how adjustors working for Write Your Own 
insurers made such determinations. NFIP does not know how they 
made the determination between wind and water.
    Further, the report says, FEMA cannot be certain whether 
NFIP has paid only for damage caused by flooding when insurers 
with a financial interest in apportioning damages between wind 
and flooding are responsible for making such apportionments, a 
conflict of interest that is underscored by the testimony today 
from the Consumer Federation of America. In the full testimony 
submitted for the record, Mr. Plunkett says these Write Your 
Own insurers also have a serious conflict of interest when they 
settle hurricane claims for the program, since they make more 
money if they determine that losses were caused by flood damage 
rather than by wind damage.
    I think Senator Vitter is right. It may very well be, based 
upon the testimony of these two witnesses, who I did not 
request but I think have made valuable contributions today, 
based upon their testimony, it may very well be that the Flood 
Insurance Program and the taxpayers have paid more than their 
fair share because you have got private insurance adjustors who 
have an inherent conflict of interest, or at least the 
appearance of a conflict of interest, in allocating more of the 
loss to the taxpayer and Uncle Sugar rather than to their own 
insurance companies, and it would seem to me, Mr. Richardson, 
that your proposal of scientific allocation deals with this. Am 
I correct in that?
    Mr. Richardson. Yes, sir, it is, and you are also correct 
in the Write Your Own Program does have a frailty of when you 
have an insurance company basically determine what they pay and 
what the National Flood Insurance Company would pay, with a 
single adjustor, is a potential moral hazard. There is no 
question. They get paid--I have forgotten what the--to manage 
those policies, they get paid, what, 30 percent? Ms. Brown 
might know. I think it is close to 30 percent. That is a huge 
number. If you look at TPA, what we call third party 
administrative things in the insurance industry, that is a 
number that is off the charts, you know, 30 percent to do that. 
That is way too high, but anyway, I will leave that.
    But, I mean, it is efficient in many ways to have a single 
adjustor, but to have the single adjustor working for an 
individual company against the Federal Government where the 
Federal Government is the big honey pot, as you say, is crazy. 
And when you have the science to create a formula that would 
eliminate that, I cannot see why you would not do it and I 
applaud you for----
    Senator Wicker. Let me ask you this, Mr. Richardson. We are 
not asking the Federal Government to come up with a new regime 
of data collection, are we, in your proposal?
    Mr. Richardson. No, sir. I would----
    Senator Wicker. Tell us about the data that you would use, 
because I do not think we have spread that----
    Mr. Richardson. Well, NOAA and a lot of the things that are 
out there, this information is available. Now, we might want to 
make it more robust. We might want to have more collection 
centers. But a lot of this is already being done, and if this 
information is basically brought together and put into an 
algorithm that you could use actuarially, it is there. And not 
only that, but you could use the information for other people. 
You could rent the information to all sorts of people. We have 
studied that, as well, and I think you could dramatically 
reduce the cost of it in that way.
    Senator Wicker. Let me----
    Mr. Plunkett. Senator, could I pitch in here on this?
    Senator Wicker. Yes, sir.
    Mr. Plunkett. Thank you for mentioning our concern with the 
conflict of interest with the Write Your Own Program. We think 
your bill is laudable in its goal. We do worry, however, that 
even though some of this information is being collected now, 
charging FEMA, which has had trouble managing simpler aspects 
of the program, with creating this formula and getting all this 
information together and doing it right and doing it fair is 
too much for them to handle.
    In the testimony--I will not give you the details because 
you only have a little time, but we suggest an alternative 
approach involving the law of averages, which is the way that 
auto claims are used when you have different claims between 
auto insurers. We would love to talk to you about that.
    Senator Wicker. Well----
    Mr. Richardson. Senator, this does not make FEMA do it. It 
gives FEMA the ability to engage whomever they choose to do it. 
They can go to the private industry--I think I am correct in 
saying that--and have them create this formula. FEMA does not 
have to do it.
    Senator Wicker. OK. I am----
    Mr. Plunkett. They do have to manage it, though, and we are 
worried about their ability to do that.
    Senator Wicker. I am a little over on my time, but I do 
appreciate Mr. Plunkett making that suggestion. I think you 
would concede that the current program does not work when it 
comes to the wind versus water claims in a slab situation, and 
you point out----
    Mr. Plunkett. Most certainly, we would----
    Senator Wicker. ----you point out that many Gulf Coast 
consumers are still in court dealing with claims they believe 
should have been paid under their wind coverage, and here we 
are in 2011 on a 2005 event, and your testimony is consumers 
still are in court on this determination, which whether under 
your proposal or under Mr. Richardson's proposal could be done 
much simpler and keep us out of court and away from huge legal 
fees.
    Thank you all for your testimony, and thank you, Mr. 
Chairman.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you, Mr. Chairman, and thank you to 
all for discussing these issues.
    I am trying to get my hands around just how big a hole the 
program is in currently, and if I catch these various 
statistics correctly, and I am going to say them out loud so 
somebody can correct me here, but the policies being sold are 
about $3.5 billion per year, that the debt is about $18 billion 
currently, that if they are borrowing from Treasury at a 3-
percent rate, that puts you at about half-a-billion per year. 
So just to pay the interest would be about a seventh of the 
current price of the policies, that is, if we are just paying 
the interest on that debt, and if we are paying off that debt 
and amortizing it over a certain number of years, depending on 
the number of years, policies would have to go up 
substantially. Is there any--I am assuming the answer is no, 
but is there any--first of all, are these numbers in the 
ballpark, and is there any sort of mechanism in the law in 
which rates are adjusted in order to cover the interest on the 
debt and to pay off the capital over a particular number of 
years, and if so, how many years and so forth? Who would like 
to help us understand the dynamics of this hole?
    Ms. Brown. Well, I would say your numbers are in the right 
ballpark, and no, there is no current mechanism in the law to 
allow FEMA to increase rates to start paying down the debt.
    Senator Merkley. Why not?
    Ms. Brown. It just does not exist.
    Senator Merkley. So FEMA has paid off some of the loans it 
has borrowed, I believe I understand.
    Ms. Brown. Yes.
    Senator Merkley. So what determined how much they could pay 
off how fast?
    Ms. Brown. It is--basically, it has been driven by the 
claims rates. It is----
    Senator Merkley. So if the claims were below the premiums 
and there is a surplus, you pay off some of the debt. 
Otherwise, you just live with an increasing balance. So what 
would you propose?
    Ms. Brown. Well, there are a couple of options we have 
looked at. I would like to note that FEMA can increase rates up 
to 10 percent annually by zone, so there is a possibility to 
adjust rates through that. But we have----
    Senator Merkley. On an enduring basis?
    Ms. Brown. Umm----
    Senator Merkley. Ten percent each year, it could go up?
    Ms. Brown. Yes. Yes.
    Senator Merkley. OK.
    Ms. Brown. That is the cap for an increase in any given 
year.
    Senator Merkley. All right.
    Ms. Brown. We have looked at various scenarios in terms of 
what it would take to pay down the current outstanding debt, 
and one option would be, for example, to have an additional fee 
to pay it down, but it would be in addition to a movement 
toward more full-risk rates and there are questions of equity 
and fairness to have future or current policyholders to repay 
the debt that was created for previous policyholders. So there 
are a number of ways to do it. I know the last legislation the 
Senate approved actually would forgive the debt. Dealing with 
the $18 billion outstanding debt is vital to increasing the 
ongoing stability of the program. But in years of any type of 
above-average flooding, FEMA risks having to borrow to make 
interest payments. So the debt would continue to balloon unless 
it is dealt with.
    Senator Merkley. Yes, Mr. Richardson?
    Mr. Richardson. Senator, I would submit to you, and I have 
seen some studies, and perhaps--I think it might have been done 
by the Heartland Institute, who is here today--penetration of 
policy ownership is the way to solve this financially. If you 
had a much higher--you know, we have got some good regulations 
in the laws. If you make more people that are in flood zones, 
designated flood zones, have the flood insurance or they are 
ineligible for any kind of Federal help, you are going to raise 
the penetration, you are going to have more money coming in, 
and I think--I have seen that study, it shows, and Ms. Brown 
could relate to this, but you could very quickly take your--let 
us just say 10 percent of the people have flood insurance now. 
You raise that to 20, 30, 40, it will show you very quickly 
that you have enough money to make the Flood Insurance Program 
solvent just like it is.
    Senator Merkley. And you are talking about only 10 percent 
inside a 100-year flood zone?
    Mr. Richardson. Some places, it is true. I mean, I would 
rather refer to Ms. Brown because I do not have those figures 
readily available, but, I mean, the only people you have 
mandating flood insurance is people who have mortgages that are 
federally backed and they have to have it. Other than that, I 
do not think--Ms. Brown might be able to say--I do not think 
there is any other mandate on the flood insurance. But----
    Senator Merkley. Well, and indeed, no, I think you are 
absolutely right, and previously, someone had referred to the 
Federal mandate, but indeed, we have had a lot of discussion 
about mandates up here and it is quite different for it to be 
tied into a mortgage. But separate from a mortgage, you are 
proposing to say, yes, you must spend your money on this form 
of insurance?
    Mr. Richardson. If you want to be available for Federal 
assistance in the event of----
    Senator Merkley. OK. I see.
    Mr. Richardson. ----not going to make you buy it----
    Senator Merkley. I see.
    Mr. Richardson. ----but if you do not buy it and your house 
goes bye-bye, do not expect the Federal Government to come 
write you a check for your house.
    Mr. Berginnis. Senator, if I could just also add this, this 
ties into the actuarial and really what is actuarial rating 
under this program. The debt that accrued was from catastrophic 
events and even though the subsidized policies are about a 
quarter of the policies in the NFIP, one could probably say 
that 100 percent are subsidized to the extent that you do not 
have any factor for catastrophic events built in there. Senator 
Shelby has--this is a point that he has raised repeatedly. But 
this is also one of the areas that perhaps is more promising 
for private sector involvement in terms of the use of 
reinsurance and those types of things.
    Senator Merkley. My time is up and I thank you very much.
    Ms. Brown. I would like to note one thing. In terms of 
doing an analysis in terms of what it would take to pay down 
the debt, you also have to factor in that current interest 
rates are very low. If interest rates change, if there is 
another event, there are a number of moving parts that will 
impact the ability of the program to be able to pay off the 
debt.
    Senator Merkley. Absolutely. Thank you.
    Chairman Johnson. I would like to thank our witnesses for 
being here today.
    Senator Wicker. Mr. Chairman?
    Chairman Johnson. Yes.
    Senator Wicker. I wonder if I could take a moment or two on 
a second round. It will not be long----
    Chairman Johnson. Yes, you may.
    Senator Wicker. I appreciate that. Let me ask--I want Mr. 
Rutenberg and Mr. Kolton to address this issue, and I will 
start with Mr. Kolton. If there is a levee, surely the property 
owner should get some reduced premium because that levee is 
there. You are not advocating, are you, flood insurance at the 
same premium for that type of property owner, are you?
    Mr. Kolton. No, Senator. We believe that what ought to be 
accounted for is the level of flood protection that exists and 
we ought to be looking at what level of protection exists from 
a particular levee. But it would be a mistake not to have any 
flood insurance behind a levee that is not accredited.
    Senator Wicker. Well, OK. Well, the fact is, and I think, 
Mr. Rutenberg, you would agree with this, that most levees 
work, that most levees provide the protection that is 
necessary, and it is really not fair to make property owners 
act as though they had no protection whatever in their 
premiums, do you not agree, Mr. Rutenberg?
    Mr. Rutenberg. Senator, I agree, but I think it is a 
broader question than just the levees, if I might. This also 
goes back to my earlier point, that we have some communities 
and counties require much more in-depth stormwater management 
than others, and if you are going to take it to a different 
level, then you should really take it to a different level and 
have the rates be commensurate with the risk.
    Senator Wicker. And just one final question, and that is to 
you, Ms. Brown. I do not understand why the banks do not do a 
better job of enforcing the requirement for flood insurance. If 
flood insurance is required at a closing, it would seem to me 
that NFIP and the banks have a responsibility to be just as 
aggressive as the banks are with any other kind of insurance. I 
have gotten calls from my mortgage company about my insurance. 
Even when there was a mistake, I did have insurance, but the 
company changed or whatever, they called me quickly. And I can 
assure you, they make sure that my hazard insurance premiums 
are up to date or they will impose another insurance 
requirement on me quickly.
    Ms. Brown. Mm-hmm.
    Senator Wicker. That is not the way the Flood Insurance 
Program works, and I am mystified as to why banks and NFIP do 
not work together to enforce this requirement as aggressively 
as banks enforce the other types of insurance.
    Ms. Brown. No, it is, you know, very unusual, and part of 
it goes to this issue of it is not clear if the banks focus at 
the closing to ensure that there is flood insurance at closing, 
but the flood insurance is not maintained over the life of the 
mortgage. And part of the problem is the bank regulators, as I 
mentioned, they do a risk-based approach to examinations, so 
they have a number of consumer protection laws that they test 
for compliance with. So they are doing limited testing. They 
are not finding problems in their limited testing, so they are 
concluding that compliance is not an issue. But you talk to 
FEMA, and as I mentioned, they are looking at the number of 
properties in the Special Flood Hazard Areas and they are 
looking at new mortgages and they are determining that there is 
a gap in terms of the compliance. So it is an ongoing issue and 
it is one that definitely warrants attention.
    Senator Wicker. It needs to be addressed in any 
reauthorization. Thank you, and Mr. Chairman, thank you for 
indulging me.
    Chairman Johnson. Senator Shelby for a last observation.
    Senator Shelby. I was intrigued by the exchange a minute 
ago dealing with someone who would build a home or an office or 
whatever behind a levee and so forth, because it looks to me 
like that would tell me that, boy, I am in a floodplain. It is 
just a question of risk, and I understand that. To not have 
insurance would be nonsense. It would remind me if I had a home 
here in Washington or in my home town of Tuscaloosa, Alabama, 
and if I were ten houses from a fire station and a fireplug, 
water out there in front of my house, and I said, well, I do 
not need fire protection because I have got the fire 
department, you know, I am fine. That is nonsense to me. If I 
were in a floodplain, at or near or building behind a levee, 
that would send a signal to me, whoa, we are in a floodplain. 
Mr. Kolton, what do you----
    Mr. Kolton. Senator, you are absolutely right. The National 
Committee on Levee Safety, which Congress authorized to look at 
this issue in the 2007 Water Resources Development Act, 
recommended that there be mandatory flood insurance behind 
levees, and----
    Senator Shelby. Because that would be a false security. You 
would think, looking at what has happened lately, the 
breaching--well, as we are talking, up in the Dakotas, for 
example. It could have happened in my State or in Mississippi 
or anywhere, breach those levees. And sooner or later, they 
could be breached. It might be 50 years. It might be 10 years. 
It might be 100 years. But the chances are in the floodplain.
    Mr. Plunkett. Senator, we would also agree, and we would 
agree with Senator Wicker that, I mean, there should be 
coverage, but it could be lower if----
    Senator Shelby. Oh, I understand----
    Mr. Plunkett. ----if the levees are in good shape. We would 
warn against an approach in the House NFIP bill which would say 
that if a levee has been decertified by FEMA as being in good 
shape, that rates could be lowered upon promises, essentially 
promises by communities that they are going to fix it. In other 
words, they are not done yet. They are thinking about it or 
they have started it, but it is not back up to snuff.
    Senator Shelby. Sure.
    Mr. Richardson. Senator----
    Mr. Berginnis. Senator----
    Mr. Richardson. Senator, I would just say, do not rate 
anything based on promises. I mean, that goes against 
everything that has been said at this table here. In the 
insurance formula, when it is there, when you can prove it, 
that is when it gets rated and that is when you pay for it. Do 
not give somebody----
    Senator Shelby. I have been around politics for 40 years. 
You are absolutely right. Watch the promises.
    Mr. Berginnis. And if I could just add one more thing on 
the rating of those properties behind levees, currently, if you 
had a levee that is certified to provide a level protection, so 
it is certified it is in good shape, if you made the flood 
insurance mandatory, you are paying those low-risk rates. That 
is in the current rating structure as it exists.
    Senator Shelby. Thank you.
    Chairman Johnson. I would like to thank our witnesses for 
being here today to contribute to our NFIP reauthorization 
discussion. The NFIP has an important mission to aid in 
disaster mitigation and recovery, and the views that we have 
heard today will assist us as we chart a sustainable future for 
the program. This hearing is adjourned.
    [Whereupon, at 11:43 a.m., the hearing was adjourned.]
    [Prepared statements and additional material supplied for 
the record follow:]

            PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY

    Thank you, Mr. Chairman.
    This year has been marked by extreme weather and natural disasters 
across the country. My own State was devastated by massive and deadly 
tornadoes in April.
    According to NOAA, the United States has suffered eight natural 
disasters each costing in excess of $1 billion. The total damage is $32 
billion and rising.
    While these natural disasters include droughts, fires, and 
tornadoes, the historic flooding of the Mississippi and Missouri rivers 
has dominated the headlines lately. Unfortunately, the flooding may not 
end for months because rainstorms continue in the Midwest and last 
winter's snowfall is still melting.
    To make matters worse, many communities that thought they were 
protected by levees have been flooded due to intentional breaches by 
the Army Corps of Engineers.
    We may see even more extreme weather later this year as the 
National Weather Service predicts that 2011 will be a ``busier-than-
usual'' hurricane season.
    The severity of this year's weather highlights the need for the 
National Flood Insurance Program to be reauthorized and placed on a 
sustainable path.
    For nearly 6 years, Congress has been unable to pass a long-term 
reauthorization of the flood program.
    The short-term extensions have kept the program alive, but have 
prevented the implementation of important reforms.
    This has made it difficult for communities in high-risk flood zones 
to plan for the future.
    Accordingly, it is my hope that this year we can pass a long-term 
extension of the flood program that includes the reforms needed to make 
the program ``actuarially sound.''
    I look forward to hearing from today's witnesses and hope that they 
can provide further insights on how the flood program should be 
modernized.
    I am especially interested in hearing what can be done to increase 
participation in the program.
    We know that most people that need flood insurance do not have it. 
We must explore ways to change that.
    We can have the best flood insurance program in the world, but it 
will do little good if people do not participate. Although the flood 
program expires in a few months, I am confident that the Committee can 
successfully work together to, once again, pass bipartisan legislation.
    Thank you Mr. Chairman.
                                 ______
                                 
               PREPARED STATEMENT OF SENATOR MIKE JOHANNS

    Thank you for being here today and your willingness to testify 
about an issue that is currently so critical to Nebraskans. According 
to the National Geospatial-Intelligence Agency, about 110,000 acres of 
land have been affected by the flood waters in Nebraska. The water has 
hit people's homes and livelihoods; in some areas, wiping them out. 
Yesterday, I met with FEMA Administrator Craig Fugate and the U.S. Army 
Corps of Engineers Brigadier General John McMahon to talk about what 
they're doing to try and relieve some of the suffering Nebraskans are 
facing. I also shared with them some of the concerns surrounding their 
water release and flood insurance decisions. My constituents and I are 
concerned about some of the Corps decisions on water releases, and 
FEMA's decision to designate a single start date for the entire 
Missouri River Basin. FEMA has announced that June 1, the date at which 
floodwaters were first released from the Garrison Dam in North Dakota, 
is the official starting point of the Missouri River Basin flooding.
    However, there were multiple releases from multiple dams, some much 
closer to Nebraska. It's not clear why releases from the Garrison Dam, 
in North Dakota, are the start of the floods in Nebraska. I know that 
these agencies have their hands full right now getting help to people. 
But they're also going to have to answer some pretty frank questions. I 
look forward to having our witnesses help us understand the risk that 
people both inside and outside of 100-year floodplains contend with, 
and how that impacts the overall insurance system. With that, Mr. 
Chairman, I conclude my statement, and thank the witnesses again for 
being here today.

               PREPARED STATEMENT OF ORICE WILLIAMS BROWN

    Director, Office of Financial Markets and Community Investment, 
                    Government Accountability Office
                             June 23, 2011











































                  PREPARED STATEMENT OF CHAD BERGINNIS

      Associate Director, Association of State Floodplain Managers
                             June 23, 2011

Introduction
    The Association of State Floodplain Managers (ASFPM) is very 
pleased to offer our thoughts and recommendations regarding the 
reauthorization and reform of the National Flood Insurance Program 
(NFIP). We thank Chairman Johnson and Ranking Member Shelby for your 
attention to the importance of providing reauthorization and guidance 
for the future direction of the program. We appreciate the opportunity 
to share with you observations about the current status of the NFIP, 
challenges the program confronts and opportunities to improve our 
Nation's efforts to reduce flood-related losses.
    We are hopeful that this Congress can provide stability for the 
NFIP while also moving the program in the direction of needed 
improvements and adjustments. We note that extensive work in both the 
House and Senate in the 110th Congress did not result in final action 
on reform legislation and legislation passed by the House in the 111th 
Congress also did not result in final legislative action. Since then, 
other issues have emerged and actions have been taken by the Federal 
Emergency Management Agency that point to the need to update those 
earlier reform and revision proposals and to seriously consider further 
and possibly significant NFIP reform ideas.
    The convergence of several areas of concern, in particular new 
flood maps, accreditation status of levees, and affordability of flood 
insurance, has focused considerable attention on challenges faced by 
the NFIP. We believe this creates an opportunity to better manage flood 
risk, to better protect lives and property and to help communities and 
individual citizens restore their economic and personal lives more 
fully and quickly after a flood disaster.

Central Question
Perhaps the central question for the Congress to consider during 
        reauthorization of the NFIP is what the program is expected to 
        do and what it should be expected to do in the future?
    We are all well aware that the program is in debt to the Nation's 
taxpayers for $17.6 billion after being overwhelmed by claims following 
flood damage resulting from the major hurricanes of 2004 and 2005. 
Floods are our Nation's most frequent and, overall, most costly 
disasters. We also know that due to the ever-changing climate, 
scientists predict that some parts of the country are expected to 
experience more frequent and more intense storms in the future, and 
that sea-level rise along the coasts of the United States will result 
in oceans being at least several feet higher by 2100. Given this, 
should the NFIP be expected to cover all claims associated with 
catastrophic losses or should the program be expected to cover claims 
in the average annual loss year with catastrophic losses handled in 
some other manner.
    How Congress decides the answer to this question is central to the 
way in which future reforms to the NFIP should be framed.

About ASFPM
    Members of the Association of State Floodplain Managers (ASFPM) are 
the Federal Emergency Management Agency's (FEMA's) partners in 
coordinating and implementing the insurance, risk identification and 
hazard mitigation components of the NFIP. ASFPM and its 30 Chapters 
represent over 14,000 State and local officials and other professionals 
who are engaged in all aspects of floodplain management and hazard 
mitigation, including management, mapping, engineering, planning, 
community development, hydrology, forecasting, emergency response, 
water resources, and insurance for flood risk. All ASFPM members are 
concerned with working to reduce our Nation's flood-related losses. 
Many of our State members are designated by their governors to 
coordinate and implement the National Flood Insurance Program, and many 
others are involved in the administration and implementation of FEMA's 
mitigation programs. For more information on the Association, our Web 
site is: http://www.floods.org.

The NFIP and Benefits to Communities, Policyholders, and Taxpayers
Intentions
    The National Flood Insurance Program was enacted into law in 1968 
following several years of policy development. The private insurance 
industry was not writing flood insurance policies as it was not deemed 
to be a profitable enterprise and potential flooding areas had not been 
identified and mapped making quantification of risk difficult. 
Taxpayers paid the bills for Disaster Relief following flood disasters. 
The original purposes of the NFIP were several:

    to require those living in at-risk locations to pay for a 
        portion of their risk through insurance premiums;

    to reduce dependency on disaster assistance and save the 
        taxpayers' money by requiring insurance in at-risk locations;

    to make flood victims closer to whole following a disaster 
        than they would be with only disaster relief;

    to reduce flood related losses over time by requiring 
        participating communities to adopt ordinances to guide 
        development in areas at risk of flooding; and

    to identify areas at risk of flooding for the dual purposes 
        of knowing where to require the purchase of flood insurance and 
        of guiding development and building practices to save lives and 
        reduce property damage.

    As originally authorized, rates were to be affordable to encourage 
broader participation in the program, thereby expanding the base of 
policyholders. Properties built before issuance of Flood Insurance Rate 
Maps (FIRMs) would have flood insurance available at lower, 
``subsidized'' rates based on the presumption that the builder and 
property owner were not aware of the flood risk. It was thought that, 
over time, the number of such subsidized properties would diminish 
because they would be substantially damaged by floods or would be 
demolished for other reasons. In the early years, some 70 percent of 
policies were subsidized. Currently, only about 23 percent are 
subsidized, and the remaining are charged actuarial rates based on 
risk. As authorized, the NFIP does not incorporate the potential for 
catastrophic losses in the rate structure. Rather, to pay for claims 
that exceeded the resources of the National Flood Insurance Fund, the 
program is authorized to borrow, with interest, from the U.S. Treasury. 
Prior to the 2004 and 2005 hurricane seasons the NFIP had built a 
strong reputation for repayment.

Results Thus Far
    The Association of State Floodplain Managers concludes that the 
NFIP has been successful in meeting a number of its original 
objectives, but less so in reducing total flood losses in the Nation. 
The statute does mandate lenders to require certain borrowers to obtain 
flood insurance, sparing taxpayers from paying many millions of dollars 
in disaster relief and casualty loss deductions, and enabling those 
citizens with flood insurance to more fully restore their lives to 
normalcy after a disaster. Additionally, the NFIP has prevented some 
unwise development and promoted flood hazard mitigation through local 
adoption of floodplain management ordinances. On the other hand, too 
many Americans continue to build in at-risk locations, including 
residual risk areas behind flood control structures and high risk 
coastal areas. Thus collective flood losses for the Nation continue to 
increase in real dollars. In the first decade of this century, average 
yearly flood losses have increased from $6 billion to $10 billion.
    Over the 40-plus years of the NFIP, there have been revisions and 
reforms, but the program has, in large part, functioned as it was 
designed to function. The original framers did not require the NFIP to 
set rates for truly catastrophic flooding associated with extreme 
events like Hurricane Katrina, or to have reserves to cover the fiscal 
impact such events would have on the program. A significant, often 
unrecognized, and difficult to measure benefit of the NFIP is the 
number of decisions people have made to build on higher ground and the 
damage that does not occur because buildings have been built to resist 
flood damage. For those who decide to build in mapped flood hazard 
areas, FEMA estimates that meeting the NFIP standards prevents over $2 
billion in damage each year.
    However, issues have emerged which now necessitate some 
reevaluation of the scope of the program and some significant 
readjustments to better meet the original and still valid purposes.

Emerging Issues
    The program has saved taxpayer dollars in disaster relief and, 
until recently, flood claims have been covered by premium and fee 
revenues or by Treasury borrowing which was repaid with interest. (In 
the 1980s, approximately $2 billion in borrowing was forgiven.) The 
rate structure was generally sufficient to cover the costs of the 
average loss year. Currently, however, the program has a debt of 
approximately $17.75 billion. The FEMA Administrator has testified that 
full repayment from current revenues is unlikely. This leads to 
questions about how the program should cope with catastrophic losses in 
the future and about how to put the program back on solid footing.
    Enforcement of local floodplain management ordinances, land-use 
regulations (i.e., subdivision and zoning codes) and building codes has 
reduced flood losses. However, other policies in some cases, including 
levee construction, have had the opposite effect of encouraging 
development in areas that still have a residual flood risk and where 
the consequences are dramatic when flooding occurs. Incentives for 
communities and property owners to take steps to mitigate future flood 
losses have not been sufficient. As a result, flood losses in the 
Nation continue to increase.
    Concern about the debt has led to calls to increase premiums and to 
take other steps to reduce exposure and increase revenues. In 
particular, there have been calls to move certain properties that 
currently receive ``subsidized'' rates to full actuarial rates. 
However, this feeds existing concerns about affordability of flood 
insurance. Can the program be fiscally sound and still have affordable 
rates?
    Concerns about affordability have played an important role in 
response to issuance of new, updated flood risk maps and to 
decertification of levees, which is beginning to interfere with 
improved identification of risk because of the related requirement to 
purchase flood insurance. Identification of risk is key to both 
providing property owners with the insurance protection they need as 
well as to facilitating appropriate construction techniques and loss 
mitigation activities.
    When Map Modernization began in 2003, most flood maps were between 
15 and 30 years old. The Map Modernization program, which ended in 
2009, focused primarily on bringing modernized maps to a current and 
consistent digital platform while only focusing some effort on 
identifying new flood hazard areas and updating the maps with new 
engineering studies. Also, levees were analyzed for their ability to 
provide flood protection based on current engineering and design 
standards on a national level--which hadn't previously been done on 
such a large scale. One of the lessons learned under Map Modernization 
is that outreach and data are critical to help communities understand 
flood risk. Another is that the publication of new flood maps with old 
engineering data and methods casts doubt as to the credibility of the 
maps overall. In reflection, the digital conversion of the flood maps 
was an important and necessary step to bring the national inventory of 
flood maps into a modern platform; however, that step alone is not the 
final answer. Many maps have been converted to digital format but 
significant work remains to update them with new engineering studies to 
reflect the effects of increased watershed development and increased 
storm intensity on flood hazards.
    Why is new engineering and risk data so important? When new and 
improved engineering models are used, when data is updated to reflect 
changes from watershed development, when additional stream gage and 
precipitation data are incorporated to better reflect changing storm 
intensity and watershed runoff patterns, and when better topographic 
data is used, you get a better flood map. The result? The poor 
condition of much of the Nation's infrastructure, including levees, 
dams, and other flood control structures, as well as stormwater 
facilities, has become much more evident. Updated flood maps more 
accurately reflect the floodplain by showing some areas as now in 100-
year flood hazard areas and, conversely, by showing many areas as no 
longer in the 100-year flood hazard areas. (It is important to note 
that, to date, approximately as many properties are newly shown as out 
of a Special Flood Hazard Area (SFHA) as are newly shown as in the SHFA 
due largely to improved topographic mapping.)
    Under FEMA's RiskMAP program, which has replaced Map Modernization, 
there is more focus on providing new engineering data as well as 
providing adequate flood risk data and outreach to communities. The 
mapping program has evolved to incorporate some of the lessons learned 
under Map Modernization. Newly designed map products will provide much 
more risk information for areas both inside and outside the 100-year 
flood hazard area which will enable citizens and communities to make 
better decisions about management of risk. New maps will also reflect 
whether levees are reliable which can change the hazard designation 
behind the levee. However, budgetary limitations threaten to 
significantly slow the process of making RiskMAP products available. 
The National Flood Insurance Fund pays the administrative costs of the 
NFIP, but does not collect enough in policy fee income to pay the full 
cost of mapping and risk identification. This has necessitated the 
appropriation of funds for the Map Modernization Initiative and now the 
RiskMAP program to supplement the funds available from policy fees 
associated with premiums.
    The use of the 100-year flood (or 1 percent annual chance flood) 
for designation of the Special Flood Hazard Areas (SFHAs) has led to 
overreliance on this artificial boundary and underestimation of flood 
risk beyond that boundary. Currently, 25 percent of flood claims are 
paid on properties located outside of the mapped SHFA. Improved 
awareness of risk beyond the SFHA boundary is necessary along with 
better communication about the affordability of policies in these 
areas. Whether these areas lie outside of the natural floodplain or 
exist behind levees, downstream of dams, or in designated floodways of 
major flood control systems, these areas are at risk from flooding. And 
that risk can be catastrophic in the case of areas behind levees or 
downstream of dams.

Reforms for the Congress To Consider
    The Association of State Floodplain Managers has been very pleased 
that FEMA, at the direction of Administrator Craig Fugate, has 
undertaken a ``Re-Thinking the NFIP'' analysis. A report to the 
Congress on the options reviewed is expected this summer. Some of those 
options and possible reforms from this analysis could be acted on by 
the Congress, but others will undoubtedly require further study and 
research. ASFPM recommends that this Committee seriously evaluate 
FEMA's findings. At this time, our suggestions range from larger issues 
to smaller adjustments:

1. ASFPM recommends that the Congress clarify whether or not the NFIP 
should be structured to accommodate catastrophic losses, as discussed 
at the beginning of this testimony. Many reform decisions would flow 
from this clarification.

2. Authorization of an ongoing flood mapping program is needed. The 
Senate-passed 2008 bill included a well-conceived section providing 
such an authorization and outlining important mapping activities. It is 
important that the section authorize the continuation of an annual 
appropriation in addition to funds available from policy fee and map 
fee revenue. The 2008 act would have authorized establishment of a 
Technical Mapping Advisory Committee of key NFIP stakeholders much like 
the one authorized in the 1994. That body proved to be very effective 
and its reports led to development of the Map Modernization Initiative.

3. The Severe Repetitive Loss Program (SRL) was established in the 2004 
Flood Insurance Reform Act as one component of a three part approach to 
diminish the problem of repetitive loss claims by mitigating these 
properties. SRL has not been fully effective largely because the 
statutory provisions establishing the program are so prescriptive that 
FEMA's ability to design an effective program was limited. The 
statutory requirements also heavily burdened States and communities to 
the point that some declined to participate. Statutory changes are 
needed to simplify the program and make it more attractive to States 
and communities.

The SRL program is intended as a fiscally responsible means of 
investing funds from the National Flood Insurance Fund (NFIF) to reduce 
the approximately $200 million per year drain on the fund represented 
by properties that have received multiple claims. Instead of simply 
reauthorizing the SRL program, we recommend that the well-received 
Flood Mitigation Assistance (FMA) program be expanded to include the 
focus and funding from both SRL and another component, the Repetitive 
Flood Claims (RFC) program. The combined program would retain the 
authorized level of funding (by transfer from the NFIF) for each 
component provided in the 2004 Flood Insurance Reform Act--$40 million 
for mitigation of severe repetitive loss structures (defined in 
statute), $40 million for FMA and $10 million for certain properties in 
certain communities. This would have the effect of simplifying 
administration so that the unobligated balance in the program can be 
put to its intended use of reducing claims from severe repetitive loss 
properties.

4. Improved flood hazard mitigation incentives are needed. ASFPM 
suggests that better linkages between premium rates and mitigation 
actions must be encouraged. We support the suggestions made by FEMA 
Administrator Fugate for a community-based risk assessment system 
involving payment by the community for a community policy. As the 
Administrator said, `` Incentives could be structured to encourage 
communities to implement flood mitigation measures in order to reduce 
their overall premium assessment.'' The Committee could direct either 
further research on the feasibility of this concept or direct that 
pilot group policies be tested.

5. As in the 2008 Senate-passed bill, the debt to the Treasury should 
be forgiven. Since the debt exceeds the NFIP's ability to repay, it is 
prudent to stabilize the program without debt and to build in reforms 
to improve its fiscal soundness. The definition of ``actuarial premium 
rates'' will depend on whether or not the program is to accommodate 
catastrophic losses.

Due to two mild hurricane seasons and a favorable refinancing of the 
debt, the NFIP has been able to cover claims, to pay interest on its 
debt, and to repay $2 billion of the original loan. However, full 
repayment of the debt is not a reasonable expectation because mild loss 
seasons cannot be expected to continue, the Nation's flood risk is 
increasing due to development and more intense storms, the interest on 
the debt will go up, and the annual program income is about $3.2 
billion, from which operating expenses and claims must be paid. It is 
not expected that program income will change significantly unless 
dramatic changes are made to the NFIP's rate structure.

6. Purchase of flood insurance in residual risk areas behind levees 
should be mandatory.

The Senate-passed 2008 bill included such a provision. Engineers know 
that all levees are subject to failure or over-topping. Because of the 
low probability but catastrophic loss possibility, premium rates in 
such areas would likely be relatively low, but property owners would be 
protected with insurance as well as appropriate risk messaging. The 
report to Congress from the National Committee on Levee Safety 
(established by the Water Resourced Development Act of 2007) strongly 
recommends mandatory purchase of flood insurance behind levees.

7. The affordability issue must be addressed. Not only is the mandatory 
purchase requirement a financial hardship for many lower income 
property owners, but affordability concerns are beginning to interfere 
with identification of risk, related mitigation of risk and protection 
of public safety. Legislative suggestions for delaying map issuance or 
for delaying effective dates for the mandatory purchase requirement are 
examples. We note that the bill soon to be considered by the House of 
Representatives includes language which focuses and limits the 
application and time frame for a delay in the mandatory purchase 
requirement for areas newly mapped as within the SFHA. A phase-in of 
actuarial rates in these areas is a better approach to ease the 
financial burden because property owners are insured during the phase-
in period rather than entirely without insurance protection.

Ideas have emerged in academic research for a means-tested system of 
flood insurance vouchers. ASFPM recommends that the Committee direct 
that an economic analysis be conducted of the overall effect on 
taxpayer funds of providing flood insurance vouchers to low income 
property owners as opposed to providing assistance through disaster 
relief funds. Such an analysis should include aspects such as 
restoration of community and economic vitality and speed of rebuilding, 
repair, and restoration of lifestyle.

8. ASFPM has long supported movement of policies toward actuarial rates 
for both for fiscal soundness and for clarity of the risk message. As 
we have identified earlier, however, there are affordability issues 
that will emerge. ASFPM also believes that robust mitigation programs 
can be an opportunity for property owners who are affected by such 
changes to help offset the resources needed to mitigate. Movement of 
certain classes of properties towards actuarial rates such as second 
homes, commercial properties and severe repetitive loss properties is 
consistent with ASFPM positions and this should be done so within a 
reasonable timeframe.

9. Exploration of additional private insurance engagement with the NFIP 
should be conducted. For example, the private reinsurance market could 
possibly provide part of the solution to the problem of catastrophic 
losses. We recommend studying the feasibility of purchasing some amount 
of reinsurance for the NFIP.

10. The NFIP should operate within a true flood risk management 
framework. The Committee could direct that FEMA work with other Federal 
agencies in the Federal Interagency Floodplain Management Task Force to 
develop a comprehensive flood risk management framework to improve 
Federal coordination toward the objective of reducing flood related 
losses in the Nation.

The Nation must carefully balance the issue of who benefits and who 
pays for development at risk. There are about 130 million housing units 
in the U.S. Of that, about 10 to 11 million are in flood hazard areas, 
with fewer than half of those carrying flood insurance. This means 90 
percent of the population does not live in identified Special Flood 
Hazard Areas, yet they must continue to support large outlays each year 
for disaster relief for flooding of uninsured buildings and rebuilding 
damaged infrastructure in flood areas, including the possibility of 
having to cover the $17.75 billion debt of the NFIP. Yet those same 
taxpayers obtain few, if any, of the benefits of that development. This 
points out the need to tie program outcomes of the NFIP to these other 
programs such as FEMA's disaster relief programs and programs of HUD, 
DOT, USDA, and others.

The U.S. Army Corps of Engineers has adopted the comprehensive flood 
risk management approach in many of its programs at the national level. 
For this approach to be successful for the Nation, FEMA must also 
actively promote the concept and integrate its programs for the NFIP, 
mitigation and disaster relief internally, and must integrate them with 
other Federal programs that impact flood risk.

11. Future changes in flood levels and sea-level rise should be 
reflected in flood mapping and risk data and long term adaptation 
strategies should be programmed into the land use and planning 
provisions of the NFIP and mitigation planning. It is clear that many 
parts of the Nation are experiencing more intense rainfall and storm 
events. The Mayor of Des Moines, Iowa, relates how his community 
suffered a 500-year flood event in three consecutive months during the 
summer of 2010. Sea levels have fluctuated over time and the current 
pattern shows an accelerated rise through at least the year 2100. FEMA 
flood maps need to reflect these future conditions so communities have 
the data to implement adaptation and mitigation strategies. This is 
essential in order for communities to be economically and socially 
sustainable and to incorporate resiliency in infrastructure and 
development now when it is incrementally less expensive versus later 
when it will be much more expensive to retrofit these facilities.

12. FEMA is authorized to delegate to qualified States the 
administration of the post-disaster mitigation grant program authorized 
in the Stafford Act and known as the Sec. 404 Hazard Mitigation Grant 
Program. If selected States develop the capacity necessary for that 
delegation, FEMA should also delegate the authority to administer the 
NFIP-funded grant programs where appropriate. ASFPM continues to focus 
on building State capacity. We believe that those States which have 
developed the capacity to assume program administration are in the best 
position to efficiently and effectively carry out the purpose of 
reducing flood losses.

13. ASFPM concurs with many recommendations for a longer-term 
reauthorization for the NFIP to avoid the dislocations for the housing 
market, lenders, and insurers when the program undergoes periods of 
lapsed authority. In view of the ``Re-Thinking the NFIP'' effort, 
Congress could direct FEMA to perform necessary studies from the policy 
options for major policy reform consideration at the end of that 5-year 
authorization. This would facilitate the Committee taking action on 
FEMA's findings and recommendations in 2016.

    The Association of State Floodplain Managers appreciates this 
opportunity to share our observations and recommendations with the 
Senate Committee on Banking, Housing and Urban Affairs as you consider 
reauthorization and reform of the National Flood Insurance Program. We 
look forward to answering any questions you may have and to assisting 
in any way that is helpful as you develop legislation.
                                 ______
                                 
                   PREPARED STATEMENT OF ADAM KOLTON

    Executive Director, National Advocacy Center, National Wildlife 
          Federation, on behalf of the Smarter Safer Coalition
                             June 23, 2011

    Good Morning Chairman Johnson, Ranking Member Shelby, and Members 
of the Committee. I am Adam Kolton and I serve as the Executive 
Director of the National Advocacy Center of the National Wildlife 
Federation (NWF), the Nation's largest conservation education and 
advocacy organization with more than four million members and 
supporters and affiliate conservation organizations in 47 U.S. States 
and territories. We greatly appreciate the opportunity to offer our 
views on the need to reform the National Flood Insurance Program 
(NFIP).
    At the outset let me express our concern over the impact that the 
recent and ongoing record breaking flooding is having on thousands of 
people across America's heartland. The first priority of the Federal, 
State, and local government is appropriately focused now on preventing 
loss of life, minimizing property damage, and assisting those in need 
with all resources possible. At the same time it's imperative that we 
not miss this opportunity to reform Federal policies so that we are 
better prepared for and can better protect people and communities from 
future storms and floods. In that regard, reforming the National Flood 
Insurance Program could not be more urgent.
    National Wildlife Federation has joined forces with a uniquely 
diverse set of interests that includes other national conservation 
organizations, insurance and reinsurance companies and associations, 
housing advocacy groups, taxpayer and free market think tanks, and 
others to form the Smarter Safer coalition (list attached). While each 
Smarter Safer member has different underlying motivations and interests 
we all support the same goal--environmentally responsible, fiscally 
sound approaches to natural catastrophe policy that promote public 
safety. We all believe that the NFIP is broken and in desperate need of 
reform.
    The unprecedented string of flooding disasters including Hurricanes 
Katrina, Rita, and Wilma in 2005, Hurricane Ike and the Midwest floods 
of 2008, the New England Floods of 2010, and this year's Midwest floods 
that continue to unfold along the Mississippi, Missouri, and Ohio 
Rivers have strained the flood program. These events caused tremendous 
damage, threw the program into record level debt and highlighted the 
limited effectiveness of the Nation's floodplain management strategy to 
protect property owners and reduce Federal disaster relief 
expenditures.
    The NFIP is in the most serious trouble of its entire 43-year 
history and, without significant reform, it could be in danger of 
eventual collapse. The NFIP is currently $18 billion in debt to the 
U.S. Treasury, and that amount is likely to increase in the near future 
as a result of recent flooding. With annual revenues of only $3 
billion, FEMA Administrator Fugate recently testified that it will be 
virtually impossible to repay the debt. The NFIP is essentially 
bankrupt.
    The program has essentially been bailed out by U.S. taxpayers, and 
given the many problems the program continues to face, we have little 
reason to believe that without major changes this scenario will not 
repeat itself over and over in the future. We do not believe the public 
or Congress will continue to support the program under such conditions.
    While the program has established some minimum standards for flood 
risk management, which are now in place in most communities, the NFIP 
has fundamentally failed to keep pace with and to substantially 
discourage and reduce the buildup of flood risks and damages across the 
Nation. It has also contributed to the deterioration and loss of 
important floodplain and coastal habitat areas and the serious decline 
of valuable and sensitive ecosystems. The NFIP minimum standards have 
changed little since the program was initiated over 40 years ago. 
Standards are so weak that even when properly enforced they virtually 
guarantee increasing flood losses. In addition, these standards remain 
in desperate need of updating, strengthening and reform.
    The NFIP was originally founded on a strategy developed by eminent 
scientists and Government officials in the early 1960s, which combined 
the ideas of identifying flood risks (generally through mapping), 
developing and implementing risk-reducing land use and building codes, 
and providing affordable insurance that was not otherwise available in 
the private markets. It was believed that the NFIP would slowly reduce 
the amount of development of the floodplain. Forty-three years later, 
we find major failures on each of these fronts. This is in large part 
due to the failure to charge actuarially sound rates, the failure to 
aggressively mitigate risks, and the failure to protect the vital 
functions that floodplains perform. National flood damages, instead of 
decreasing as the program's founders would have hoped, are now rising 
at alarming levels.
    The Smarter Safer Coalition has formulated a proposal to reform the 
National Flood Insurance Program that we believe will better protect 
taxpayers; will protect environmentally sensitive areas; will ensure 
that people understand their true risks; and will encourage mitigation 
of homes, property and communities. Our proposal focuses on the 
following (full proposal attached):

    Flood maps must be accurate, up to date, and based on the 
        best science available. This will ensure that people understand 
        their true risk and will increase the confidence in FEMA's 
        ability to accurately assess risk.

    The NFIP must charge rates that are based on true risk. 
        This will reduce the burden on taxpayers, encourage private 
        sector engagement, and allow market forces to direct 
        development toward higher ground.

    Finally, the NFIP must incentivize and encourage mitigation 
        with an increased emphasis on protection of natural ecosystem 
        functions, in lieu of subsidizing development in 
        environmentally sensitive areas.

    My testimony today will focus on necessary reforms that must be 
made to ensure the survival and viability of the National Flood 
Insurance Program in each of these key areas: rates, mapping, and 
mitigation. But first, allow me to explain the National Wildlife 
Federation's underlying interest in the NFIP and its reform--the 
protection of America's floodplains.

The NFIP Must Protect Floodplain Functions
    Floodplains, the flood-prone bottomlands that cradle rivers, 
streams, and oceans are where the land and the waters meet. Naturally 
functioning floodplains provide vital habitat for countless species. 
These areas provide breeding, foraging, and other life cycles and 
grounds for a variety of plants, insects, reptiles, amphibians, birds, 
and mammals. Floodplains are also crucial to the survival and recovery 
of many threatened and endangered species, including salmon, steelhead 
trout, sturgeon, and sea turtles. Alterations to floodplains, however, 
create multiple threats to wildlife through a range of impacts 
including: changing the flow and hydrology of rivers; eliminating 
wetlands and side channels, nesting, and other important habitat areas; 
straightening and deepening channels; and causing siltation, nutrient, 
and other water quality problems.
    Additionally, floodplains, in their natural form, provide an array 
of environmental and public health benefits, including: reducing the 
number and severity of floods; fostering vegetation to limit nonpoint 
water pollution from storm water runoff; providing a tree canopy for 
shade to moderate temperature extremes in adjacent rivers and streams, 
which in turn increases dissolved oxygen levels and consequently 
improves habitat for aquatic plants and animals; allowing water to 
recharge underground drinking water aquifers; and providing aesthetic 
beauty and outdoor recreation benefits.
    The current floodplain management system in the United States is 
not working. Instead of reducing floodplain development, one of the 
NFIP's original goals, it has incentivized and exacerbated development. 
The result has been large-scale loss and alteration of floodplains, as 
these important natural systems have been developed, filled, and leveed 
off due in part to ill-conceived NFIP policy choices. As such, land-use 
patterns have been altered, impairing the ability of the systems 
themselves to provide natural flood protection values. We are bearing 
the high costs of these policy failures: increased flood risk and flood 
intensity, habitat loss and destruction, the placement of people in 
harm's way, and economic devastation when floods hit. Between 1978 and 
2008, the number of NFIP policies in force has nearly quadrupled from 
1.4 million to 5.6 million. And as more and more properties are located 
in floodplains, the ecological benefits they provide are being further 
degraded or lost.
    The Federal Government has done far too little to protect 
floodplains, and what it has done has too often been ineffective. Not 
only does the current system fail to discourage people from building 
and rebuilding in vulnerable locations, it also uses taxpayers' dollars 
to encourage and enable development by subsiding flood insurance rates 
and masking the true cost of risk associated with this type of 
development. This is the primary reason the NWF and its conservation 
partners take an extremely serious interest in the NFIP.

FEMA Mapping Must Use the Best Available Science To Accurately Reflect 
        Risk and Place a Priority on Natural Resources Protection
    The NFIP is dependent upon the accuracy of its flood insurance rate 
maps. They show whether a property lies within the 100-year floodplain 
(and in some cases, the 500-year floodplain), high-risk storm surge 
zone, floodway, or Coastal Barrier Resource Area and ultimately are the 
basis for the premiums associated with a property. The maps are key to 
the program's success or failure. They must be up-to-date, accurate and 
based on the best available science. This is why we support FEMA's Risk 
Map program and recognize its impact on the long term fiscal viability 
of the NFIP. However, we believe that Congress should mandate that maps 
be updated in a way that ensures they are as accurate as possible.
    The Nation's floodplains are dynamic. Changes include not only 
natural forces, but also the impacts of development, weather patterns, 
and topographical changes. Areas that were previously less prone to 
flooding may now be at greater and increasing risk of flooding. Levees 
that were thought to provide 100-year (1 percent annual chance) 
protection a decade ago may now provide far less protection due to poor 
maintenance, heightened flood elevations due to increasing runoff, new 
development, increased weather intensity, or sea-level rise.
    Since 2003, FEMA has been working to update thousands of flood 
maps. In addition, levees are being reviewed and in many cases 
decertified and losing accreditation for not meeting the required 
levels of protection. According to FEMA, the Nation's special flood 
hazard areas (SFHA) have grown in size by 7 percent. While in some 
cases map updates have revealed more land and housing vulnerable to 
flooding, in other areas fewer areas are vulnerable. In fact, the 
number of housing units in SFHAs has seen a net decrease of 1 percent. 
\1\
---------------------------------------------------------------------------
     \1\ Testimony of Craig Fugate, Administrator, Federal Emergency 
Management Agency, Department of Homeland Security before the 
Subcommittee on Housing and Community Opportunity, Committee on 
Financial Services, House of Representatives. April 21, 2010, p. 4. 
Available at http://www.house.gov/apps/list/hearing/financialsvcs_dem/
fugate_4-21-10.pdf.
---------------------------------------------------------------------------
    Not surprisingly, FEMA's map updating effort has been met with some 
controversy. Some homeowners now face dramatic increases to their 
premiums, and others are now required to purchase insurance that was 
not mandated in the past, despite the fact that their home hasn't 
moved. However, as noted above, risk levels and understanding of risk 
can change.
    Some have suggested that FEMA delay updating maps or waive building 
standards. But what may make good politics generally makes horrible 
insurance policy--and by extension with Federal flood insurance--bad 
public policy. People deserve to know the cost and risks of where they 
live, and should be responsible for insuring against those risks. The 
Smarter Safer coalition strongly opposes any effort to delay map 
changes or mandatory purchase requirements. We believe this is not only 
bad policy, but it is irresponsible. If people are in harm's way, they 
must be informed of their risk, and they should have insurance 
protection. While many people believe that the Federal Government will 
write blank checks after a natural disaster, in general, the Federal 
Government pays little for the uninsured losses of individuals. Federal 
disaster payments focus principally on debris clean-up and rebuilding 
of public structures and infrastructure, and are only available in 
presidentially declared disasters. Homeowners who suffer losses can 
access temporary assistance through FEMA and may be allowed to apply 
for an SBA disaster assistance loan. However, if people are not covered 
by flood insurance, they will often have limited resources to rebuild 
after a flood. If they are not required to purchase flood insurance, 
many fail to purchase it and they will be unable to rebuild after a 
flood.
    To ensure that maps are accurate and fair, the Smarter Safer 
coalition proposes that Congress create a Technical Advisory Mapping 
Council. Much like the one this Committee included in its 2008 reform 
legislation, this council would develop new standards for flood 
insurance rate maps that would incorporate true risk, be graduated, and 
reflect both realities on the ground--both man-made and natural. Such a 
council should include a broad membership including representatives 
from all impacted Federal agencies, as well as experts with technical 
expertise in mapping natural and beneficial floodplain functions. This 
will ensure that maps are accurate and comprehensively designed to 
assist communities and FEMA with high quality flood hazard 
identification, insurance rating, and effective floodplain management.
    We propose that the standards they create ensure that maps 
accurately detail risk, requiring that rate maps be graduated to 
include not only the 100-year floodplain, but also the 10-, 50-, 200-, 
250-, and 500-year floodplain areas (for example) and residual risk 
areas and associated depths of flooding, along with other flood-related 
hazards and important habitat and key natural ecosystem functions areas 
and be graduated further to include additional risk areas. While it has 
been expedient to list whether a property is located in or out of a 
floodplain (special flood hazard area), that does not reflect real 
risk. We believe maps should be as graduated as possible, so that a 
homeowner knows if they are in a 10-year floodplain or a 70-year 
floodplain. The council should ensure that maps meet current 
topographic conditions, account for altered hydrology from fill, and 
reflect natural features that mitigate risk like wetlands and riparian 
buffers.
    These standards also must address the issue of levee 
decertification. Like the 100-year floodplain, FEMA's rate maps are 
currently based on an in-out model. When a levee is no longer 
accredited to provide protection from a 100-year flood, FEMA's maps are 
redrawn as if the levee is not in existence. Again, while this may have 
been expedient in the past, it does not reflect real-life conditions. 
Our proposal will require FEMA to take into account each levee based on 
the level of protection each confers.
    Finally, the Technical Mapping Advisory Council must address the 
impacts of sea-level rise and likelihood of increasing storm surges and 
precipitation events as it pertains to increased risk to policyholders. 
While members of Smarter Safer may disagree on the causes of these 
phenomena, we all agree that in recent years we've experienced heavier 
rainfall, changing patterns of snowfall, more severe hurricanes, and 
increasing sea levels, all of which will increase flooding risk. Across 
the Nation, precipitation is already more likely to fall in heavy 
downpours than in light sprinkles, a trend a large number of scientists 
expected to continue. \2\ \3\
---------------------------------------------------------------------------
     \2\ CCSP, 2008a. ``Weather and Climate Extremes in a Changing 
Climate, Regions of Focus: North America, Hawaii, Caribbean, and U.S. 
Pacific Islands'', a Report by the U.S. Climate Change Science Program 
and the Subcommittee on Global Change Research, [Thomas R. Karl, Gerald 
A. Meehl, Christopher D. Miller, Susan J. Hassol, Anne M. Waple, and 
William L. Murray (eds.)]. Department of Commerce, NOAA's National 
Climatic Data Center.
     \3\ CCSP, 2008a. ``Weather and Climate Extremes in a Changing 
Climate, Regions of Focus: North America, Hawaii, Caribbean, and U.S. 
Pacific Islands'', a Report by the U.S. Climate Change Science Program 
and the Subcommittee on Global Change Research, [Thomas R. Karl, Gerald 
A. Meehl, Christopher D. Miller, Susan J. Hassol, Anne M. Waple, and 
William L. Murray (eds.)]. Department of Commerce, NOAA's National 
Climatic Data Center.
---------------------------------------------------------------------------
    The trends are troubling:

    In the Midwest and Northeast, big storms that historically 
        would only be seen once every 20 years are projected to happen 
        as often as every 4 to 6 years by the end of the 21st century. 
        \4\
---------------------------------------------------------------------------
     \4\ Id.

    Winter precipitation is beginning to shift toward more rain 
        instead of snow. The fraction of wintertime precipitation 
        falling as snow declined by 9 percent since 1949 in the Western 
        United States and 23 percent in the Northeast. The biggest 
        shifts from snow to rain are in March for all regions studied, 
        December in New England, and January along the Pacific coast. 
        \5\
---------------------------------------------------------------------------
     \5\ Id.

    Rain-on-snow events may become more common in some 
        locations. \6\ Recent events in the Pacific Northwest have 
        caused extensive and notable flooding. In January 2009, tens of 
        thousands were evacuated and major transportation routes were 
        closed when 10 inches of rain fell over 2 days, causing major 
        snow melt and flooding in western Washington State. \7\ At the 
        same time, scientists have been gaining confidence in 
        projections for more intense hurricanes and tropical storms in 
        the future, even as they continue to debate whether they can 
        detect the signal of climate change in the records of past 
        storms. The latest studies indicate that hurricanes will have 
        stronger winds and more rainfall, but will become somewhat less 
        frequent. \8\
---------------------------------------------------------------------------
     \6\ Hamlet, A.F., and D.P. Lettenmaier, 2007. ``Effects of 20th 
Century Warming and Climate Variability on Flood Risk in the Western 
U.S.'', Water Resources Research 43:W06427.
     \7\ Mapes, L.V., January 1, 2010, 2009. ``Was a Year of Weather 
Extremes'', The Seattle Times.
     \8\ Knutson, T.R., et al., 2010. ``Tropical Cyclones and Climate 
Change'', Nature Geosciences Advance Online Publication on February 21, 
2010, DOI: 10.1038/NGEO779.

    The mean maximum wind speed of tropical cyclones is likely 
        to increase by 2 to 11 percent globally by the end of the 
        century. The biggest changes may occur for the most intense 
        storms, with the wind speeds of these storms increasing by a 
        significantly larger percentage. \9\ While these changes in 
        wind speed may seem small, they can translate into large 
        increases in damages. For example, a 10 percent increase in 
        wind speed of a category four hurricane can increase damages by 
        about 50 percent. \10\
---------------------------------------------------------------------------
     \9\ Knutson et al., 2010.
     \10\ CCSP, 2008a.

    All climate models project more rainfall from tropical 
        cyclones in a warmer climate. The latest projections are that 
        rainfall from hurricanes may increase from 3 to 37 percent. 
        \11\ The average increase projected by the late 21st century is 
        about 20 percent within 62 miles of the storm center. \12\
---------------------------------------------------------------------------
     \11\ Knutson et al., 2010.
     \12\ Id.

    Sea-level rise will further increase the vulnerability of States 
along the Gulf and Atlantic coasts to storm-surge flooding. When a 
tropical storm hits, higher sea level translates into bigger storm 
surges that can cause flooding further inland. Sea-level rise will also 
endanger coastal wetlands and barrier islands that form a first line of 
defense and help buffer coastal areas against hurricanes and storm 
surges. Even in the unlikely circumstance that the characteristics of 
tropical cyclones do not change, scientists are highly confident that 
sea level is rising and that coastal areas will have a greater risk of 
damaging storm surge. Globally, sea level has already increased by 
about seven inches over the past century due to thermal expansion of 
water and the melting of land-based glaciers and ice. \13\ Additional 
increases in sea level are considered inevitable; the question only 
remains is how much and how fast.
---------------------------------------------------------------------------
     \13\ Intergovernmental Panel on Climate Change (IPCC), 2007. 
``Climate Change 2007: The Physical Science Basis. Contribution of 
Working Group I to the Fourth Assessment Report of the 
Intergovernmental Panel on Climate Change'' [Solomon, S., D. Qin, M. 
Manning, Z. Chen, M. Marquis, K.B. Averyt, M. Tignor, and H.L. Miller 
(eds.)].
---------------------------------------------------------------------------
    For these reasons, the NFIP must find a way to account for these 
changes to accurately assess and underwrite increased risks of flooding 
throughout the country. Smarter Safer strongly believes that mapping 
underlies the whole flood program and if maps are not accurate the 
program will be constantly undermined.

Rates Must Reflect Risk
    Currently, NFIP insurance rates do not reflect actual risk of flood 
damage. The NFIP does not charge market-based or risk-based rates, or 
increase rates based on previous loss experience. 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 itself, especially since 
the loans are virtually interest free.
    Perhaps the best example of the program's failure regarding rates 
can be demonstrated by the alarming number of repetitive loss 
properties that account for payouts. In 1998, NWF completed and 
released a landmark report, Higher Ground, on the NFIP repetitive flood 
loss properties--those that have two or more paid claims of at least 
$1,000 each over a rolling 10-year period. At that time our report 
showed there were 74,501 repetitive loss properties in the NFIP. While 
only approximately 2 percent of insured properties, but with 200,182 
paid claims from 1978-1995, which had cost the NFIP $2.581 billion, 
they represented approximately 40 percent of all claims paid. More 
recently, despite Congress' efforts in the 1994 and 2004 Flood 
Insurance Reform Acts, the total number of repetitive loss properties 
has grown to 153,000 repetitive loss properties with 447,700 claims 
that have cost the NFIP $10.692 billion. Within these properties, 9,129 
properties are ``severe repetitive losses'' with 50,607 total losses 
that have cost the NFIP over $1.5 billion. These types of losses cannot 
be sustained.
    NFIP's fiscal solvency is further challenged because properties 
that predate a community's involvement in the NFIP or the applicable 
flood insurance rate map (whichever is later) enjoy significantly 
subsidized rates, paying only 35 to 40 percent of their actual full-
risk level premium. While the initial thought may be that because of 
their vulnerability these pre-FIRM (Flood Insurance Rate Map) 
properties wouldn't be long for this world, according to GAO in 2008, 
over 1.1 million properties, or 25-30 percent of the program, was 
subsidized. FEMA puts the percentage of properties in the NFIP 
receiving explicitly subsidized rates at more than 20 percent. \14\
---------------------------------------------------------------------------
     \14\ United States Government Accountability Office. GAO-08-437. 
Report to the Ranking Member, Committee on Banking, Housing, and Urban 
Affairs, U.S. Senate. National Flood Insurance Program. Financial 
Challenges Underscore Need for Improved Oversight of Mitigation 
Programs and Key Contracts, p. 18.
---------------------------------------------------------------------------
    As the Committee begins to draft a reauthorization bill, we urge 
you to address this issue by moving all rates towards risk-based over a 
5-year period. We believe that this Committee made a good start with 
the Flood Insurance Reform and Modernization Act of 2007 by requiring 
that certain properties (including nonprimary residences; severe 
repetitive loss properties; commercial properties; properties damaged 
over 50 percent of the home's value; and properties improved by over 30 
percent of the home's value) phase up to actuarial rates over 4 years, 
and by raising the limit of annual policy increase from 10 to 15 
percent. These are great steps, but in light of recent conditions and a 
growing deficit, we urge the Committee to go further.
    We believe that to prevent further taxpayer bailouts, and to ensure 
the program does not incentivize building in harmful and 
environmentally sensitive areas, all rates must be based on risk. The 
coalition believes that properties should begin paying risk-based 
rates, through a phase in over a period of no longer than 5 years. We 
understand that there may be some homeowners who are unable to pay 
risk-based rates; however, that population is limited. For that limited 
population, we recommend establishing a subsidy system; however, any 
subsidies should be fully divorced from the insurance rates. Subsidies 
could be limited to those only with true affordability issues, and 
could be paid for through surcharges on higher-end properties. 
Currently, million dollar homes receive the same subsidies as homes 
valued at $100,000. We believe that in this current fiscal environment, 
we should not be providing subsidies to people who do not need Federal 
assistance.
    I want to stress that it is imperative that any subsidy mechanism 
be separate from the rate structure of the NFIP. Tying these two issues 
together masks and exacerbates risk. Once rates are risk-based, the 
program will be better positioned to encourage mitigation and the 
private sector will be in a position to compete with the Federal 
Government, helping to lower risk to the U.S. taxpayer. Until rates are 
risk-based, the NFIP cannot fully incentivize mitigation. Once rates 
are based on risk, NFIP could provide discounts if homeowners undertake 
mitigation that lowers their risk.

NFIP Community Eligibility Criteria Must Reduce Flood Risk to People 
        and Protect and Restore Natural Resources
    We urge the Committee to consider addressing the community 
participation eligibility criteria in the NFIP to require adequate 
protection or restoration of natural resources and the functions of 
floodplains that benefit communities and species. This current 
oversight misses an important opportunity to better protect the public 
and beneficial natural resources.
    Eligibility criteria must be enhanced so that participation in the 
NFIP requires communities to maintain or improve the habitat and flood 
management values of floodplains. NWF believes that this can be 
addressed by taking the following principles into account. First, the 
program should restrict or prohibit development in floodplains in high 
hazard and environmentally sensitive areas unless it is shown to have 
no adverse effect on natural resources or can be fully and sustainably 
mitigated. Second, repairs or improvements to existing structures 
should include mitigation for damage to natural resources. Third, all 
mitigation should prefer nonstructural means and must account for the 
impacts of climate change. Fourth, voluntary buyouts of homes and 
businesses in high flood risk areas should be promoted with appropriate 
lands dedicated to open space uses. Fifth, communities participating in 
the NFIP should be required to strengthen land-use and building code 
standards and provide increased incentives to encourage communities to 
use higher standards. This should include requiring higher building 
freeboard; limiting use of floodplain fill to exempt areas from flood 
insurance purchase requirements; eliminating the 1-foot rise for 
determining floodways; greater use of open-space and low density 
zoning; protection of natural shorelines; identifying additional no-
build zones for public safety and protecting natural floodplain 
functions; establishing building setbacks for maintaining flood 
conveyance, shoreline erosion zones, and natural channel migration; and 
employing low-impact development methods to prevent and/or minimize the 
degradation of floodplain habitat. Finally, Congress must encourage or 
require FEMA to bring the NFIP into compliance with the Endangered 
Species Act (ESA) and other conservation laws to prevent harm to ESA 
listed species affected by floodplain development.

FEMA's Community Rating System Must Be Improved
    FEMA's Community Rating System is a voluntary incentive program 
designed to encourage communities to go beyond the minimum standards of 
the NFIP. If a community takes mitigation steps, the premiums of 
individual policyholders are reduced. However, individuals only have so 
much sway over the mitigation decisions of their local governments. 
Local government officials must have an incentive to make smart 
mitigation decisions. FEMA must take steps to address this shortcoming 
and bolster incentives for participation in the program.
    One way to do this is for FEMA to offer this incentive through a 
voluntary, community-based flood insurance policy in which a local 
government holds a policy that covers homes and buildings in their 
jurisdiction. A local government will be more likely to undertake 
mitigation steps that will reduce their risk and the cost of flood 
insurance if they are also responsible for paying the flood insurance 
bill. This idea holds great potential to improve floodplain management 
decision making on a local level. We recommend that the Senate 
authorize the GAO and FEMA to study the feasibility and implementation 
of community-based flood insurance, including authorization for a pilot 
program with volunteering communities.

The NFIP Must Encourage Mitigation of Natural Features To Protect 
        Against Flooding
    We strongly support measures that would encourage and assist 
homeowners in taking steps to mitigate damage to protect their homes 
against natural disasters. As claims to the program increase, the need 
to implement techniques and activities to mitigate flood damage is 
reinforced. The NFIP has already encouraged this through NFIP-funded 
hazard mitigation grant programs, created with bipartisan support, 
which have successfully reduced property damage, protected floodplains, 
and reduced the financial burden on the program. In light of these 
benefits, Smarter Safer has urged Congress to streamline, consolidate, 
and permanently extend the NFIP-funded grant programs under the Flood 
Mitigation Assistance (FMA) Program.
    Currently, FEMA administers three separate programs to help 
property owners and communities mitigate against flood damage: the 
Flood Mitigation Assistance (FMA) Program provides funds to assist 
States and communities to implement measures that reduce or eliminate 
the long-term risk of flood damage to buildings, manufactured homes, 
and other structures insured under the National Flood Insurance 
Program; the Severe Repetitive Loss (SRL) program provides funding to 
mitigate SRL structures insured under the NFIP to reduce or eliminate 
the long-term risk of flood damage; and the Repetitive Flood Claims 
(RFC) grant program provides similar direct assistance to reduce flood 
damages to insured properties in communities that don't have the 
capacity to undertake mitigation activates. Given that every one dollar 
spent on mitigation yields a return of four dollars in avoided losses, 
these programs have helped slow the growth of the program's enormous 
$18 billion deficit. Furthermore, in its review of H.R. 5114, the Flood 
Insurance Reform Act of 2010, CBO noted that ``[o]ver the next 10 
years, some or all of the costs of the mitigation program may be offset 
by lower claim payments, depending on the effectiveness of the 
mitigation efforts.'' \15\
---------------------------------------------------------------------------
     \15\ Congressional Budget Office. Review of H.R. 5114, Flood 
Insurance Reform Act of 2010. May 17, 2010.
---------------------------------------------------------------------------
    Yet as effective as these programs have been, they can be made more 
effective and efficient by consolidating the RFC and SRL Grant Programs 
into the Flood Mitigation Assistance Program as subsets. Doing so would 
allow the SRL program to reach its full potential, by reducing the 
burden that SRL properties have on the NFIP, and improving 
participation in RFC grant program by allowing FEMA or States to work 
directly with property owners if communities decline to participate.
    This solution does not change the net authorization levels for the 
combined programs, funding for which comes from the transfer of funds 
from the National Flood Insurance Fund rather than the general 
treasury. It would, however, reduce bureaucracy and cost and allow FEMA 
to continue to help communities and property owners reduce flood damage 
and claims to the NFIP. These cost savings would reduce the program's 
burden to taxpayers, safeguard communities, help restore the fiscal 
soundness of the NFIP, and better manage our Nation's floodplains. We 
urge the Committee to consider this important fix as you begin to draft 
an NFIP bill.

FEMA Should Consider Reinsurance To Ensure Risk and Protect Taxpayers
    We were pleased to see that the House included in its bill 
authority for FEMA to purchase private reinsurance. This is one of the 
few means available to FEMA to reduce the risk on Federal taxpayers and 
move the program to safe and sound financial practices. Like a ``real'' 
insurance company, the NFIP would retain some risk and buy protection 
in the private market for catastrophic exposures. This is a prudent 
step and one we hope the Senate will emulate.

Conclusion: A New Approach to the Nation's Flooding Problems
    As we begin to assess the damage from some of the most severe 
flooding since 1927, it is critical that Congress not miss this 
opportunity to substantially reform the NFIP to better protect people, 
property and the environment. We urge the Committee to pass a strong, 
comprehensive reform bill that improves flood risk mapping, ensures 
risk-based rates and incentivizes mitigation by individuals and 
communities. Reforming the NFIP can lead to less development and 
redevelopment in some of the most high risk sensitive areas, better 
land-use planning, and significant savings for U.S. taxpayers.
                                 ______
                                 
                 PREPARED STATEMENT OF BARRY RUTENBERG

First Vice Chairman of the Board, National Association of Home Builders
                             June 23, 2011

Introduction
    Chairman Johnson, Ranking Member Shelby, and Members of the Senate 
Committee on Banking, I am pleased to appear before you today on behalf 
of the 160,000 members of the National Association of Home Builders 
(NAHB) to share our views concerning efforts to reform the National 
Flood Insurance Program (NFIP). We appreciate the invitation to appear 
before the Committee on this important issue. My name is Barry 
Rutenberg and I am the First Vice Chairman of the Board for NAHB and a 
home builder from Gainesville, Florida.
    NAHB commends the Committee for addressing reform of the NFIP 
program. As we have seen this year, floods can devastate every part of 
the country--even areas we would never think of, and for this reason, 
NAHB wants to be very clear that it strongly supports a long-term 
program reauthorization. We believe a 5-year term is the only way to 
provide a steady foundation on which to build program revisions and 
ensure the NFIP is efficient and effective in protecting flood-prone 
properties. As you know, for the last several years, the NFIP has had 
to undergo a series of short-term extensions that have created a high 
level of uncertainty in the program and caused severe problems for our 
Nation's already troubled housing markets. During these uncertain 
times, many home buyers faced delayed or canceled closings due to the 
inability to obtain NFIP insurance for a mortgage. In other instances, 
builders themselves were forced to stop or delay construction on a new 
home due to the lack of flood insurance approval, adding unneeded delay 
and job loss. NAHB believes a long-term extension will ensure the 
Nation's real estate markets operate smoothly and without delay. We 
therefore commend the Committee for making this issue a priority.

Background
    The Federal Emergency Management Agency's (FEMA) National Flood 
Insurance Program (NFIP) plays a critical role in directing the use of 
flood-prone areas and managing the risk of flooding for residential 
properties. The availability and affordability of flood insurance gives 
local governments the ability to plan and zone their entire communities 
including floodplains. In addition, if a local government deems an area 
fit for residential building, flood insurance allows home buyers and 
homeowners the opportunity to live in a home of their choice in a 
location of their choice, even when the home lies in or near a 
floodplain. The home building industry depends upon the NFIP to be 
annually predictable, universally available, and fiscally viable. A 
strong, viable national flood insurance program enables the members of 
the housing industry to continue to provide safe, decent, and 
affordable housing to consumers.
    The NFIP provides flood insurance to over 5 million policyholders, 
enabling homeowners to protect their properties and investments against 
flood losses. Further, the NFIP creates a strong partnership between 
State and local governments by requiring them to enact and enforce 
floodplain management measures, including building requirements that 
are designed to ensure occupant safety and reduce future flood damage. 
This partnership, which depends upon the availability of comprehensive, 
up-to-date flood maps and a financially stable Federal component, 
allows local communities to direct development where it best suits the 
needs of their constituents and consumers. This arrangement has, in 
large part, worked well. Unfortunately, the losses suffered in the 2004 
and 2005 hurricane seasons, including the devastation brought about by 
Hurricanes Katrina, Rita, and Wilma, have severely taxed and threatened 
the solvency of the NFIP.
    According to FEMA, between the NFIP's inception in 1968 through 
2004, a total of $15 billion has been needed to cover more than 1.3 
million losses. The 2004 hurricane season required close to $2 billion 
in NFIP coverage, and the 2005 hurricane season resulted in payments 
totaling over $13.5 billion. Combined claims for these 2 years exceeded 
the total amount paid during the previous 37-year existence of the NFIP 
program. While these losses are severe, they are clearly unprecedented 
in the history of this important program, as losses since that time 
have dropped significantly (e.g., $612 million in 2007 and $773 million 
in 2009). Thus, in our opinion, the losses of 2004 and 2005 are not a 
reflection of a fundamentally broken program. Nevertheless, NAHB 
recognizes the need to ensure the long-term financial stability of the 
NFIP and looks forward to working with this Committee to consider and 
implement needed reforms, including the possibility of privatizing the 
NFIP.
    While NAHB supports reform of the NFIP to ensure its financial 
stability, it is absolutely critical that Congress approach this 
reauthorization with care. The NFIP is not simply about flood insurance 
premiums and payouts. Rather, it is a comprehensive program that guides 
future development and mitigates against future loss. NAHB believes a 
financially stable NFIP is in all of our interests, and the steps that 
Congress takes to ensure financial stability have the potential to 
greatly impact housing affordability and the ability of local 
communities to exercise control over their growth and development 
options; thus any such steps must be carefully designed and implemented 
to minimize these real impacts.

NAHB Supports Thoughtful NFIP Reforms
    The unprecedented losses suffered in 2004 and 2005 have severely 
taxed and threatened the solvency of the NFIP. While these events have 
been tragic, sobering, and have exposed shortcomings in the NFIP, any 
resulting reforms must not be an overreaction to unusual circumstances. 
Instead, reform should take the form of thoughtful, deliberative, and 
reasoned solutions. A key step in this process is to take stock of 
where we are today, what has worked, and what has not.
    An important part of the reform process is determining what area or 
areas of the NFIP are in actual need of reform. In the past, a key tool 
in the NFIP's implementation, the Flood Insurance Rate Maps (FIRMs), 
have been recognized by Congress to be inaccurate and out-of-date. 
Through the strong leadership of both Chambers, FEMA is completing its 
map modernization effort to digitize, update, and modernize the 
Nation's aging flood maps. While FEMA was successful in digitizing most 
of the FIRMs, not all are based on updated hydrologic data and a recent 
National Academy of Sciences report faulted some of the maps because of 
a lack of reliable topographical data. As a result of these data 
deficiencies, there are large discrepancies between what was mapped as 
the 1-percent annual chance of flood (100-year floodplain) decades ago 
and what areas may be reflected as falling within the 1-percent annual 
chance of flood on the newer maps, and what the actual 1-percent annual 
chance of flood is today. While FEMA is currently addressing this 
oversight through its RISKMAP program, NAHB believes that continued 
Congressional oversight is necessary. Ensuring the scientific validity 
of the maps, as well as ensuring that they reflect the true risks to 
property is an extremely important step for all who rely on NFIP. It is 
for this reason that NAHB supports the establishment of a Technical 
Mapping Advisory Council, as proposed in the House bill H.R 1309. We 
are hopeful that if such a council is approved, it would also result in 
further collaboration and coordination among the agencies and the 
private sector, thus leading to regular dialog to help ensure that the 
NFIP is working as intended.
    Fixing the maps, however, is merely the first step. In an attempt 
to improve both the solvency of the program and its attractiveness to 
potential policyholders, NAHB supports a number of reforms designed to 
allow FEMA, through the NFIP, to better adapt to changes to risk, 
inflation, and the marketplace. Increasing coverage limits to better 
reflect replacement costs, for example, would provide more assurances 
that legitimate losses will be covered and improve program solvency by 
generating increased premiums. Similarly, the creation of a more 
expansive ``deluxe'' flood insurance option, or a menu of insurance 
options from which policyholders could pick and choose, could provide 
additional homeowner benefits while aiding program solvency. Finally, 
increasing the minimum deductible for paid claims would provide a 
strong incentive for homeowners to mitigate and protect their homes, 
thereby reducing potential future losses to the program.
    The NFIP and its implementing provisions were not created solely to 
alleviate risk and generate premiums. They were created to balance the 
needs of growing communities with the need for reasonable protection of 
life and property. Part and parcel of this is the need for regulatory 
certainty and expedient decision making. First, 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. While officials at all levels of government must 
work together so that lives, homes, schools, businesses and public 
infrastructure are protected from the damages and costs incurred by 
flooding, the local communities must provide the first line of defense 
in terms of land-use policies and practices. It is clear that the NFIP 
was specifically designed to allow this to occur, as the availability 
of flood insurance is predicated on the involvement of the community 
and relies on the breadth of activities that local governments can (and 
do) take to protect their citizens and properties from flood damage.
    Additionally, FEMA must better coordinate its activities with those 
of other Federal agencies who have oversight over other Federal 
programs. For example, FEMA recently began requiring certain property 
owners to demonstrate compliance with the Endangered Species Act (ESA) 
prior to FEMA issuing them a Conditional Letter of Map Revision. \1\ To 
do so, FEMA must engage the U.S. Fish and Wildlife Service or the 
National Marine Fisheries Service in an extensive consultation to 
determine the potential impacts on the endangered species in question 
and to develop any steps that could be taken to mitigate any adverse 
effects. FEMA, however, has claimed it does not have to resources to 
conduct the review and has deflected its responsibilities to the 
landowner. Not only does this cause confusion, but FEMA's dereliction 
of duties places landowners in a no-win situation, creating project 
delays, increased construction costs, and a decreases in housing 
affordability. As NAHB does not believe that the NFIP is a proper 
trigger for the ESA, we are hopeful that any legislation will clarify 
that such consultations are unnecessary. Likewise, we are hopeful that 
FEMA will work to improve collaboration and cooperation with the other 
Federal, State, and local entities as this program continues to evolve 
(see, Appendix).
---------------------------------------------------------------------------
     \1\ Procedure Memorandum No. 64--http://www.fema.gov/library/
viewRecord.do?id=4312 (see, Appendix).
---------------------------------------------------------------------------
    Similarly, NAHB believes FEMA could do a better job of coordinating 
and overseeing local efforts to implement building codes as part of a 
community's floodplain management program. In an effort to address this 
shortcoming, past NFIP bills have asked for a report on the inclusion 
of building codes in floodplain management criteria. While NAHB 
supports efforts to allow FEMA to conduct a study on the efficacy, 
economic and regulatory impacts, and effectiveness of including 
national model building codes, NAHB believes it would be beneficial to 
evaluate the effectiveness of allowing States to continue to use the 
national model codes--specifically, International Building Code and 
International Residential Code--with State-specific amendments, as 
currently allowed.
    Past language has been unclear about exclusions and would allow 
State-prescribed or other privately developed building codes and 
standards to be considered in the study. This is problematic because 
over the last 5 years, State and local governments have begun adopting 
various ``green'' codes and protocols for use as mandatory building 
standards within their respective jurisdictions. In addition to the 
fact that these codes may not adequately consider the unique geographic 
needs for building in zones with the potential for high-impact natural 
disaster risks, these codes and standards generally exist outside of 
the scope of the national model code development bodies. As such, they 
can be prohibitively expensive and may not provide all stakeholders an 
opportunity to equally participate in the codes' development.
    NAHB supports allowing FEMA to investigate the costs and benefits 
of using the national model codes with respect to floodplain management 
and enforcement in areas with high-impact weather risks. However, NAHB 
recommends that the study language be modified to focus only on the 
national model codes that have provisions to address floodplain 
management criteria--i.e., the International Building Code and the 
International Residential Code--and not to consider ``green'' codes, 
even ``green'' codes that have been developed in accordance with the 
model codes development process, as such codes are not designed to 
accommodate affordability criteria, which is critical in any cost-
benefit analysis.
    More importantly, NAHB believes that FEMA must maintain the 
flexibility for State and local governments to adopt innovative ways to 
address building needs that cannot be achieved through a nationally 
applied or privately developed code. As such, NAHB recommends that any 
study on the cost-benefit impacts of adopting national model building 
codes must include codified safeguards preserving the rights of State 
and local governments to amend the model building codes to meet 
specific local needs. Lastly, FEMA must ensure that any study on the 
impacts of building codes in NFIP be conducted with explicit 
prohibition against the development, implementation, or enforcement of 
national model codes by FEMA itself.

NAHB Is Concerned With Potential Negative Reforms
    As Congress considers strategies to bolster the financial stability 
of the NFIP, NAHB cautions against those reforms that have far-reaching 
and unintended consequences, including reforms that decrease housing 
affordability and the ability of communities to meet current and future 
growth needs. Chief among these concerns are changes that would require 
more homeowners to purchase insurance and expand the Special Flood 
Hazard Area (SFHA), or expand the current Federal minimum residential 
design, construction, and modification standards.
    NAHB believes that modifying the numbers, location, or types of 
structures required to be covered by flood insurance may play an 
important part in ensuring the NFIP's continued financial stability, 
but any such decision must be taken with extreme care. Two options have 
been widely considered in recent years. The first would require the 
mandatory purchase of flood insurance for structures located behind 
flood control structures, such as levees or dams. The second would 
mandate that all structures within the 1-percent annual chance of flood 
obtain flood insurance regardless of whether or not they currently hold 
a mortgage serviced by a federally licensed or insured carrier. While 
both of these strategies would increase the number of residences 
participating in the NFIP, buttressing the program against greater 
losses, they are not as simple as they seem. At a minimum, NAHB 
believes that before any reforms are enacted FEMA should first 
demonstrate that the resulting impacts on property owners, local 
communities, and local land use are more than offset by the increased 
premiums generated and the hazard mitigation steps taken. Only after 
such documentation is provided, documentation that includes the 
regulatory, financial, and economic impact of reform efforts, can 
Congress, FEMA, stakeholders, and the general public fully understand 
whether or not such actions are appropriate.
    One important component of the NFIP is the ability of communities, 
with the assistance of the Federal Government, to design, install, and 
maintain flood protection structures for the purpose of reducing risk. 
In most instances, residential structures located behind dams or levees 
that provide protection to the 1-percent-annual-chance flood level are 
not required to purchase flood insurance. This is a planned trade off. 
In exchange for constructing adequate flood controls, structures 
located behind those controls are removed from the 100-year floodplain 
or SFHA on the relevant FIRM. Accordingly, any reforms that contemplate 
bringing these same residences back under a mandatory purchase 
requirement raise very real and powerful equity and fairness issues. 
Should Congress or FEMA produce adequate documentation indicating that 
the benefits of mandating flood insurance purchase for residences 
behind flood control structures outweigh the costs to homeowners, NAHB 
would support these residences being charged premiums at a reduced rate 
to reflect their reduced risk. A great deal of time and taxpayer money 
was invested to provide additional flood protection to these 
residences, and it is only fair that homeowners in these areas, if 
required to purchase insurance, be recognized for their communities' 
efforts. In addition, some localities charge a levee fee on property 
taxes to residents for operation and maintenance of the levee, charging 
for flood insurance is an additional burden.
    While changes to the NFIP's mandatory flood insurance purchase 
requirements present one set of issues, a programmatic change of the 
SFHA presents an entirely different and overwhelming set of concerns. 
Changing the SFHA from a 100-year standard (1-percent-annual chance 
flood) to a higher level (i.e., 500-year standard as described in 
previous bills) would not only require more homeowners to purchase 
flood insurance, but would also impose mandatory construction 
requirements on a completely new set of structures. Furthermore, those 
homeowners who had been in compliance with the 100-year standard will 
suddenly find themselves below the design flood elevation for the 
increased level. Although these structures may be grandfathered and 
avoid higher premiums as a result of their noncompliant status, this 
ends when the structure is sold or substantially improved. Placing 
these homes in this category impacts their resale value in a very real 
way, as any new buyer may be faced with substantially higher premiums 
or retrofit and compliance costs.
    Any revision of the SHFA standard would not only affect homeowners, 
but also home builders, local communities, and FEMA. An expanded 
floodplain means an expanded number of activities taking place in the 
floodplain, and a corresponding increase in the overhead needed to 
manage and coordinate these activities. A larger regulated floodplain 
would likely result in an increased number of flood map amendments and 
revisions, placing additional burdens on Federal resources to make 
these revisions and amendments in a timely fashion. Residents located 
in newly designated SFHAs would need to be notified through systematic 
outreach efforts. Communities would likely need to modify their 
floodplain ordinances and policies to reflect the new SFHA. In short, 
the entire infrastructure of flood management and mitigation practice 
and procedures that is currently institutionalized around the 1-
percent-annual chance flood standard would need to change, all at a 
time when FEMA has admitted its lack of resources to provide current 
services.
    Furthermore, there is little convincing data to demonstrate that 
such a change is necessary or prudent. Indeed, even specially convened 
policy forums have failed to reach consensus on the issue. As a result, 
NAHB strongly cautions against making such sweeping changes to the NFIP 
and supports the House bill (H.R 1309), which maintains the 100-year 
level for both maps and the SFHAs.
    While requiring mandatory flood insurance purchase is one option, 
another option that has been considered is to require structures to 
meet Federal residential design, construction, and modification 
requirements. NAHB is strongly opposed to expanding such requirements 
to any new classes of structures, including those found behind flood 
protection structures and those affected by any programmatic change to 
the SFHA. Any such requirements would substantially increase the cost 
of home construction and severely impact housing affordability. For 
example, elevating structures could add $60,000 to $210,000 to the cost 
of a home. \2\ It is easy to see the tremendous impact that such 
reforms would have not only on Nation's home builders, but also on the 
Nation's home buyers and homeowners. NAHB urges Congress to soften the 
impact of any programmatic changes to the NFIP by ensuring that 
construction requirements remain tied to the 1-percent-annual chance 
flood standard.
---------------------------------------------------------------------------
     \2\ Federal Emergency Management Agency, ``Homeowner's Guide to 
Retrofitting'', (Dec. 2009) table 3-3--Using the dollar figures in 
table 3-3 multiplied by a 2,200 square foot median house size (see, 
Appendix).
---------------------------------------------------------------------------
    Finally, past bills would phase-in actuarial rates for 
nonresidential properties and nonprimary residences. NAHB's primary 
concern is that flood insurance remains available and affordable. FEMA 
reports that 78 percent of policyholders are already paying actuarial 
(risk-based) premiums; \3\ nevertheless, NAHB believes reforms aimed at 
reducing Federal subsidies for any subset of the remaining properties 
must ensure that overall affordability is not adversely affected. NAHB 
looks forward to working with the Committee to strike the proper 
balance between ensuring the long-term financial viability of the NFIP, 
and ensuring program affordability and equality for those who rely on 
this valuable Government insurance program.
---------------------------------------------------------------------------
     \3\ Federal Emergency Management Agency, ``Actuarial Rate Review: 
In Support of the October 1, 2010, Rate and Rule Changes'', (July 2010) 
p. 22 (see, Appendix).
---------------------------------------------------------------------------
    Thank you for this opportunity to share the views of the National 
Association of Home Builders on this important issue. We look forward 
to working with you and your colleagues as you contemplate changes to 
the National Flood Insurance Program to ensure that federally backed 
flood insurance remains available, affordable, and financially stable. 
We urge you to fully consider NAHB's positions on this issue and how 
this program enables the home building industry to deliver safe, 
decent, affordable housing to consumers. I look forward to any 
questions you or other Members of the Committee may have for me.

APPENDIX





























                PREPARED STATEMENT OF TRAVIS B. PLUNKETT

          Legislative Director, Consumer Federation of America
                             June 23, 2011

    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, I appreciate the invitation to appear before you today to 
discuss how to reform and reauthorize the National Flood Insurance 
Program (NFIP). My name is Travis Plunkett and I am the Legislative 
Director of the Consumer Federation of America (CFA). CFA is a 
nonprofit association of 300 organizations that has sought to advance 
the consumer interest through research, advocacy, and education since 
1968. I am here today because our Insurance Director, J. Robert Hunter, 
is, unfortunately, not available. Hunter was the Federal Insurance 
Administrator under Presidents Ford and Carter, where he helped create 
and run the NFIP in the 1970s. He also served as Texas Insurance 
Commissioner.
    As Hunter has testified before this Committee several times, the 
NFIP is in very deep trouble. \1\ CFA recommends a three-step process 
to fix long-term, structural flaws in the program that are harming 
consumers and taxpayers. First, use legislation reported out of the 
Committee on a bipartisan basis in 2007 as the basis for improving and 
extending the program for no more than 2 years beyond its expiration on 
September 30, 2011. Second, require the completion of a study within 18 
months that thoroughly examines more far-reaching measures to 
permanently address problems with the NFIP, including how to terminate 
the insurance aspects of the program if strong movement toward fiscal 
soundness cannot be made, or how to revamp it so that private insurers 
assume a significant amount of flood risk. Third, enact legislation 
that addresses these broader recommendations.
---------------------------------------------------------------------------
     \1\ J. Robert Hunter's Testimony on Flood Insurance before the 
Senate Banking Committee, October 2, 2007. http://www.consumerfed.org/
elements/www.consumerfed.org/file/finance/
Hunter%27s_Senate_Testimony_Flood_Insurance_10-2-07.pdf; Testimony of 
CFA's J. Robert Hunter before the Senate Banking Committee on Oversight 
of the National Flood Insurance Program, October 18, 2005. http://
www.consumerfed.org/elements/www.consumerfed.org/file/finance/
Flood_Insurance_Senate_oversight_testimony_101805.pdf
---------------------------------------------------------------------------
    The insurance component of the NFIP has proven unworkable because 
political pressure has kept flood insurance rates in many areas below 
the real cost of providing coverage. This has led to chronic taxpayer 
subsidies now totaling $18 billion. Much of this subsidy has led to 
risky coastal development, often by affluent builders and homeowners. 
The Federal Emergency Management Agency (FEMA) has been repeatedly 
criticized by the Government Accountability Office (GAO) \2\ and many 
others for grossly mismanaging the program, especially the process of 
updating flood insurance maps. This has misled many people into 
concluding that it was safe to buy homes or start businesses in 
dangerous floodplains. FEMA has also failed to fix the costly ``Write 
Your Own'' (WYO) program, which allows private insurers who assume no 
flood risk to reap excessive fees for servicing flood policies, 
especially at times of severe flooding. The WYO program eats up one-
third to two-thirds of the insufficient premium dollars and exposes 
taxpayers to unnecessary costs.
---------------------------------------------------------------------------
     \2\ ``FEMA: Action Needed to Improve Administration of the 
National Flood Insurance Program'', GAO-11-297, June 9, 2011; ``Flood 
Insurance: Public Policy Goals Provide a Framework for Reform'', GAO-
11-429T, Mar 11, 2011; ``GAO's 2011 High Risk Series: An Update'', GAO-
11-394T, Feb 17, 2011; ``FEMA Flood Maps: Some Standards and Processes 
in Place To Promote Map Accuracy and Outreach, But Opportunities Exist 
To Address Implementation Challenges'', GAO-11-17, Dec 2, 2010; 
``National Flood Insurance Program: Continued Actions Needed To Address 
Financial and Operational Issues'', GAO-10-1063T, Sep 22, 2010.
---------------------------------------------------------------------------
    As meaningful changes to the NFIP to deal with these systemic 
problems have not been made, the time has come for Congress to begin 
the process of evaluating how to revamp the program to make it fiscally 
sound or to end the insurance aspect of the program and allow more 
effective alternatives to take its place. Such an evaluation could 
examine a number of factors, including: how to encourage private 
insurers to take some, and ultimately all, of the existing flood risk 
covered by the program; how the insurance part of the program could be 
phased out to spur such private risk taking; how low and moderate-
income homeowners and renters could be protected from rate shock and 
provided with a targeted subsidy to help them afford private flood 
insurance while removing general subsidies for people who do not need 
them; and requirements that should be kept in place and improved 
regarding flood maps and construction in local communities.

I. The Consumer Interest in Fixing the NFIP
    In assessing the potential impact of changes to the NFIP on 
consumers, it is important to note that most policyholders receive few 
if any subsidies under the program. Some consumers receive intended 
subsidies, such as those who own structures built before the flood maps 
began being issued in 1974. However, many others benefit from 
unintended taxpayer subsidies that support unwise construction in the 
Nation's floodplains, which is exactly the opposite intent of the NFIP. 
The policyholders who benefit from these unintended and expensive 
subsidies include: the owners of structures in areas with flood maps 
that have not been updated; builders selling homes that appear to be 
safe from flood under outdated flood maps, but are not; and those who 
own ``grandfathered'' buildings in higher risk areas who FEMA still 
allows to pay older, lower rates, contradicting the program's intent.
    CFA is often asked how a consumer group can favor bringing the NFIP 
into actuarial soundness, which will likely raise rates for some 
consumers. CFA strongly believes that the program should set fair, 
actuarially sound rates that accurately reflect the potential loss 
risk. However, the worst thing Government can do is run an 
``insurance'' program that is not true insurance, but an unwise and 
untargeted subsidy program that misleads consumers into putting their 
homes, businesses, and lives at risk in areas that are dangerously 
flood-prone and that often unfairly subsidizes affluent individuals and 
contractors who do this building.
    Homeowners who buy new homes in areas that they think are safe from 
floods are harmed when old maps underestimate risk. Some are misled 
into believing their homes are safe from floods when they build or buy 
new homes built to the old map's 100-year flood estimates that are, in 
fact, far below the real 100-year elevation. These people and their 
families are at risk of being killed or injured if a storm hits, or of 
having their homes or treasured possessions destroyed. Paying a little 
more and being truly aware of the risk is a blessing, not a curse, for 
consumers.
    Other homeowners will look at these inaccurate flood maps and 
think, ``I don't need insurance, I am way outside the risk area.'' But 
they are really well inside the area of high risk when the maps are old 
and development, erosion, climate change, and other impacts have caused 
the 100-year flood to rise significantly, as those living on the Gulf 
found out the hard way during Hurricane Katrina. CFA's study of Hancock 
County Mississippi flood maps after Hurricane Katrina hit found that 
the average map (of 76 in the county) was 20 years old and 10 feet too 
low in measuring the 100-year flood elevation. \3\ Many home and 
business owners were misled into building unwisely, or not buying 
needed insurance, in the county where Hurricane Katrina hit, exposing 
the deeply flawed program's weaknesses in a most tragic way.
---------------------------------------------------------------------------
     \3\ ``An Examination of the National Flood Insurance Program'', 
testimony of J. Robert Hunter, Director of Insurance, CFA before the 
Committee on Banking, Housing, and Urban Affairs of the U. S. Senate, 
October 2, 2007. http://www.consumerfed.org/elements/
www.consumerfed.org/file/finance/
Hunter%27s_Senate_Testimony_Flood_Insurance_10-2-07.pdf
---------------------------------------------------------------------------
    The current patchwork of general subsidies that drain the program 
of resources should be phased out. Targeted subsidies should be used to 
help low- and moderate-income people in flood-prone areas who cannot 
afford flood insurance. It is improper for the Government to require 
the purchase of insurance, as the NFIP does, and not help those who 
cannot afford it. It is also improper to give broad, hidden subsidies 
to consumers and call it ``insurance.'' Targeted subsidies for those 
who are most in need would cost far less than the current mix of 
general subsidies, some of which appear not to have been authorized by 
Congress.

II. Signs That the NFIP Is in Serious Trouble
    The NFIP was intended to end unwise construction in high-risk 
floodplains throughout the country, while providing affordable coverage 
for people who really needed it. In return for taxpayer funding for the 
development of flood risk maps and the provision of subsidized 
insurance for older buildings, new construction was to be done wisely, 
and full ``actuarial'' rates were to be paid for flood coverage. Over 
time, the subsidies would be phased out and the program would reach 
complete actuarial soundness.
    The NFIP was brilliantly designed, but it has failed to live up to 
its promise. Politics and inept administration have made it a sort of 
Frankenstein monster, encouraging and even subsidizing unwise 
construction. Millions of consumers have also been misled into thinking 
their homes or businesses were not in harm's way, because FEMA has 
completely mismanaged the process of updating flood insurance maps.
    A. The NFIP is bankrupt, requiring billions of dollars in taxpayer 
support. \4\ Such a deficit would be acceptable for a short time if the 
program was doing what Congress intended, ending unwise construction in 
the Nation's floodplains and requiring inhabitants of floodplains to 
bear their own risk through actuarially sound insurance premiums. 
However, the NFIP is doing the opposite of what Congress intended. 
These unwise subsidies will likely persist and worsen until the program 
is dramatically restructured or ended.
---------------------------------------------------------------------------
     \4\ The current deficit is estimated at $18 billion by the GAO. 
GAO, ``National Flood Insurance Program: Continued Actions Needed To 
Address Financial and Operational Issues'', GAO-10-1063T, Sep 22, 2010. 
http://www.gao.gov/new.items/d101063t.pdf 
---------------------------------------------------------------------------
    B. This taxpayer subsidy is not just due to catastrophe losses, but 
is routine. FEMA Administrator Craig Fugate testified before this 
Committee earlier this month that it is collecting $3 billion a year in 
premiums, but said that this amount would be $4.5 billion if coverage 
rates were actuarially sound. This represents an astonishing 50-percent 
shortfall in the amount collected. \5\ If correct, this estimate means 
that, over the next decade, the current $18 billion NFIP deficit will 
almost double. From the beginning of the program until late 2009, the 
Congressional Budget Office (CBO) determined that the average annual 
taxpayer subsidy has been $1.3 billion for the known/intended portion 
of the subsidy involving structures that existed before flood maps were 
developed. What is more shocking is that the NFIP's actuarially rated 
coverage, which is supposedly self-supporting, has been priced 5 
percent too low if paid catastrophic claims are not considered and an 
astonishing 100 percent too low if they are included. \6\ Moreover, the 
GAO reported this month that the number of policies receiving 
subsidized rates has steadily increased recently and will likely 
continue to grow if changes to the program are not made. \7\
---------------------------------------------------------------------------
     \5\ Testimony of William Craig Fugate, FEMA Administrator, before 
the Committee on Banking, Housing, and Urban Affairs of the U.S. 
Senate, Hearing on Reauthorization of the National Flood Insurance 
Program, June 9, 2011. http://banking.senate.gov/public/
index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=a2c7e4b9-5b4d-4635-
befe-8ce662da1774&Witness_ID=bdf843f6-112e-4009-80bb-2cc0f50d92c8 
    \6\ Ibid.
     \7\ GAO, ``FEMA: Action Needed To Improve Administration of the 
National Flood Insurance Program'', GAO-11-297, June 9, 2011, p. 52. 
http://www.gao.gov/products/GAO-11-297
---------------------------------------------------------------------------
    C. NFIP subsidies are hidden. FEMA administratively 
``grandfathers'' rates from old maps when new maps are developed, which 
means that there is a hidden subsidy for structures covered by the NFIP 
from the old map. (FEMA allows new rates if the price drops but freezes 
the rate if the risk increases, as is usually the case.) This subsidy, 
which is not stipulated in law, means that the number of structures 
receiving subsidies will grow continuously. Absent a huge infusion of 
funds from Congress, the NFIP has no chance of paying back the borrowed 
funds or of building adequate reserves for future catastrophic 
flooding. Another hidden subsidy stems from old maps, which almost 
always show flood elevations that are too low because construction 
raises elevations over time. (See discussion below.)
    D. GAO found that the NFIP is a ``high-risk'' program for the 
American people. GAO placed the program on the high-risk list in 2006 
``because of the potential for the program to incur billions of dollars 
in losses and because the program faces a number of financial and 
management problems.'' \8\ The GAO findings included: the NFIP could 
not generate enough revenue to repay the billions it had borrowed from 
taxpayers; the program would not be able to cover catastrophic claims 
that it paid in the future; oversight of the WYO program was weak, with 
potential for overpayment and inefficiency; FEMA does not study the 
program's expenses to see if WYO insurers are overpaid; the NFIP is 
actuarially unsound; maps are out of date; FEMA does not understand the 
long-term impact of planned and ongoing development on projected damage 
estimates; NFIP debt is likely to grow; and FEMA has not implemented 
its own financial control plan. \9\
---------------------------------------------------------------------------
     \8\ See, GAO's listing of the NFIP problems at: http:www.gao.gov/
highrisk/risks/insurance/national_flood_insurance.php
     \9\ Ibid.
---------------------------------------------------------------------------
    E. FEMA has created a Write-Your-Own program that overcharges 
taxpayers and policyholders and is riddled with conflicts-of-interest. 
Considerable evidence has demonstrated that private insurers in this 
program overcharge for administrative and claims settlement duties \10\ 
and that FEMA has repeatedly mismanaged this aspect of the program. 
\11\ Additionally, FEMA refuses to broadly inform policyholders that 
they have an option to directly purchase flood insurance and 
potentially save taxpayers a considerable amount of money. \12\ These 
WYO insurers also have a serious conflict-of-interest when they settle 
hurricane claims for the program, since they make more money if they 
determine that losses were caused by flood damage rather than wind 
damage. This is because taxpayers pay for 100 percent of flood claims 
under the NFIP, while WYO insurers must pay 100 percent of legitimate 
wind claims. Many Gulf Coast consumers are still in court dealing with 
claims that they believe should have been paid under their wind 
coverage.
---------------------------------------------------------------------------
     \10\ GAO, ``Flood Insurance: Opportunities Exist To Improve 
Oversight of the WYO Program'', GAO-09-455, August 2009. http://
www.gao.gov/products/GAO-09-455
     \11\ GAO, ``FEMA: Action Needed To Improve Administration of the 
National Flood Insurance Program'', GAO-11-297, June 9, 2011, p. 26. 
http://www.gao.gov/products/GAO-11-297
     \12\ ``Resources: Frequently Asked Questions'', FEMA, May 26, 
2011. http://www.floodsmart.gov/floodsmart/pages/faqs/
faqs_considering.jsp
---------------------------------------------------------------------------
    F. FEMA is far behind in keeping flood maps up-to-date. ``FEMA is 
not reviewing its flood maps every 5 years as required by law--older 
maps do not reflect significant changes in local conditions that tend 
to increase the risk of flooding.'' \13\ Coastal erosion, climate 
change, urbanization, loss of wetlands, and other changes tend to make 
flooding worse. Old maps encourage construction in high-risk areas and 
subsidize such construction by charging actuarial rates with a hidden 
subsidy, which is the difference between what the old map would require 
to be charged and what the charges would be if the map were current. 
According to the GAO, 50 percent of the maps are over 15 years old and 
another 8 percent are between 10 and 15 years old. \14\
---------------------------------------------------------------------------
     \13\ ``The National Flood Insurance Program: Factors Affecting 
Actuarial Soundness'', Congressional Budget Office, November 2009. 
http://www.cbo.gov/doc.cfm?index=10620
     \14\ GAO, ``Flood Insurance: FEMA's Rate Setting Process Warrants 
Attention'', GAO-09-12, October 31, 2008. http://www.gao.gov/products/
GAO-09-12
---------------------------------------------------------------------------
    G. FEMA does not take into account development that is already 
planned and in the process of being completed when a map is published. 
By the time a map is printed, it is out of date. FEMA's own research 
shows the problem. In a test of what planned development would do to 
projected damages in the pricing model they use, FEMA funded a study 
that showed that it would raise projected damages by 20 percent in Fort 
Collins, CO, by 100 percent in Du Page County, IL, and Macklenberg, NC, 
and by a whopping 1,200 percent in Harris County, TX. \15\ Ignoring 
what is planned means that a greater subsidy is built into the rate 
development process FEMA uses.
---------------------------------------------------------------------------
     \15\ ``Managing Future Development Conditions in the National 
Flood Insurance Program'', Blais, et al., October 2006.
---------------------------------------------------------------------------
    H. FEMA is running into opposition as it updates its maps because 
communities are balking at adopting the much higher 100-year storm 
elevations now required. Big increases in elevations are often needed, 
since FEMA allowed the Flood Insurance Rate Maps (FIRMs) to become so 
antiquated. FEMA has been too willing to compromise under political 
pressure from affected communities regarding the restrictions on 
development that are required. As a result, FIRMs are not being 
developed that will result in actuarially sound rates and properly 
elevated homes and businesses, and include all at-risk homes within the 
designated floodplains.
    I. FEMA is not ensuring that communities live up to their land-use 
commitments, the quid pro quo that Congress mandated for the creation 
of the entire program. FEMA's own studies show the problem. It has a 
goal of visiting communities once every 5 years to promote, monitor, 
and enforce compliance. The real rate is only once every 10 years, 
however, ``and only half of those contacts include a community visit. 
This is not a sufficient level of FEMA or State presence to maintain a 
level of monitoring necessary to avert compliance problems.'' \16\
---------------------------------------------------------------------------
     \16\ ``An Evaluation of Compliance With the NFIP Part A: Achieving 
Community Compliance'', Monday, et al., a study for FEMA, 2006.
---------------------------------------------------------------------------
    Worse, even if problems of compliance are found, FEMA is timid. 
FEMA uses probation and suspension, the two sanctions they have to 
assure compliance, ``only sparingly.'' As of June 23, 2010, less than 1 
percent of the communities participating in the NFIP (212 out of 
21,153) have been suspended from participating in the NFIP for 
noncompliance with the maps. Virtually all of the suspended communities 
appear to be small, rural towns. One study of the NFIP found that the 
threat of penalty is

        used so infrequently that there has developed a widespread 
        perception that it is unlikely to be imposed in any given 
        situation. This perception deprives the threat of its 
        credibility and thus keeps recalcitrant communities 
        unresponsive. Further, FEMA regional office and State staff 
        themselves have grown to believe that they will never be able 
        to succeed in having probation imposed on a noncompliant 
        community, and their frustration is detrimental to an effective 
        community compliance initiative. FEMA should make an effort to 
        act with deliberation on existing or future recommendations for 
        probation action, with an eye toward reestablishing the 
        credibility of this sanction. \17\ (Emphasis in original.)
---------------------------------------------------------------------------
     \17\ Ibid.

    This study also recommended that FEMA should undertake an 
investigation of State compliance with NFIP criteria, since FEMA 
regional staff and State officials do not ``know whether the 
development activities of State agencies (are) in compliance with NFIP 
regulations.'' Finally, these 2006 FEMA studies found noncompliance 
with record keeping and construction requirements in the Community 
Rating System (CRS) communities that were getting a rate break for 
complying well with such requirements. This ``affects the viability of 
the flood insurance fund even more than noncompliance in other 
communities.'' \18\
---------------------------------------------------------------------------
     \18\ Ibid.
---------------------------------------------------------------------------
    Anyone who walks barrier islands on the Nation's eastern and Gulf 
Coasts and looks at recent construction along the beaches will know 
that the NFIP has failed to stop unwise construction at high-risk 
locations. It does not take an engineer to find relatively new 
structures that are at high risk and are not safe from storm surge. For 
years, CFA has been urging FEMA to create an enforcement program 
administered by an independent party, like the GAO, that would conduct 
spot checks to see if local building enforcement is occurring, even 
regarding the current inadequate maps, but FEMA has not done so and 
Congress has not required it.
    J. Instead of challenging communities that refuse to make land-use 
improvements as required by updated rate maps, FEMA offered ``preferred 
risk'' policies that under-price insurance. As detailed by the GAO in 
their most recent critical report of FEMA's management of the NFIP, 
FEMA recently created a new coverage option called the Preferred Risk 
Policy (PRP) Eligibility Extension that lowers rates for up to 2 years 
for policies that would have converted to higher premium costs upon 
renewal. \19\ This is an unauthorized give away of taxpayer money to 
subsidize high-risk structures for no reason other than the fact that 
new maps had raised required building elevations. Giving high risk 
people below-cost rates for 2 years is an unjustifiable increase in 
taxpayer subsidies. If a subsidy is needed, it should be targeted to 
policyholders who have low or moderate incomes. General subsidies 
should be ended.
---------------------------------------------------------------------------
     \19\ GAO, ``FEMA: Action Needed to Improve Administration of the 
National Flood Insurance Program'', GAO-11-297, June 9, 2011, p. 53. 
http://www.gao.gov/products/GAO-11-297 
---------------------------------------------------------------------------
    K. FEMA has mismanaged the NFIP's policy and claims management 
system at considerable cost to taxpayers. The GAO found that FEMA spent 
7 years and $40 million dollars to create a new policy and claims 
management system called ``NextGen'' that it canceled in November of 
2009 because it was ineffectual. ``As a result, the agency continues to 
rely on an ineffective and inefficient 30-year old system.'' \20\
---------------------------------------------------------------------------
     \20\ GAO, ``FEMA: Action Needed to Improve Administration of the 
National Flood Insurance Program'', GAO-11-297, June 9, 2011, p. 57. 
http://www.gao.gov/products/GAO-11-297
---------------------------------------------------------------------------
    L. State Farm Mutual Insurance Company stopped servicing flood 
insurance policies for the Federal Government last fall, causing 
829,273 NFIP policyholders to scramble for coverage. State Farm blames 
Congress and FEMA for poor administration of the program. The move is 
also at least equally likely to be related to State Farm's long-term 
strategy to significantly reduce its home insurance risk along the 
Nation's coasts. FEMA's spokesperson Rachel Racusen says that these 
policyholders will be just fine because they will be able to continue 
to use State Farm's agents ``or one of the other 90 insurers that sell 
flood insurance through the NFIP.'' \21\ However, this approach will 
likely cost taxpayers millions of dollars and result in poor customer 
service. It would be a mistake to allow ``captive'' State Farm agents 
to work for another WYO carrier because these agents are only 
responsible to State Farm. They are not prepared, trained, equipped or 
otherwise ready to deal with another company. Only so-called 
``independent'' agents have such experience. Additionally, WYO 
companies cost about twice as much administratively as FEMA's 
contractor, which handles the direct program of flood insurance for 
FEMA. Removing the agent and using the direct contractor would reduce 
overhead and profit-costs for the State Farm policies by about two-
thirds, saving millions of taxpayer dollars.
---------------------------------------------------------------------------
     \21\ ``State Farm Won't Handle Claims for Flood Insurance 
Program'', National Underwriter, June 7, 2010.
---------------------------------------------------------------------------
    M. If FEMA were to try to make the program more actuarially sound, 
existing law limits that possibility. Currently, rates cannot rise more 
than 10 percent a year. Limits on 1-year rate increases are necessary 
because consumers need time to adjust to insurance price increases but 
10 percent is too low. The House proposal to raise the allowable rate 
increase to 20 percent makes more sense. \22\ However, it is important 
to note that this limit is not related to income or any measure of the 
ability of homeowners to pay increased rates. This means that a 
substantial portion of the NFIP subsidy will likely continue to be 
provided to affluent homeowners living on barrier islands, or near 
lakes and other waterways.
---------------------------------------------------------------------------
     \22\ H.R. 1309, Flood Insurance Reform Act of 2011, Section 5(a).
---------------------------------------------------------------------------
    N. Congress has allowed the NFIP to lapse several times recently, 
creating uncertainty and instability in the program. As an insurance 
executive recently put it, ``this is now the fourth time Congress will 
have let this program lapse, and it's beginning to feel like 
`Groundhog's Day,' '' said Blain Rethmeier, a spokesman for the 
American Insurance Association. \23\
---------------------------------------------------------------------------
     \23\ ``NFIP Lapses Again Due to Senate Inaction'', National 
Underwriter, May 28, 2010.
---------------------------------------------------------------------------
    O. Until now, Congress has been unwilling to stop the trend toward 
making NFIP more of a giveaway program to some consumers and businesses 
than an insurance program with sound risk management. Overall, Congress 
has not moved fast enough to lift woefully inadequate limits on flood 
insurance rates to allow the program to move to actuarial soundness, 
which is undermining hope for a self-sustaining NFIP anytime in the 
near future. \24\
---------------------------------------------------------------------------
     \24\ NFIP is an insurance program and is not designed to be a 
charity program. The current subsidies are disbursed indiscriminately, 
with no test of the ability of the subsidy recipient to pay the real 
cost of risk of the structure he or she owns.
---------------------------------------------------------------------------
FEMA's Response to Systemic Problems at the NFIP
    In his testimony before the Committee on June 9th, FEMA 
Administrator Craig Fugate acknowledged many of the systemic problems 
with the NFIP that I have cited, but offered little information and no 
details regarding what the agency will do to address long-standing and 
well-documented concerns about its management of the NFIP. It is of 
particular concern to CFA that he provide no information about how FEMA 
intends to cut the excessive costs of the WYO program or overcome the 
wind/water conflicts-of-interest that exist for insurers who 
participate in the program. I understand that the agency is in the 
middle of a lengthy effort to review proposals for NFIP reform. 
However, after years of concern about the direction of the NFIP from 
Congress, the GAO and outside organizations, the Senate deserves a more 
specific, urgent reform plan from FEMA.

III. The Future of the NFIP
    As mentioned above, CFA recommends that Congress evaluate far-
reaching, longer term measures that would either permanently fix fatal 
flaws in the NFIP, such as ideas for getting private insurers to assume 
substantial flood risk, or that would phase out the program in a 
responsible manner and create effective, affordable alternatives. While 
this research is being done, we recommend the adoption of legislation 
that would take steps to bring the program back towards solvency and 
that would extend it for no more than 2 years.
    A. Congress should study ending the NFIP to correct fatal flaws. If 
Congress were to decide to end the systemic problems with the NFIP 
described above, the only responsible way to do so would be to make 
sure that the program becomes fully actuarially sound. However, to 
date, strong political pressure on Congress and from Congress, as well 
as from State and local leaders, has prevented the program from 
becoming actuarially sound. It is likely that developers will continue 
to find loopholes to let them build unsafe structures, politicians will 
resist community suspension, and higher (but proper) rates will not be 
allowed.
    The only counter-weight to this one-way pressure to soften the 
program's impact on communities, developers and consumers at taxpayer 
expense would be to encourage private insurers to get more involved in 
at least some of the risk-taking aspects of the program. If the private 
sector has some ``skin in the game,'' then there would be pressure 
brought to bear by insurers to make sure maps are accurate and 
enforced, updated actuarial rates were used and that everyone was doing 
all things necessary to make the program effective and to protect the 
taxpayer (and the insurer's) bottom line. Insurers would resist 
pressure from politicians and developers to lower rates below cost. 
Politicians would resist pressure from insurers to have rates that were 
excessive. These checks and balances would help keep flood insurance 
prices reasonable but adequate.
    However, many private insurers will not jump at the opportunity to 
underwrite more flood risk. Many are in the midst of significantly 
cutting back on the coverage they offer on the coasts because of wind 
risk. As private sector participation in the risk-taking aspect of NFIP 
is questionable, it is necessary to study the possibility of protecting 
taxpayers by ending the insurance component of the program in a 
responsible way that protects vulnerable consumers.
    The point of the study would be to evaluate potential outcomes if 
the program is ended and to develop a transition plan that allows all 
affected parties to prepare for the consequences of such an event. The 
transition plan will be complex and must be done with great concern for 
the current inhabitants of floodplains, particularly NFIP 
policyholders. CFA recommends that Congress task the GAO and FEMA with 
evaluating the following specific topics when making recommendations 
about how to end the NFIP, as part of the legislation to extend the 
NFIP beyond September 30, 2011.
    1. Ending only the insurance part of the program. (As stated below, 
accurate and up-to-date FIRM information on risk is vital if any 
private sector insurance underwriting is to become viable.) Ultimately, 
after a long transition where the Federal Government participates in 
risk taking either directly or through reinsurance, a private market 
could develop if there is accurate and current risk information and 
safe construction in the floodplains.
    2. Providing a long transition period to allow all parties time to 
adjust to the lack of a Federal insurance program. Thirty years, for 
example, would provide time for the Government to gradually phase out 
its subsidies, for insurers to determine how to underwrite flood risk 
and for consumers to find alternatives to the NFIP.
    3. Phasing out the provision of insurance over this period. A 
likely first step in the phase-out process would be for the Federal 
Government to stop writing new business. Even this measure would have 
to be done in a way that allowed safely constructed new homes to 
receive mortgages through the provision of clear, accurate information 
on flood risk to lenders.
    4. Protecting LMI homeowners and renters. Congress could likely end 
the NFIP over a 5 or 10-year period if not for the need to protect LMI 
consumers from rate shock. The study should consider providing an 
ongoing subsidy to LMI homeowners during the transition and even after 
some degree of private insurance enters the market.
    5. Requirements that should be placed on communities in floodplains 
and on FEMA regarding flood maps. Keeping the mapping and community 
participation requirements in current law would provide private 
insurers with sufficient information to begin to take risk. This 
knowledge base is vital to encouraging a private response. Insurers 
will need information to help them write coverage for structures at 
actuarial rates and to have an ability to determine which communities 
are requiring safe building in floodplains to help them focus their 
insurance capacity. When HUD did its 1966 Feasibility Study into why 
flood insurance was not privately available at the time, it found that 
the factors were:

    Lack of any way to accurately determine pricing (i.e., no 
        mapping of the flood risk);

    Consumers knew more about the risk of flood than the 
        insurers, which meant that there would be adverse selection by 
        people against any price insurers set;

    If prices were raised, only people at higher and higher 
        risk would buy the insurance;

    No one was controlling new construction, so changes up or 
        down stream could make prices for insurance too low;

    Lenders did not require flood insurance.

    Unlike 1966, we now have the ability to solve many of these old 
insurance concerns. Maps, if they are kept up-to-date, can calculate 
rates that are actuarially sound for every structure. Adverse selection 
is minimized since lenders in the high-risk floodplains now require all 
building owners to get flood insurance. Floodplain management is in 
place as a condition of flood insurance availability in a community.
    6. Encouraging private insurers to take some, and ultimately all, 
of the existing flood risk. This could be done either on a property-by-
property basis or with some overall sharing of risk. The sharing might 
start with the Government taking 95 percent of the risk and setting 
actuarial rates that would have to be paid. Insurers would initially 
assume 5 percent of the risk and set rates for those structures they 
would underwrite. FEMA could advertise which insurers were selling 
flood insurance in its ``Flood Smart'' ad program. Over time, the 
Government's percentage of the risk would decline. In order to 
incentivize insurers to participate, the Government could develop a 
stop-loss reinsurance program, which caps the private insurer annual 
exposure to loss.
    7. Mandating the purchase of flood coverage. If flood insurance is 
unavailable, there should obviously be no requirement to purchase it. 
On the other hand, if the private market does develop, a purchase 
requirement might allow insurers to effectively spread their risk. This 
would further increase their ability to soundly underwrite flood 
coverage. Whether and how to mandate purchase during the transition is 
a key question the study must consider.
    B. The Senate Flood Insurance Reform and Modernization Act of 2007 
(S. 2284) is the best starting point for making much-needed incremental 
changes to the NFIP. S. 2284 takes several very important steps to 
protect taxpayers, increase the market penetration of flood insurance, 
and eliminate unjustified subsidies in the flood program. In 
particular, the bill would phase out subsidies for vacation and second 
homes, properties built before the availability of Flood Insurance Rate 
Maps (FIRMs), and structures that have experienced severe repetitive 
losses. It would also require the NFIP to build reserves over time, add 
a 500-year floodplain to the flood maps, and require the evaluation of 
flood risk behind dams and levees. It would also take the important 
step of creating a flood insurance advocate's office to assist those 
with flood coverage in resolving problems with the NFIP and add 
deductibles to NFIP policies.
    CFA recommends that the Committee add provisions to this bill that 
would move the NFIP even more quickly towards solvency, so that it will 
become financially viable over time and be there for homeowners who 
need it. The bill should require a study of NFIP to determine the steps 
needed to make it fully self-sufficient, including the review detailed 
above on how to increase private insurer underwriting of flood risk or 
to responsibly end the program should self-sufficiency be unattainable. 
Just studying these possibilities will demonstrate that Congress is 
serious about making the program viable for the long term. The bill 
should also increase the cap on allowable rate increases per year from 
15 to at least 20 percent. Finally, in order to give Congress a 
meaningful opportunity to make needed, more far-reaching changes to the 
program that result from required studies, the bill should only renew 
the NFIP for 2 years, instead of five.
    C. House legislation to renew the NFIP (H.R. 1309) has 
significantly improved over previous House bills, but still contains 
some damaging provisions. (This bill has been marked-up this year by 
the House Financial Services Committee and is currently on the House 
Floor.) On the positive side, the bill allows rates to rise by 20 
percent annually, rather than the 10 percent cap in the current 
program. It adds mandatory deductibles to NFIP policies. It phases in 
full actuarial rates a bit more slowly than we would like to see (at 20 
percent of the required increase per year over 5 years) for commercial 
properties, second and recently purchased homes, existing 
policyholders, severely damaged homes, and repetitive loss homes. No 
subsidy is allowed on lapsed policies. It also protects those who are 
required to purchase high-priced ``forced-placed'' coverage by 
requiring repayment to the borrower for any coverage that is paid for 
under a forced-placed policy in force at the same time an NFIP policy 
is in place.
    The bill also requires some important studies within 18 months of 
the effective date, including both a FEMA and GAO report on how to 
privatize the program. FEMA is also required to report annually on its 
ability to pay claims with and without authorized borrowing authority. 
It must study community-based flood insurance and adding building code 
requirements to floodplain management standards. Finally, the National 
Academy of Sciences must evaluate how to do a ``graduated risk'' 
assessment of flood risk behind levees.
    The bill also contains several negative provisions. FEMA is 
permitted to suspend flood insurance purchase requirements for 1 to 2 
years for several questionable reasons: (1) if an area has no history 
of flooding, even though the science underlying the new maps that show 
increased flood risk is sound; (2) if a community says it is upgrading 
a levee or dam that has been decertified because it can't provide 100-
year flood protection, even when improvement efforts are not complete; 
or (3) when someone appeals a requirement to purchase insurance.
    The bill also contains several provisions that will increase the 
cost of the program and taxpayer exposure. It allows maximum policy 
coverage to be indexed according to the cost-of-living. Coverage for 
loss-of-use is also added. Maximum coverage benefits will be indexed. 
It also requires policy rates in newly mapped areas to be significantly 
less than what is actuarially required for the first year of coverage.
    The bill authorizes FEMA to purchase private reinsurance, which is 
silly and unnecessary, given the financial ability of the Federal 
Government to cover losses. It is analogous to requiring a very large 
insurance company, such as State Farm or Lloyd's of London, to seek 
reinsurance from a very small, single-State reinsurer. Moreover, when a 
big insured event occurs, reinsurers often suspend coverage or 
overreact by making rates too high, \25\ which will further increase 
Federal costs.
---------------------------------------------------------------------------
     \25\ As a leading reinsurance executive told Hunter, reinsurers 
often get ``too greedy'' when a big event opens the door for price 
gouging.
---------------------------------------------------------------------------
    The bill also increases the chances that taxpayers will be 
overcharged by the WYO program by requiring that those who are insured 
through the more-efficient and less-costly direct program be notified 
that they should consider finding a WYO company. Since WYO program 
costs are significantly higher than those of the direct program, this 
requirement encourages policyholders to make a choice that will cost 
taxpayers more money. Even worse, the bill requires FEMA to study how 
to keep participation in the direct program under 10 percent of the 
NFIP portfolio, even if WYO costs continue to be too high.
    Finally, the bill renews the NFIP for 5 years, instead of two. As 
mentioned above, this is too long to renew a program that needs far-
reaching changes, which will be recommended in the bill's mandated 
studies.
    D. The COASTAL Act of 2011 is well-intended, but unnecessarily 
complex and probably unworkable under FEMA's management. The Consumer 
Option for an Alternative System To Allocate Losses Act of 2011 (S. 
1091) was proposed this year by Senator Wicker. This bill does more to 
ease the NFIP shortfall than the current program, with an allowable 20 
percent annual cap on rate increases and mandated full actuarial rates 
on new and lapsed policies. It also does not raise program costs by 
increasing coverage limits or adding new loss-of-use coverage. It 
requires State-charted banks to mandate the purchase of flood insurance 
when underwriting mortgage loans, but insurers that do mortgage lending 
do not have to meet this requirement. However, the bill does not 
require study of how to get private sector involvement or how to cut 
the systemic program deficits, both of which are very important to 
bringing the program back into solvency.
    As with the 2007 Senate bill and the House bill, this legislation 
extends the NFIP for 5 years without making broad reforms. This is too 
long for Congress to wait to take the further steps recommended by the 
studies required in final legislation.
    The centerpiece of the bill is a system to handle wind and water 
claims that is unnecessarily complex and probably unworkable. It 
requires FEMA to come up with models to calculate wind speed and storm 
surge whenever a named storm hits. These models must be accurate to 90 
percent, but it is quite unclear exactly what such a 90 percent 
standard requires. (As written, the requirement is statistically 
meaningless.) The bill requires a massive effort to develop these 
models involving data collection from academics, private persons, State 
and Federal agencies, and so on. It would even require storm 
``sensors'' to be put along the coasts.
    When adjusters find a loss to be ``indeterminate,'' because they 
are unable to tell which losses are due to wind damage and which are 
from water damage, the as-yet-unavailable data from the massive 
collection effort will be plugged into a yet-to-be-determined formula 
the Administrator of FEMA will create. The formula would include the 
property's FEMA Flood Elevation Certificate and other information the 
Administrator would like to use. Taken together, these very complex 
requirements seem quite inappropriate for an agency that has had 
serious, well-documented trouble managing relatively simple NFIP 
requirements, such as the WYO program and the mapping of floodplains, 
where the science is mature.
    Wind and flood insurers are required to use this method to 
distribute losses. Other insurers ``may'' use this process if the 
policyholder agrees to it at the time of policy sale. There is no 
judicial review of this formula, or the data that is used to create it. 
However, there is an appeal to a five-member Arbitration Panel. Prior 
to the allocation, insurers can do a ``good faith'' allocation and true 
it up when the formula results are known. All this relates only to 
``indeterminate'' claims. Other claims will rely on good faith between 
wind insurers and FEMA. Disputes here are also to be sent to the 
Arbitration Panel.
    The method proposed in this legislation for accurately assessing 
wind versus water claims is unnecessarily complex and costly. A look at 
what private insurers do when faced with apportioning costs from losses 
is instructive. Large property/casualty insurers do not bother to 
balance out subrogations they have between themselves after auto 
accidents since there are so many claims and they have learned that 
doing a lot of research on each claim is not required, since the costs 
between insurers even out over time. Therefore, it makes no sense with 
flood insurance to try to be so complex. The law of averages will lead 
to a fair division between wind and water claims over time. All that is 
needed are three things: a Federal claims adjusting contractor to do 
all of the adjusting of flood claims; an occasional GAO audit of the 
WYO carriers to make sure their apportionments are not biased on the 
wind claims; and for FEMA to disallow insurer use of anticoncurrent 
causation clauses, which allow them to refuse to pay wind damage if 
flood damage occurred to the insured property at the same time. If 
apportionment bias is occurring, FEMA must then initiate enforcement 
actions against WYO companies by removing them from the program.
    After this monumental effort, the Wicker bill allows the 
policyholder and insurer to agree to opt-out of this approach. It also 
allows an insurer to opt-in so that every one of its claims from a 
named storm will be done using this method. (It seems unlikely that 
many insurers would want to opt-in, however.) In sum, the goal of the 
legislation is laudable, but the methods it requires will create a lot 
of bureaucratic difficulty and would likely fail.
    Thank you for the opportunity to offer CFA's thoughts on reform and 
reauthorization of the NFIP.
                                 ______
                                 
               PREPARED STATEMENT OF SCOTT H. RICHARDSON

 Policy Advisor, The Heartland Institute, and Partner, Richardson and 
                           Ritchie Consulting
                             June 23, 2011

    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, I am here today to address an issue of great concern to the 
National Flood Insurance Program's future and to explain how a proposal 
that has been brought before your Committee by Senator Roger Wicker 
presents what I believe is a solution to a problem that has long 
plagued coastal communities.
    As a former insurance agent, member of the South Carolina State 
Legislature, and Director of Insurance of the State of South Carolina, 
I have seen the difficulties that coastal communities, their residents, 
insurers, courts, and insurance regulators--in short, just about 
everyone involved in coastal insurance--face in the course of dealing 
with severe windstorms. I speak, of course, of the problem of 
indeterminate loss. The problem of what is to be done when a storm is 
so severe that it leaves nothing in place to determine whether wind or 
water caused damage.
    This is a particular problem because it undermines the insurance 
system that undergirds our entire modern economy by allowing for 
certainty. Insurance allows people to build skyscrapers, develop 
miracle drugs, advance technology, drive automobiles, and operate 
businesses with the knowledge that the risks implicit in doing these 
things will be managed in an effective manner. Our current system for 
managing the risk of severe windstorms does not create that certainty. 
Indeed, it creates uncertainty. It is broken and it needs to be fixed.
    In this testimony, I aim to outline the problem of indeterminate 
loss, describe how the current flood/wind loss allocation system fails 
many communities, outline why other solutions are not practical, 
describe how a Standardized Loss Allocation Model would work, go over 
several public policy concerns involved in implementing a Standardized 
Loss Allocation system, and describe how I believe it will solve the 
problem of indeterminate loss.

The Problem of Indeterminate Loss Resulting From Windstorms
    Hurricanes rank among nature's most destructive phenomena. High 
winds, wind-driven debris, and the storm surges that follow hurricane 
landfall can do enormous damage to everything in their paths. In many 
cases, over areas of several miles, all above-ground traces of 
buildings can be torn apart, leaving nothing but foundation slabs in 
place. \1\ I have seen total losses myself: what remains after a 
particularly severe storm resembles a moonscape.
---------------------------------------------------------------------------
     \1\ A good example of the total destruction that can result from a 
hurricane and the damage it causes can be found at Dan Swenson and Bob 
Marshall, ``Flash Flood: Hurricane Katrina's Inundation of New Orleans, 
August 29, 2005'', New Orleans Times Picayune, September 13, 2005, 
http://www.nola.com/katrina/graphics/flashflood.swf. See also ``Total 
Devastation from Hurricane Katrina'', http://
www.katrinadestruction.com/images/v/hurricane+katrina+photos/
Img_19kd45-slidell-katrina-lr2.html.
---------------------------------------------------------------------------
    Because they combine high winds with storm surge, hurricanes cause 
both wind and water-related losses in very close proximity to one 
another. When nothing above remains of a structure and both wind and 
storm surge were sufficient to cause its total destruction, claims 
adjusters, consumers, and insurers currently have no practical way to 
determine how to distribute losses between NFIP, which provides nearly 
all flood coverage, and private insurers or State residual wind 
insurance markets, who cover wind and related damage. When a home is 
totally destroyed, there's no simple way to resolve disputes over who 
should pay for losses. When this happens, the current U.S. system for 
paying insurance claims can cause enormous problems for consumers, 
insurers, and regulators. The problems are most serious when people do 
not have flood insurance and therefore try to get insurers that sell 
wind insurance policies to cover damages that may have resulted from 
flood. Insurers often refuse these claims and say flooding (which they 
do not cover) caused the damage, leaving consumers with little recourse 
besides litigation. \2\ This, in turn, can lead to enormous and 
protracted legal battles among insurers, consumers, and regulators.
---------------------------------------------------------------------------
     \2\ Jihyun Lee, et al., ``Flood Insurance Demand Along the Gulf 
and Florida Coast'', Southern Agricultural Economics Association, 2010, 
http://ideas.repec.org/p/ags/saea11/99239.html.
---------------------------------------------------------------------------
The Problems Communities Face and the Inadequacy of Other Solutions
    Following the terrible 2005 hurricane season--the season of 
Hurricanes Rita, Wilma, and Katrina--nearly all States impacted by 
major hurricanes saw significant litigation between insurers and 
insured over responsibility for wind and water claims. Many of these 
legal disputes stretched over months and years. Many people and many 
communities did not get the resources they needed and deserved to 
rebuild. The costs of litigation, of delayed rebuilding, and of damage 
to the fabric of communities, were all immense.
    Fundamentally, these problems exist because separate parties are 
responsible for paying for wind and water damage. A huge incentive 
exists for insurers and consumers alike to shift the responsibility for 
paying any given claim to someone else and, right now, it's difficult 
(sometimes impossible) to determine what (and therefore who) is 
responsible for any given damage.
    Proposals have been made to solve this problem by unifying 
responsibility for flood and wind damage. If a single party is 
responsible for covering both flooding and wind damage, the problem of 
indeterminate loss would no longer exist. In principle, I believe that 
this unification of responsibility under private insurers is a worthy 
long-term goal. Many provisions in the flood reform bill before you 
would increase the private sector role in the flood insurance program 
but, based on my knowledge of the insurance industry, I simply do not 
believe that the major private insurers could or would cover all flood 
risk in the near future. Thus, even if you take every step towards 
privatization of the flood insurance program that has been proposed, 
the problem of indeterminate loss will continue to exist for some time.
    Thus, if Congress is not to privatize flood insurance entirely, it 
ought to come up with another solution to the problem of indeterminate 
loss. And I believe that a Standardized Loss Allocation model as 
Senator Wicker's COASTAL Act envisions is such a solution.

Standardized Loss Allocation--How It Works
    Under a Standardized Loss Allocation (SLA) system, insurers, NFIP, 
and State-run or State-mandated residual insurance markets such as wind 
pools and Fair Access to Insurance Requirements (FAIR) plans would 
agree in advance to distribute liability based on standardized loss 
allocations models. The sizes of the distributions would be based on 
extrinsic, meteorological evidence. This approach would solve almost 
all of the problems implicit in the current system and could 
potentially save money for both NFIP and private insurers. Implementing 
it properly, however, will require the collection of more 
meteorological data. I'd like to use the remainder of my testimony to 
describe how it would work and what public policies should be 
implemented to make sure that it is effective.

How an SLA System Would Work and How It Solves Problems
    An SLA system would begin by establishing a model for assessing the 
damage resulting from each major storm based on four major inputs: 
direct observations, information about building characteristics, 
indirect aerial observations of storm surge, and widely used storm 
models. Direct observations are what they sound like: direct 
information, collected by scientific instruments about wind speed and 
storm surge. Information about building characteristics--particularly 
elevation information that would provide input as to the consequences 
of storm surge--is not always included in current insurance 
underwriting standards but is necessary in certain cases to determine 
the exact damage resulting from storm surge. Aerial observations 
collected during and immediately after a storm (as well as satellite 
imagery collected during a storm) could provide additional information 
on storm surge since few instruments can withstand the most severe 
storm surge. Finally, a wide range of storm modeling techniques would 
work together to build a model that could, ideally, provide a very good 
estimate of the extent to which wind or water caused the damage to a 
given structure. The National Oceanic and Atmospheric Administration 
and several private-sector modeling firms already have created such 
models; building a standardized national one would not require 
significant additional scientific work.

Public Policies To Implement an SLA System: Improved Data Collection
    All this said, some minor public policy changes would have to be 
made to assure the success of an SLA system. These would primarily 
involve improving data collection. Although the scientific instruments 
and mathematical techniques needed to develop a standardized loss 
allocation model already exist, there are places where data collection 
could be improved. This is not universal: Particularly along the Gulf 
Coast, the Coastal-Marine Automated Network (C-MAN) already provide the 
data now needed. In some other areas--areas further from the coast and 
thus less likely to be hit by hurricanes--the available data may not be 
quite as good and measures should be undertaken to improve data quality 
over time. Senator Wicker's COASTAL Act asks the National Oceanographic 
and Atmospheric Administration to form partnerships with private 
entities, other Federal agencies to place new sensors on Federal 
Government property. It also envisions paying some or all of the costs 
for keeping an expanded network in place by leasing space on new 
observation posts (many of them on existing Federal property) to mobile 
phone providers, other weather-related businesses, and anyone else who 
has need for such access. This particular funding approach certainly 
has promise, but Congress, the Federal Emergency Management Agency 
(which oversees the flood program), NOAA, and State and local agencies 
should, over time, consider other proposals as well.

Public Policies To Implement an SLA System: Making the System Universal 
        But Voluntary
    A standardized loss allocation system is a good idea but it should 
not become a straightjacket. There are far too many unknowns for it to 
be wise to force the system on every consumer, every community, every 
insurer, and every insurance agent in the country. Instead, 
participation should be voluntary.
    To facilitate universal but optional participation, NFIP should 
participate in an SLA model for all policies written under the Write 
Your Own program and not participate in it for most policies written by 
independent agents under NFIP Direct. This is the approach that Senator 
Wicker's bill takes and it is one I believe that the Committee should 
take care to continue and to clarify in the bill's legislation 
language.
    A voluntary system will provide a choice to all consumers, 
insurers, and State residual insurance market mechanisms. Individuals 
who want to opt out of the SLA program can purchase a direct policy, 
since nearly all independent insurance agents in the country will write 
them, and thereby get the same flood coverage at the same price as they 
would otherwise. Private insurers and residual insurance market 
mechanisms that don't want to take part can simply leave (or never 
join) the Write Your Own program. In short, it seems possible to make 
SLA-based policies an available option for almost everyone without 
mandating them for anyone.

Conclusion: An SLA System Is Better
    An SLA system would work better than the current system. For those 
participating in the system, the model essentially would end 
litigation, assure payments to consumers, shore up NFIP finances, and 
provide certainty to NFIP itself. With payments determined by formula 
alone, there would be little to litigate: The use of the model would be 
written into policy language for both NFIP and private-sector coverage, 
and anyone challenging it in court would have to present expert 
scientific testimony indicating why the model was invalid. If anyone 
went through the trouble to do this, it would probably help improve the 
system by pointing out flaws in the models.
    Customers, even those who live in flooded areas but lack flood 
insurance, generally would be assured of at least some payments from 
their wind insurance policy rather than outright claims denial. NFIP 
itself, likewise, would rarely if ever face the prospect of having to 
pay the full cost of damage caused in part by wind. Insurers, finally, 
would have the same assurance, that they would never have to pay total 
losses when flood has done part of the damage. Quite simply, an SLA 
system promises to be less expensive, more certain, and more efficient 
than any currently available alternative.
    I am delighted to take your questions.

              Additional Material Supplied for the Record

       STATEMENT SUBMITTED BY THE AMERICAN INSURANCE ASSOCIATION

    The American Insurance Association (AIA) is pleased to submit this 
statement as the Committee considers proposals to reform and 
reauthorize the National Flood Insurance Program (NFIP). AIA 
appreciates the Committee's attention to this important issue.
    AIA represents approximately 300 major U.S. insurance companies 
that provide all lines of property and casualty insurance to U.S. 
consumers and businesses, writing $100 billion annually in premiums. 
AIA and several of its members are also members of the ``Write-Your-
Own'' Flood Insurance Coalition (WYO Coalition), a group that includes 
private insurers that participate in the NFIP Write-Your-Own program.

Background
    The NFIP's current authorization expires on September 30, 2011. 
Prior to its current 1-year extension, the NFIP has experienced 
repeated short-term extensions, including four actual lapses when the 
program was effectively unable to write new or renewed business. Those 
lapses hindered numerous consumer housing closings and caused 
significant uncertainty for our Nation's millions of NFIP 
policyholders, as well as real-estate professionals, lenders, and 
insurers. AIA and its member companies believe that a long-term 
extension, combined with essential reforms, is needed to bring 
stability and certainty to the program.
    A cornerstone of AIA's proactive natural catastrophe agenda has 
been meaningful reform of the NFIP. When considering NFIP reforms, AIA 
and its members start with the following principles: (1) program 
certainty is first and foremost; and (2) premiums need to better 
reflect risk.
    Following from these two principles, AIA recommends several reforms 
for the Committee's consideration. Many of these reforms were included 
in 2008 legislation previously approved by the Senate and are in 
legislation (H.R. 1309) that the House Financial Services Committee 
recently passed.
    Specifically, any legislation to reform and reauthorize the NFIP 
should include: (1) a meaningful long-term extension of the program; 
(2) movement toward risk-based premiums; (3) a reduction in price 
subsidies; (4) deductible increases that help increase program capacity 
while encouraging mitigation by consumers; (5) an increase in coverage 
limits that have not changed in more than 15 years; and (6) 
authorization for the purchase of additional living expense coverage 
(residential) or business interruption (commercial). Again, many of 
these reforms were included in legislation (S. 2284) approved by the 
Senate in 2008.

Meaningful Extension/Reauthorization of the Program
    AIA has advocated for a long-term reauthorization of the NFIP to 
protect consumers and help increase stability for real estate 
transactions and policyholders. AIA believes that a long-term 
reauthorization, such as a 5-year extension, will provide certainty in 
the flood program thereby increasing consumer and business confidence 
in the NFIP. Moreover, AIA believes that a long-term extension is 
necessary to allow for meaningful rate and premium appreciation so that 
the program may get on a solid financial footing and allow prices to 
more accurately reflect risk.

Premiums Reflecting Risk
    The NFIP must ensure that premiums for coverage reflect the true 
costs to taxpayers so that flood loss subsidies can be eliminated over 
time. Understanding that this could cause significant hardship for 
those who cannot afford true risk-based premium payments, a possible 
solution is a Government premium subsidy that could be provided outside 
of the NFIP. We believe this could be less expensive to taxpayers than 
flood loss subsidies and would likely result in more coverage being 
purchased while reducing cross-subsidies that make the program less 
attractive to many potential policyholders.
    Legislation approved by the Senate in 2008, as well as H.R. 1309, 
take positive steps toward better pricing NFIP coverage. Both bills 
would increase the permissible annual premium--the so called 
``elasticity band'' and move toward actuarial rates for a variety of 
properties--(1) commercial properties, (2) second homes and vacation 
homes, (3) homes sold to new owners, (4) homes damaged or improved, (5) 
homes with multiple claims, and (6) pre-FIRM properties. These are all 
positive steps that move the program toward a better financial 
position.

Changes to Coverage
    WYO insurers help administer 95 percent of the NFIP business 
providing market penetration, innovation and efficiency. Unfortunately, 
the number of homeowners and businesses purchasing flood insurance has 
dropped from its peak following the 2005 hurricane season. In order to 
maximize the program's effectiveness and reduce its reliance on the 
treasury, participation in the NFIP needs to continue to grow and 
consumers should be encouraged to purchase flood coverage.
    For several years AIA has supported changes in flood coverage to 
make the product more attractive. These include: (1) increasing 
coverage limits which will mean fewer uncovered losses for consumers 
while allowing greater premiums to be collected by the program; (2) 
increasing deductibles which will allow consumers to save more on 
premiums by assuming greater risk while encouraging mitigation; and (3) 
allowing the purchase of additional living expense coverage 
(residential) or business interruption coverage (commercial) thereby 
providing consumers with greater product options.
    Undertaking these steps will increase product diversification which 
should encourage more consumers to consider purchasing NFIP flood 
coverage.

Other Proposals Being Considered
    During the continuing discussions to reauthorize and reform the 
NFIP several additional proposals have been brought forward. One such 
proposal centers on the notion of immediately ``privatizing'' the flood 
insurance program. AIA strongly supports an open and free market 
environment; however, the NFIP was created precisely because the 
private insurance market could not write flood insurance on an 
economically feasible basis in the vast majority of instances. The NFIP 
arose from the simple fact that prior to 1968, for all practical 
purposes, flood insurance that was both actuarially sound and 
affordable was unavailable to the home-owning public because it was 
subject to such acute adverse selection (only those who need it would 
purchase it). Indeed, long before the creation of the NFIP, private 
insurers had effectively stopped providing flood coverage.
    While it constitutes a declining percentage of all NFIP policies, 
the number of properties receiving subsidized premium rates has grown 
since 1985; by 2007 it was at its highest point in almost 30 years. To 
date, more than half of the subsidized policies are concentrated in 
five States with relatively high flood risk. Based on our experience, 
these subsidies would not vanish if the NFIP were privatized. 
Unfortunately, in many States--including those States that are exposed 
to losses by natural catastrophes--insurers face arbitrary rate 
suppression. That said, any discussion of privatization of the NFIP or 
large portions of it must be carefully considered.
    Another suggestion is a proposal by Senator Wicker. Senator Wicker 
recently introduced the COASTAL Act, (S. 1091), which proposes a new 
approach to adjusting total losses in which both flood and wind played 
a role and yet remaining physical evidence is scant or nonexistent. For 
such claims, the legislation proposes the use of a new post-event model 
to produce a formulaic allocation of total losses between certain wind 
and flood coverages when both are present. This is a significant 
departure from long standing NFIP and wind claims adjusting and how 
they are governed by Federal and State law, respectively. As with any 
new idea that could impact a large, important program, AIA believes 
this allocation proposal needs proper consideration and study to ensure 
that it will not result in unintended consequences.

Conclusion
    As we noted at the time, AIA supported many of the provisions 
contained in the 2008 Senate legislation, particularly those provisions 
providing for a long-term reauthorization and those that put the 
program on sound financial footing. Thank you for the opportunity to 
submit this statement. We look forward to working with the Committee as 
this process moves forward.
                                 ______
                                 
   STATEMENT SUBMITTED BY STUART MATHEWSON, FCAS, MAAA, CHAIR, FLOOD 
  INSURANCE SUBCOMMITTEE, EXTREME EVENTS COMMITTEE, ON BEHALF OF THE 
                     AMERICAN ACADEMY OF ACTUARIES

    Chairman Johnson, Ranking Member Shelby, and distinguished Members 
of the Committee, on behalf of the American Academy of Actuaries' 
Subcommittee on Flood Insurance, I appreciate the opportunity to 
provide testimony regarding the National Flood Insurance Program 
(NFIP).
    The American Academy of Actuaries is a 17,000-member professional 
association whose mission is to serve the public and the U.S. actuarial 
profession. The Academy assists public policy makers on all levels by 
providing leadership, objective expertise, and actuarial advice on risk 
and financial security issues. The Academy also sets qualification, 
practice, and professionalism standards for actuaries in the United 
States.
    The NFIP is a complex program and is perceived by some/many as 
having a selective impact within certain areas. Nevertheless, critical 
factors stemming from constantly changing climate, coastlines, rivers 
and streams, building construction, land-use, the scientific 
understanding of hydrology and hydraulics and the technologies used to 
measure and address flood risk create new opportunities for 
constructive NFIP reform.
    Two issues are of the highest priority with respect to the NFIP. 
First, we support reauthorizing the program for a period of time of 5 
years or longer to establish some stability in flood insurance 
coverage. This will help stabilize the market and minimize uncertainty 
for consumers: policyholders, mortgage holders, taxpayers, the real 
estate and construction market economies, and insurers and agents. In 
the recent past, short-term reauthorizations (for fewer than 5 years) 
have resulted in dislocations and additional costs to those involved in 
the process because of the near-term prospect that the program might be 
permitted to expire. Second, we support efforts to move NFIP insurance 
rates closer to a financially adequate level. The underlying principle 
necessary to guide those efforts is: insurance rates should cover the 
full cost of the transfers of risk taking place within the program. To 
accomplish this goal, rates should cover the expected losses and 
expenses involved in the insurance transaction and should provide a 
reasonable additional provision for the risk or uncertainty associated 
with the coverage being provided. This risk provision means that 
additional premiums should be collected to cover catastrophic events 
like Hurricane Katrina, which, although infrequent, may happen in any 
given year.
    The current NFIP rate subsidies do not allow the program to 
generate premiums that are sufficient to cover average annual losses. 
Furthermore, the NFIP does not collect additional premium, in excess of 
the premium sufficient to cover average annual losses and expenses, to 
allow the NFIP to build up catastrophic reserves, so the NFIP must 
borrow from the United States Treasury when very large loss events do 
occur.
    Before Hurricane Katrina, the NFIP was generally able to repay its 
debt with subsequent premiums, because the borrowing had been 
relatively modest. By contrast, the borrowing that was necessary to 
cover the losses incurred during Hurricane Katrina resulted in a debt 
many multiples of what it was before. Thus, much of the current income 
to NFIP goes to paying interest and some part of the principal for that 
debt. This leaves much less current income to pay losses, increasing 
the possibility of further borrowing. At the current rate, it will take 
decades to repay the existing NFIP debt. Consequently, it is important 
that any NFIP reform legislation address the debt issue to put the 
program on sound and sustainable financial footing.
    In addition to the above priorities, there are several other issues 
that we believe should be addressed in any reform legislation:

1. If the NFIP could increase and diversify its pool of policyholders, 
the financial strength of the program would be improved. Thus, we 
support efforts to increase participation in the NFIP. It is especially 
important that the percentage of covered properties subject to riverine 
flooding be increased. Also, properties outside of the 100-year 
floodplain, but still subject to flooding, have had significant losses 
but are not well-represented in the NFIP pool. (Ostensibly, properties 
outside the 100-year floodplain would have lower rates than those 
within the 100-year floodplain.) In general, the NFIP's premium base 
would be increased if more of these types of properties were insured. 
Increased participation in the program would minimize the impact of 
adverse selection, in which only the owners of the most exposed 
properties purchase insurance. Minimizing the impact of adverse 
selection would help to strengthen the program overall.

2. Repetitive loss properties have been shown to be much more at risk 
than the average property insured by the NFIP. We recommend Congress 
address this issue and decide whether these properties should be 
covered at all and, if so, at what price and under what conditions.

3. Continual attention to the updating of flood hazard maps is needed 
to better identify properties located within severe flood hazard areas. 
The Risk Mapping, Assessment and Planning (MAP) program provides 
digital access and dissemination of new maps. The Risk MAP program is 
intended to allow maps to be updated in a more timely way. More 
accurate, up-to-date maps allow a better assessment of hazard. The 
assessment and reassessment of hazard is vital overall to property 
liability insurance programs. As the hazard changes, so, too, should 
the rates and premiums. This would allow the NFIP to better 
differentiate rates among policyholders, resulting in more adequate and 
equitable premiums.

    Finally, the National Flood Insurance Program is critical to 
protecting home and business owners in the U.S. and should be 
strengthened and extended for a sufficiently longer reauthorization to 
allow the program to establish a sound financial footing. Steps should 
be taken to assure that the true costs are accurately apportioned to 
all property owners at risk. In addition, the current debt should be 
addressed, so that the program can use its premium income to pay the 
future losses that will invariably occur.
    Thank you for the opportunity to provide this testimony to the 
Committee.

 LETTER SUBMITTED BY SHANA UDVARDY, DIRECTOR, FLOOD MANAGEMENT POLICY, 
                            AMERICAN RIVERS









    LETTER SUBMITTED BY FRANKLIN W. NUTTER, PRESIDENT, REINSURANCE 
                         ASSOCIATION OF AMERICA



   STATEMENT SUBMITTED BY FRANKLIN W. NUTTER, PRESIDENT, REINSURANCE 
                         ASSOCIATION OF AMERICA
    My name is Frank Nutter and I am President of the Reinsurance 
Association of America (RAA). The RAA is a national trade association 
representing reinsurance companies doing business in the United States. 
RAA membership is diverse, including reinsurance underwriters and 
intermediaries licensed in the U.S. and those that conduct business on 
a cross border basis. I am pleased to appear before you today to 
provide the reinsurance industry's perspective on reforms to the 
National Flood Insurance Program.
    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 financial performance, enhance financial security, and 
reduce financial volatility. Reinsurance is the most efficient capital 
management tool available to insurers.
    Reinsurers have helped the U.S. recover from every major 
catastrophe over the past century. By way of example, 60 percent of the 
losses related to the events of September 11, 2001 were absorbed by the 
global reinsurance industry, and in 2005 61 percent of Hurricanes 
Katrina, Rita, and Wilma losses were ultimately borne by reinsurers. In 
2008, approximately one-third of insured losses from Hurricane Ike and 
Gustav were reinsured.
    The National Flood Insurance Program (NFIP) was established on the 
fundamentally sound principles of encouraging hazard mitigation and 
promoting the use of insurance to reduce postevent disaster assistance. 
However, the NFIP, as it has evolved and been modified by legislative 
action, compromises, rather than embraces sound public policy, 
insurance principles and practices. Actions (in whole or in part) to 
introduce private sector risk assessment into the NFIP, therein 
retaining the proper role for Government in land-use planning and 
hazard mitigation, could address those issues and reestablish the flood 
risk management program as a successful public-private partnership.
    In 1973 George Bernstein, the first Federal Insurance and NFIP 
Administrator, cautioned prophetically: ``It is the combination of 
land-use controls and full actuarial rates for new construction that 
makes the National Flood Insurance Program an insurance program rather 
than a reckless and unjustifiable giveaway program that could impose an 
enormous burden on the vast majority of the Nation's taxpayers without 
giving them anything in return.''
    As it currently operates, the NFIP is not an insurance program. But 
it should be and 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, thereby returning 
the Program to its original goal of being fiscally sound.
    It is a commonly held belief the NFIP is fundamentally bankrupt and 
a private sector risk bearing role is unachievable. Given the nearly 
$18 billion dollar debt to Treasury, the Program is demonstrably a 
millstone on the Federal budget and U.S. taxpayers. The assumption 
about a private sector risk-bearing role, however, deserves to be 
considered.

Protecting Taxpayers With Risk-Based Rates
    Rates in the NFIP that have been subsidized without regard to the 
present character or ownership of the property should be risk-based. 
Subsidized rates were introduced early in the Program as an inducement 
for communities to enter the Program. It was a successful strategy. 
Nearly 22,000 communities now participate. However, it was the intent 
of the original legislation that subsidized rates and the properties to 
which they apply were to be gradually eliminated. In the last 20 years, 
however, the number of subsidized properties has actually risen by 1.2 
million. Additionally, the Program was designed to address primary 
residences, yet second homes, investment, and vacation properties 
continue to receive the benefit of subsidized rates.
    The Program's subsidies have also facilitated the development of 
environmentally sensitive coastal areas, including those at high risk 
to flood losses. The Government Accountability Office (GAO) reports 
that repetitive loss properties account for 1 percent of policies and 
25-30 percent of losses. The Congressional Budget Office (CBO) reports 
the number of repetitive loss properties has increased by 50 percent in 
the last decade.
    The Congress must also recognize that statutory caps on rates may 
be popular with its beneficiaries, but the caps distort risk assessment 
by builders, local officials, property buyers, and NFIP policyholders. 
They increase the cross subsidy from low or no risk persons and 
taxpayers to those living in high risk flood areas. The classic 
``robbing Peter to pay Paul'' analogy applies.
    According to the GAO, subsidized-rated properties generate 70 
percent of the Program's claims. The NFIP and the Congress should 
address these fundamental flaws in the Program and remove inequitable 
and unjustifiable rate subsidies. Proposals to provide needs-based 
subsidies independent of NFIP rates are worthy of support.

The NFIP Should Plan for Extreme Events
    From 1978 to 2004, the NFIP had a net loss of just $2 billion. CBO 
reports that if the ``early'' years, when rates were lower and 
community participation was not as significant as now, were not 
included, the Program would have had a profit of $600 million. As a 
result of losses in 2005--the year the Program had to borrow $20 
billion from Treasury--debt service of 30 percent of premiums collected 
is built into the NFIP's finances. With the addition of a contingency 
plan for extreme event years and without this financing load, the 
Program can be fiscally sound.
    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. The Program unfortunately takes into account only 1 
percent of the losses from the 2005 program year (Hurricanes Katrina, 
Wilma, and Rita) and relies on the ``average annual loss'' model for 
its pricing. This ignores the fact that extreme event catastrophes must 
be financed. FEMA's average annual loss (FEMA presumes $1.3 billion) 
pales in comparison to actual insured and reinsured loss costs in 
recent natural catastrophes. This average annual loss 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, nor priced for, extreme event(s) years. As a result, the GAO 
recently concluded the Program does not have a viable funding model to 
repay the existing debt to Treasury. No private sector solution is 
available for this existing debt. However, as 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. As the 
GAO admonished,

        Private insurers typically retain only part of the risk that 
        they accept from policyholders, ceding a portion of the risk to 
        reinsurers (insurance for insurers). This mechanism is 
        particularly important in the case of insurance for 
        catastrophic events, because the availability of reinsurance 
        allows an insurer to limit the possibility that it will 
        experience losses beyond its ability to pay. NFIP's lack of 
        reinsurance, combined with the lack of structure to build a 
        capital surplus, transfers much of the financial risk of 
        flooding to Treasury and ultimately the taxpayer.

The Private Sector Role in the Program
    In recent years, the private insurance sector has worked in 
partnership with FEMA through the Write Your Own program (WYO). This 
role for insurers has provided the NFIP with a valuable marketing arm 
and administrative capability that minimizes the need for a Federal 
bureaucracy to issue policies and adjust claims.
    A private insurance market for flood risk has not developed. 
Insurers are concerned about State rate regulatory manipulation and 
suppression and adverse selection of risk. Historic rate subsidies by 
the NFIP make a traditional private market flood insurance product for 
homeowners noncompetitive. Without a viable private insurance market, 
the NFIP cannot be terminated or put into run-off in the short term.
    Yet, there have been positive developments in recent years: (1) 
recognizing there are significant concerns about map integrity, the 
NFIP has established a map program for all communities participating in 
the NFIP; (2) catastrophe modeling firms, as well as some reinsurance 
brokers and underwriters, now provide flood models for underwriting 
purposes in the U.S. and in other countries; (3) there has been growth 
in private sector flood mapping entities; (4) twenty-two universities 
now have flood research programs; and (5) satellite imaging has 
improved risk assessment.
    We believe a private reinsurance risk bearing role for the NFIP can 
be established, with the following conditions: (1) preserve the WYO 
program; (2) retain the current Federal risk bearing role; (3) 
introduce the risk analysis and risk spreading role of the private 
reinsurance and capital markets; (4) utilize the existing statutory 
framework; and (5) consult with knowledgeable public and private 
interests about long-term approaches to the development of a greater 
private sector flood insurance market.

The Role of Reinsurance: Two Complementary Options
    We believe the NFIP can address its volatility and extreme event 
exposure and reduce the dependence of the Program on taxpayers and 
Federal debt through risk transfer to reinsurance and private market 
capital providers. The NFIP could also seek the placement of 
catastrophe bonds to augment reinsurance. Both financial sectors have 
significant capacity and believe flood risk can be reinsured or 
transferred into capital markets. Utilizing private reinsurance or 
catastrophe bond risk transfer mechanisms also introduces a private 
sector rating verification model into the NFIP--thus providing an 
incentive and guidepost for risk-based rates.
    Transactional Reinsurance: As with most State property insurance 
plans, and nearly all private insurers, the NFIP could address its 
volatility and extreme event problem through the purchase of 
reinsurance from private market capital providers. Additionally, where 
appropriate, NFIP could seek the placement of catastrophe bonds to 
supplement reinsurance capacity. Both markets have significant capacity 
and an appetite to take flood risk. These sectors believe flood risk 
can be reinsured or transferred into capital markets if properly 
structured. As with other governmental insurance entities and private 
sector insurers, the NFIP would work with modelers, underwriters, and/
or brokers to provide the market with an evaluation of its risk 
portfolio, determine what types of risk (by geography, insured 
exposure, or category of risk) are amenable to risk transfer and then 
seek coverage in the private sector. This would allow these entities to 
evaluate the NFIP data and introduce their own risk assessment into the 
process. Like any catastrophe reinsurance and ``cat'' bond program, it 
would transfer catastrophe risk from taxpayers and the Treasury to the 
capital markets. Should the NFIP find the bids unattractive on a price 
or coverage basis, it would not go forward with the placement. The NFIP 
would, therefore, 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. No study is necessary to 
evaluate this approach as the market and NFIP officials can pursue it 
at this time with the full opportunity to evaluate coverage proposals 
without prior commitment.
    Reinsurance Pool: Section 4011 of the NFIP legislation adopted in 
1968 provides for the Director of FEMA (at the time HUD) to ``encourage 
and arrange for appropriate financial participation and risk sharing . 
. . by insurance companies and other insurers.'' Section 4051 provides 
that the Director is authorized ``to assist insurers to form, associate 
or join in a pool'' on a voluntary basis `for the purpose of assuming 
on such terms . . . as may be agreed upon, such financial 
responsibility as will enable such insurers, with the Federal financial 
assistance' to assume a reasonable proportion of responsibility for the 
adjustment and payment of claims for losses under the flood insurance 
program.'' Such a pool of insurers did in fact operate as the National 
Flood Insurers Association from 1968 to 1978, as the administrative arm 
of the Program and with a risk-bearing role through a formula 
negotiated with the Government. Section 4052 authorizes the Director to 
enter into agreements with the pool to address risk capital, 
participation in premiums and losses realized, and operating costs. 
Section 4055 authorizes the Director to enter into a reinsurance 
relationship with the pool to address losses in excess of those assumed 
by the pool.
    The provisions of the statute authorizing the pool, created in 
conjunction with the adoption of the Act, have long been dormant. Yet 
they remain a viable mechanism for the creation of another pool. This 
time it would be to reinsure the NFIP--capitalized by those insurers 
that voluntarily wish to provide capacity. By doing so, these insurers 
would have access to the NFIP's flood insurance coverage and 
underwriting data. The Director and those participating insurers would 
enter into negotiations over the risk-sharing formula and could 
individually subscribe capacity on an annual basis. As with the 
traditional reinsurance proposal noted above, FEMA would work with 
modelers, underwriters, and brokers to assess its risk portfolio. Such 
collaboration would determine what types of risk are appropriate, what 
method of reinsurance the pool would offer to the NFIP, as well as what 
type of reinsurance, if any, FEMA would provide to the pool. As with 
the prior suggestion of laying-off risk through traditional catastrophe 
reinsurance placement, this proposal does not change the WYO program. 
FEMA remains the insurer of flood risk at the consumer level, 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 program 
and the reauthorization of a standing reinsurance facility or pool, are 
both complementary and yet not exclusive to each other. The existing 
statutory authority may well be sufficient to move forward without 
delay, on either or both.
    The RAA looks forward to working with Members of this Committee, 
the Congress, FEMA, and officials from the NFIP to explore and pursue 
private sector reinsurance and capital market options.
                                 ______
                                 
  STATEMENT SUBMITTED BY THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE 
                               COMPANIES

    The National Association of Mutual Insurance Companies is pleased 
to offer comments to the United States Senate Committee on Banking, 
Housing, and Urban Affairs on the National Flood Insurance Program 
(NFIP).
    NAMIC believes that there are significant problems with the NFIP as 
it is currently structured and the best solution involves reforming and 
optimizing the program. The views we share with the Committee are based 
on the perspective of over 1,400 NAMIC members.
    Founded in 1895, the National Association of Mutual Insurance 
Companies (NAMIC) is the largest and most diverse property/casualty 
insurance trade association in the United States. Its 1,400 member 
companies write all lines of property/casualty insurance business and 
include small, single-State, regional, and national carriers accounting 
for 50 percent of the automobile/homeowners market and 31 percent of 
the business insurance market. We also have over a quarter of the 
companies that participate in the NFIP's ``Write-Your-Own'' program as 
members. NAMIC's membership truly represents a cross-section of the 
industry and has been proudly protecting its policyholders throughout 
North America for many years.

The Nature of Flood Risk
    Insurance markets function best when certain conditions are met. 
For example individual exposures should be independent of each other 
(i.e., not correlated) and there should be a large number of individual 
risk exposures to allow the use of statistical predictions of future 
losses. Losses should be accidental or unintentional in nature and 
should be generally predictable, allowing insurers to set premiums 
properly. Insurers must be able to spread risk over a large enough pool 
and each insured must pay the cost of adding to the risk pool.
    For some risks, however, private insurance markets are unable to 
provide sufficient coverage. Certain risks are uninsurable because they 
defy the conditions private markets require for operation. Flood risk 
is one of these unconventional risks. Adverse selection prompts only 
those who believe they are at risk of flooding to purchase insurance 
limiting the ability to properly pool risk. Flooding is extremely 
devastating and markets face serious problems providing coverage for 
these truly large and costly events. The fact that flooding involves a 
risk that is highly concentrated and correlated makes flood loss 
especially difficult to insure. In most lines of insurance (e.g., life, 
auto, fire insurance), the total amount in premiums collected and the 
total amount paid in claims are almost continuously in balance because 
claim costs for any given year are relatively predictable. This is not 
the case with flood risk, which by nature tends to result in losses 
that are very low in some years and extremely high in other years. 
Additionally, unlike other traditional threats to property, flooding 
has historically been spatially confined and generally limited to 
specific geographic locations complicating an insurer's ability to 
widely spread the risk. Compensating for these challenges requires 
insurers to charge high premiums to cover the sizable cost of capital 
that they must hold in reserve to ensure they are able to pay all the 
claims that will be filed in high-loss years.
    The nature of flood risk and the factors that affect its 
insurability are a recipe for adverse selection, whereby the only 
people willing to buy insurance are those with the highest levels of 
risk. Thus the insurers flood portfolio consists solely of these high-
risk individuals. Properly priced insurance (which takes into account 
the amount of surplus needed to pay claims in high-loss years) would be 
regarded by most potential purchasers as a ``bad buy''--property owners 
who perceive that there is little likelihood they will experience loss 
due to flooding will conclude that the cost of purchasing insurance is 
not worth it. Consequently, the only people who would be interested in 
purchasing flood insurance would be those most likely to suffer a 
significant flood-related loss, and the cost to insurers of providing 
coverage for these properties would cause premiums to rise to 
unaffordable levels. Simply put, the nature of flood risk 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 National Flood Insurance Program
    Prior to the creation of the NFIP, flood losses were dealt with in 
a simple and direct fashion by the Federal Government. As noted in a 
2002 report by the Federal Emergency Management Agency, ``major 
riverine flood disasters of the 1920s and 1930s led to considerable 
Federal involvement in protecting life and property from flooding 
through the use of structural flood-control projects, such as dams and 
levees, with the passage of the Flood Control Act of 1936.''
    These projects proved to be a costly and generally ineffective 
solution. Despite billions spent by the Federal Government on flood 
control projects during that time the report noted that ``the losses to 
life and property and the amount of assistance to disaster victims from 
floods continued to increase.'' Furthermore, the only assistance 
available to flood victims at that time was direct Federal disaster 
aid, which also contributed to the high costs of a major flooding 
catastrophe. Congress began considering the potential for a national 
flood insurance mechanism as early as the 1950s, but quickly realized 
that the private market simply could not underwrite the highly 
concentrated and correlated risk of massive floods. In 1968, the 
Federal Government stepped in to create the NFIP to mitigate the 
exposure both to taxpayers as well as citizens in flood-prone areas. 
Congress sought to address the increasing costs of taxpayer-funded 
disaster relief by using premium dollars taken in every year to pay out 
any flood losses incurred by policyholders for the same year.
    Originally, the only way property owners could purchase NFIP 
coverage was through specialized insurance agents. To increase take-up 
rates and streamline the claim handling process, the NFIP in 1983 
created a ``public-private'' partnership with private insurers known as 
the Write-Your-Own (WYO) program. The program utilizes private insurers 
to market, sell, and administer the Standard Flood Insurance Policy. 
These companies--WYO carriers--use their own agents and letterhead and 
deal directly with the policyholders while the Federal Government 
retains responsibility for underwriting losses. Over 90 percent of all 
flood policies are written through WYO companies. The partnership has 
proven very successful in facilitating the prompt settlement of claims, 
even when faced with a very large volume of claims following extreme 
flooding events.
    For example, as of May 2006, more than 95 percent of the 162,000 
claims for flood damage caused by the 2005 Gulf and Atlantic Coast 
hurricanes had been settled by the WYO companies.
    Over the last 40 years, the NFIP has allowed millions of Americans 
to avoid serious financial losses brought about by disastrous flooding, 
and as of today, the program had more than 5.6 million policies in 
force. However, the NFIP has many flaws in its design and execution and 
is need of serious reform in order to maintain a sound financial 
footing and better protect the American taxpayer. Subsidized premiums 
have been charged on a nonactuarial basis; development has increased 
the amount and value of property exposed to flood risk; take-up rates 
for those in need of coverage remain extremely low (under 30 percent of 
those that need flood insurance purchase it); and the recent severity 
of flood losses has demonstrated that the NFIP is not constructed to 
handle major catastrophic events. Although virtually self-sustaining 
for the 25 years prior, in 2005 the program incurred over $20 billion 
in debt, and currently carries $17.75 billion in debt.

Optimization of the NFIP
    Under the current circumstances, it is not surprising that policy 
makers would raise questions about the future direction of the NFIP. 
Clearly the status quo is unacceptable. However, we urge caution to 
those who think we can do away with the program entirely. Nothing about 
the realities of flood risk has fundamentally changed and primary 
insurers are still unable to offer this coverage. The presence of a 
Federal program is just as important today as it was 40 years ago. The 
phenomenon that led to the creation of the NFIP--the absence of a 
viable private flood insurance market--remains the fundamental problem, 
and there is no reason to believe that dismantling the NFIP would 
suddenly cause a private market to materialize.
    The NFIP fulfills an important role, and with the right mix of 
reforms, the program can begin to address the problems of adverse 
selection, moral hazard, and financial instability that have plagued it 
in the past. Therefore we believe that the best and most viable option 
is optimization--maintaining the current NFIP framework while 
implementing reforms that address existing weaknesses.
    First and foremost, the program must be reauthorized for the long 
term. Constant reauthorization debates create uncertainty and can lead 
to lapses in the program as we saw in 2010. During these lapses, 
companies were not permitted to write new policies, issue increased 
coverage on existing policies, or issue renewal policies, and lenders 
and home buyers were prevented from closing on mortgage loan contracts. 
The NFIP should be reauthorized for an extended period in order to 
bring stability to the program and instill confidence among consumers.
    In addition to long term reauthorization we recommend a package of 
key reforms designed to achieve five essential objectives:

  1.  Charge Actuarially Sound Rates and Eliminate Subsidies

  2.  Update and Improve the Accuracy of Flood Maps

  3.  Increase Take-Up Rates

  4.  Discourage Repetitive Loss Properties

  5.  Improve Management and Correct Operational Inefficiencies
Charge Actuarially Sound Rates and Eliminate Subsidies
    Inadequate rates that do not reflect the actual costs of living in 
a flood-prone area are the source of many of the NFIP's problems. In 
the original NFIP legislation, Congress tasked FEMA with setting rates 
to meet the ``objective of making flood insurance available where 
necessary at reasonable rates so as to encourage prospective insureds 
to purchase such insurance.'' The program was structured to subsidize 
the cost of flood insurance for existing homes, while charging 
actuarially sound rates for newly constructed properties built after 
the introduction of flood insurance rate maps. It has been estimated 
that, on average, the premiums charged for these older properties are 
60 percent less than the amount that would be considered actuarially 
sound.
    Moreover, it is doubtful that the rates charged for properties 
built after the advent of flood maps comport with most private 
insurers' conception of ``actuarially sound.'' The price for NFIP flood 
insurance is relatively low--on average nationwide, property owners pay 
only $2.64 per $1,000 of flood coverage, or $528 per year for $200,000 
in coverage. This average is constant across all States, including 
highly flood-prone States, which sustained major flood losses during 
the 2004, 2005, and 2008 hurricane seasons. Insofar as these rates do 
not reflect the true cost of providing coverage, the NFIP bears less 
resemblance to insurance than to a targeted public spending or risk-
management program.
    Just as inadequate rates fail to reflect the true cost of providing 
coverage, they also fail to reflect the actual risks of living in a 
flood-prone area. This has the effect of encouraging poor land use and 
development in high-risk areas, thereby increasing the total potential 
losses that will be incurred in the event of a flood. During the 40-
plus years that the NFIP has been in place, there has been a large 
population increase in flood-prone coastal States, which now account 
for a very large portion of the NFIP portfolio. In Florida, for 
example, the population has increased from 6.8 million in 1970 to 
nearly 18.5 million in 2009. During the same period, there was a 
sevenfold increase in the number of NFIP flood policies in force and 
now more than two-thirds of NFIP policies are located in just five 
coastal States.
    An updated rating system should include the following:

    Elimination of subsidized rates (implicit as well as 
        explicit);

    Immediate institution of risk-based rates for nonprimary 
        residences, repetitive loss properties, and business 
        properties;

    Tiered structure that reflects differences in risk based on 
        updated maps;

    All new policies should charge actuarially sound, risk-
        based rates;

    Under certain circumstances, areas significantly impacted 
        by changes in mapping could be eligible for phase-ins of 
        actuarial rates;

    Once risk-based rates are in place, credits should be given 
        for mitigation efforts.

    The NFIP must begin charging risk-based rates if it is to have any 
chance of being a solvent program; under the current structure there is 
no chance that the program will ever repay the debt it accumulated in 
2005. However, the move to actuarially sound rates is likely to be 
painful due to the higher premiums that will have to be charged in many 
instances. For those property owners who need assistance, flood 
vouchers might be offered on a means-tested basis to help mitigate the 
costs. 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 of where they live.

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. Increasing and maintaining the accuracy of 
flood maps is essential to the operation of an effective flood 
insurance program. The power of newer technologies must be harnessed to 
provide program officials and property owners, as well as rescue 
workers and land development officials, with the most accurate 
information possible.
    The availability of new technology has given FEMA the ability to 
better evaluate flood exposure in every region of the country, but the 
more accurate maps made possible by this technology will inevitably 
raise protests from residents who are suddenly informed that their home 
is located in a floodplain. Not only will they face the prospect of 
having to purchase flood insurance (which may be expensive assuming 
actuarial rates are charged), but some evidence suggests that homes 
designated as being in a floodplain suffer a loss in value. Elected 
officials will likely face pressure from constituents and interest 
groups to postpone the starting date of the new maps or to attack their 
credibility.
    These considerations have led NAMIC to endorse a new mapping 
protocol developed by the SmarterSafer coalition, \1\ of which NAMIC is 
an active member. The coalition's proposal contains the following 
elements:
---------------------------------------------------------------------------
     \1\ Smarter Safer Coalition Flood Proposal, February 22, 2011. 
www.SmarterSafer.org

    Establishment of a council to develop updated and accurate 
        flood maps. This new body--the Technical Mapping Advisory 
        Protocol (TMAP) Council--could be composed of the following 
---------------------------------------------------------------------------
        members:

      Federal Emergency Management Agency

      U.S. Geological Survey

      Department of the Interior

      National Oceanic and Atmospheric Administration

      A data management expert

      U.S. Army Corps of Engineers

      A flood/stormwater management representative

      Department of Agriculture's Natural Resources 
        Conservation Services

      A State emergency management representative

      U.S. Fish and Wildlife Service

      National Marine Fisheries Service

      A recognized professional surveying association or 
        organization

      A recognized professional mapping association or 
        organization

      A recognized professional engineering association or 
        organization

      A recognized professional association or organization 
        representing flood hazard determination firms;

    The TMAP Council should have a balance of State, local, 
        Federal, and private members.

    The Council should consult with stakeholders through at 
        least four public meetings annually, and seek input of all 
        stakeholder interests including:

      State and local representatives

      Environmental and conservation groups

      Insurance industry representatives

      Advocacy groups

      Planning organizations

      Mapping organizations

    Within 1 year, the TMAP Council should propose new mapping 
        standards that ensure the following:

      Maps reflect true risk, including graduated risk that 
        better reflects risk to each property. This does not need to be 
        at the property level, but should be at the smallest geographic 
        level possible--whole communities should not be mapped together 
        without taking into account different risk levels.

      Maps reflect current land use and topography and 
        incorporate the most current and accurate ground elevation 
        data.

      Determination of a methodology for ensuring that 
        decertified levees and other protections are included in maps 
        and their corresponding flood zone reflect the level of 
        protection they confer.

      Maps take into account best scientific data and potential 
        future conditions (including projections for sea-level rise).

    TMAP should continuously function, reviewing the mapping 
        protocols, and making recommendations to FEMA when they should 
        be altered.

    Within 6 months of TMAP recommending new mapping protocols, 
        FEMA should begin updating maps based on the recommendations.

    Within 5 years from the implementation of the mapping 
        protocols, all flood maps should be updated according to the 
        new protocol.

    NAMIC believes the TMAP process would facilitate 
        development and adoption of accurate maps. Speedy adoption of 
        these updated flood maps is essential to ensure that the 
        individuals and businesses in flood-prone areas can get the 
        protection they need and we owe these people and the American 
        taxpayer no less.

    Mapping technology has significantly improved since the 1970s. 
Putting off the adoption of updated flood maps does a disservice to 
those citizens living in flood-prone areas who in the end, risk losing 
their homes and their lives.

Increase Take-Up Rates
    Insurance is inherently dependent on the ``law of large numbers,'' 
thus the insurance mechanism works best when everyone participates in 
the program. Currently only 20 to 30 percent of individuals exposed to 
flood hazards actually purchase flood insurance. To make matters worse, 
many of those who purchase flood insurance do so only after suffering 
damage from a flood, then allow their policies to lapse after several 
years have passed during which they experienced no flood loss. The 
program must take steps to address this adverse selection and increase 
these numbers dramatically in order to properly pool the flood risk and 
achieve financial soundness. There are several possible ways to improve 
these take-up rates:

    Stiffer penalties could be imposed on financial 
        institutions that either fail to require flood insurance 
        coverage for mortgages on properties in flood-prone areas, or 
        allow the policies to lapse. Although owners of properties 
        located in special flood hazard areas are required to purchase 
        and maintain flood coverage as a condition of obtaining a 
        federally backed mortgage, experience suggests that enforcement 
        of this rule is spotty at best. For example, following a 
        Vermont flood in 1998, FEMA discovered that of the 1,549 homes 
        that were damaged by the flood, 84 percent lacked flood 
        insurance, even though 45 percent were required to have flood 
        coverage in place. Apparently mortgage lenders had done little 
        to ensure that the mandatory flood insurance purchase 
        requirement was met.

      Require homeowners in flood-prone areas to sign a 
        ``Disaster Relief Waiver'' stipulating that they forfeit their 
        right to disaster relief in the event they choose not to 
        purchase flood insurance. This requirement should apply to all 
        homeowners, not just those with federally backed mortgages, and 
        would serve to disabuse property owners of the expectation that 
        generous Federal disaster relief will be available to flood 
        victims and therefore they need not purchase flood insurance.

      The NFIP should be given a renewed mandate to improve and 
        expand its public education programs to ensure that more people 
        are made aware of the program and the benefits of having flood 
        insurance coverage to protect their properties.

Discourage Repetitive Loss Properties
    A recent Congressional Budget Office study revealed that there are 
currently about 71,000 NFIP-insured ``repetitive loss properties,'' 
which represent just 1.2 percent of the NFIP portfolio but account for 
16 percent of the total claims paid between 1978 and 2008. Moreover, 
roughly 10 percent of these repetitive loss properties have received 
cumulative flood insurance claim payments that exceed the value of the 
home. American taxpayers should not be forced to subsidize a small 
subset of NFIP policyholders who continue to rebuild in high-risk 
areas.
    A reformed NFIP would include a system to ensure repetitive loss 
properties are not a drain on the program. Options to achieve this goal 
include:

      A buyout program. A prioritized list of properties for 
        buy out--those that have had the largest payouts from the 
        program--could be created and purchase offers made. If a 
        reasonable buyout offer is made (based on appraisals) and a 
        repetitive loss property owner refuses, that property could be 
        prohibited from purchasing flood insurance through the NFIP.

      Make owners of repetitive loss properties ineligible for 
        NFIP coverage if they choose to rebuild in the same place 
        following a loss from a flood.

      Make owners of repetitive loss properties ineligible for 
        disaster relief.

Improve Management and Correct Operational Inefficiencies
    The GAO's report \2\ on at-risk Federal operations highlighted the 
deficiencies in FEMA's data tracking capabilities. The report found 
that FEMA lacks clear procedures for monitoring contracts and claims 
records, despite the investment of $40 million over 7 years for new 
systems. FEMA needs to be held accountable for both establishing and 
executing these procedures so the program can better monitor the flood 
situation. One of NAMIC's recommendations to improve take-up rates is a 
stronger enforcement of mandatory purchase and maintenance of flood 
insurance requirements by mortgage lenders. While lenders must take 
steps to ensure greater compliance, responsibility lies with the NFIP 
for monitoring policy data and coordinating enforcement with the 
lenders. To achieve this goal, FEMA must develop and institute clear 
procedures for monitoring contracts and claims records, effectively 
communicating with lenders and triggering enforcement actions for 
noncompliance.
---------------------------------------------------------------------------
     \2\ Government Accountability Office; GAO-11-278 High-Risk Series. 
An Update, pp. 167-170.
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NAMIC's Views on the COASTAL Act
    Finally, NAMIC would also like to take this opportunity to comment 
on S. 1091, the Consumer Option for an Alternative System to Allocate 
Losses (COASTAL) Act, sponsored by Senator Roger Wicker. We believe 
Senator Wicker has taken a constructive approach to a very complex 
issue, and we appreciate his hard work. We share the objective of 
expediting the claims resolution process for customers where allocation 
of loss between wind and water is indeterminate. These cases sometimes 
lead to coverage disputes, resulting in litigation between 
policyholders and insurers that can take up to 2 years to decide in 
court. This delay in claim resolution and payment is burdensome and 
unfair to all parties concerned.
    Notwithstanding its laudable intent, we fear that this plan could 
cause more confusion for insurers and consumers in the aftermath of a 
major natural disaster. Most claims are settled in a matter of days or 
weeks. For the vast majority of policyholders, waiting 90 days for a 
determination would significantly slow the claims payment process. More 
specifically, the following are four areas where we would seek to amend 
or clarify.

New Federal Authority Over State Regulated Insurers
    The loss allocation plan raises the specter of a greater intrusion 
by the Federal Government into the private insurance market. Under the 
COASTAL Act, for the first time a Federal agency would be telling 
State-regulated property/casualty insurance companies what they have to 
pay in claims. We strongly believe that State insurance commissioners 
should be involved in the loss allocation process. At the very least, 
State commissioners should have a seat on the arbitration panel.

Technical Questions on the Standardized Loss Allocation Model
    The COASTAL Act establishes a mechanism called the ``Standardized 
Loss Allocation'' (SLA) model that will purportedly utilize the most 
scientifically valid determinations of wind and water loss for insured 
coastal properties, in cases where only a foundation, or ``slab,'' 
remains of the original property. The model is developed by the 
National Oceanic and Atmospheric Administration (NOAA), and is required 
to be 90 percent accurate for each individual property that is subject 
to the SLA system for allocating losses. If the SLA model is less than 
90 percent accurate, it will not be used to allocate losses and claim 
disputes could then move to litigation, as happened in several Gulf 
Coast States after the 2005 Hurricane Season.
    While NOAA may have a sufficient number of weather sensors in 
hurricane-prone areas, experience has shown that strong storms, which 
cause the greatest number of indeterminate losses, are likely to damage 
the NOAA sensors relied upon for this model, causing the sensors to 
fail. In this scenario, the NOAA model would not reach 90 percent 
accuracy and the affected policyholders and insurers would receive no 
more clarity than they have today. Ironically, the low-probability, 
high-impact events whose aftermath the model is intended to address are 
precisely those for which it will probably be rendered useless.
    We also are concerned that the model may be overly reliant on NOAA 
while disregarding credible private sector resources for this type of 
loss analysis. For example, specialized engineering and scientific 
firms also offer baseline damage surveys, topographic surveys, and 
meteorological analysis of such total loss properties. Such additional 
input into the model would ease our concerns about NOAA's potential 
limitations. If not added to the NOAA model, independent causation 
analysis should be admissible in the appeal arbitration process.

Voluntary Participation in the Loss Allocation Model
    NAMIC appreciates the intent by Senator Wicker to make 
participation in the SLA system voluntary for all non-Write Your Own 
(WYO) insurers. However, as the bill is written, this provision appears 
somewhat vague. Additional language clarifying the category of insurers 
for whom participation will be truly voluntary would be appreciated.
    Furthermore, we believe this model could create an unstable 
business environment for the Write Your Own carriers and thus force 
their exit from the WYO marketplace. While we are unable to 
substantiate such claims before implementation, concerns remain over 
the civil liabilities provision and the lack of preemption from ``bad 
faith'' lawsuits. WYO carriers may very well determine that the number 
of ``slab'' claims that would trigger use of the model is not great 
enough to cause real concern. The true market signal will come in 
response to implementation of the COASTAL Act. As such, a pilot program 
that includes full implementation throughout the United States with a 
sunset provision requiring reauthorization may be a prudent move by 
Congress.

Limitations on Private Claims Adjusting
    NAMIC is concerned about limitations placed on the private 
insurance adjuster's role in the indeterminate loss allocation process. 
We appreciate that the bill allows private insurance adjusters to 
participate in the process by determining ``slab-only'' cases and 
contributing additional pertinent property-loss data to the NOAA storm 
model. However, after the ``slab'' determination and data entry, the 
adjuster must then cede decision-making authority and defer to NOAA's 
``standard formula'' as a tool to settle the claim. Aside from our 
questions about the SLA model's accuracy, forfeiting control by private 
insurers to the Federal Government creates a disconcerting precedent.
    It will be imperative that the appeals through the five-member 
arbitration panel include consideration of the private insurers' 
findings, both from their adjusters and from independent causation 
analysis professionals.
    Finally, the bill also appears to invite lawsuits against adjusters 
for their determinations of ``slab'' properties, which we believe sets 
another dangerous precedent that could potentially cause WYO carriers 
to leave the WYO program. By the same token, it could deter adjusters 
from handling flood claims, especially ``slab'' cases. The ensuing 
reduction in the number of certified adjusters handling such claims 
may, in turn, result in delays in NFIP claim adjustment.

Scope of the Standardized Loss Allocation Process
    As we understand the current draft of the bill, the Standardized 
Loss Allocation process established by the COASTAL Act would apply only 
to indeterminate loss claims where both private wind coverage and NFIP 
flood coverage are in place; it would not apply in cases where the 
affected property was not covered by flood insurance. However, some 
proponents of the bill have suggested that it would apply as well in 
cases where no flood coverage is in place. We trust that this 
interpretation is incorrect, but the fact that there is evidently some 
confusion on this point indicates that clarifying language should be 
added to the bill.

Summary of COASTAL Act Viewpoint
    There is no doubt that insurers and policyholders alike would 
benefit from the creation of a fair and efficient method for allocating 
indeterminate losses that obviates the need for costly and time-
consuming litigation. On the other hand, neither insurers nor coastal 
property owners will benefit from a new system that ultimately limits 
access to, and affordability of, homeowners insurance. We share Senator 
Wicker's goal of ensuring timely and fair claims payments to victims of 
natural disasters. NAMIC looks forward to working closely with Senator 
Wicker and his colleagues to ensure that the measure will succeed in 
achieving positive results for insurers and policyholders while 
avoiding potential negative consequences.

Conclusion
    The NFIP is in need of significant reforms in order to continue 
providing flood protection to those who need it. As a practical matter, 
there is no private residential market for flood insurance and efforts 
to create one will continue to be frustrated by rate regulation, 
adverse selection, and capital constraints. However, other proposals 
that seek to explore a risk-bearing role for the private sector in the 
NFIP may have merit and should be given due consideration. For example, 
ceding a portion of the NFIP's risk to the private sector through 
reinsurance and catastrophe bonds could reduce taxpayer exposure to 
future debt.
    In sum, the objective of any reform legislation should be to 
maintain and optimize the current flood insurance program. We believe 
that optimization is the best way to balance the many goals of the 
reform effort: fiscal soundness, affordability of insurance, adequate 
coverage for those at risk, floodplain management (reduction of flood 
hazard vulnerability), economic development, individual freedom, and 
environmental protection.
    NAMIC thanks the Committee for its consideration of National Flood 
Insurance Program reform. We hope that current legislative proposals 
will incorporate NAMIC's five fundamental objectives outlined in this 
testimony. We look forward to working with the Committee on these and 
further suggestions for ways that the current structure can be 
maintained and optimized.
                                 ______
                                 
STATEMENT SUBMITTED BY THE INDEPENDENT INSURANCE AGENTS AND BROKERS OF 
                                AMERICA
    The Independent Insurance Agents and Brokers of America, also known 
as the Big ``I'', is grateful for the opportunity to submit testimony 
to the U.S. Senate Committee on Banking regarding the reauthorization 
of the National Flood Insurance Program (NFIP). The Big ``I'' is the 
Nation's oldest and largest trade association of independent insurance 
agents and brokers, and we represent a nationwide network of more than 
300,000 agents, brokers, and employees. IIABA represents independent 
insurance agents and brokers who present consumers with a choice of 
policy options from a variety of different insurance companies. These 
small, medium, and large businesses offer all lines of insurance--
property/casualty, life, health, employee benefit plans, and retirement 
products. In fact, our members sell 80 percent of the commercial 
property/casualty market. 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.

Background
    The Big ``I'' believes that the NFIP provides a vital service to 
people and places that have been hit by a 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 the program in 1968, the Federal 
Government spent increasing sums of money on disaster assistance to 
flood victims. Since then, the NFIP has saved disaster assistance money 
and provided a more reliable system of payments for people whose 
properties have suffered flood damage. It is also important to note 
that for almost two decades, up until the 2005 hurricane season, no 
taxpayer money had been used to support the NFIP; rather, the NFIP was 
able to support itself using the funds from the premiums it collected 
every year.
    Under the NFIP, independent agents play a vital role in the 
delivery of the product through the Write Your Own (WYO) system. 
Independent agents serve as the sales force of the NFIP and the 
conduits between the NFIP, the WYO companies, and consumers. This 
relationship provides independent agents with a unique perspective on 
the issues surrounding flood insurance, yet also makes the role of the 
insurance agent in the delivery process of flood insurance an 
incredibly complex endeavor. Agents must possess a high degree of 
training and expertise and must regularly update their continuing 
education credits through flood conferences and seminars. Every agent 
assumes these responsibilities voluntarily and does so as part of being 
a professional representative of the NFIP.
    Despite our strong support of the NFIP, we also recognize that the 
program is far from perfect, which was made all the more clear by the 
devastating 2005 hurricane season. The current $18.3 billion dollar 
debt, incurred in 2005, reveals some of the deficiencies of the program 
and has strained Government resources. It is important that Congress 
shore up the NFIP's financial foundation and use this opportunity to 
enact needed reforms to ensure the long-term sustainability of the 
program.
    For this reason, the Big ``I'' strongly supports both reauthorizing 
and reforming the NFIP.

Long Term Extension
    As you know, the NFIP is a Congressionally authorized program that 
requires periodic extensions. Traditionally these extensions have been 
for multiple years (often for 5-year periods) but in recent years 
Congress has not passed a long-term extension of the program and 
instead has opted to pass numerous short-term extensions. Last year 
alone the NFIP expired three separate occasions only to be 
retroactively extended by Congress each time. Each expiration of the 
program led to concrete damage to the real estate market and the 
country's economy. During one month-long expiration in June 2010, for 
example, the National Association of Realtors estimated that as many as 
50,000 new home loans were either significantly delayed or canceled. 
While the IIABA appreciates each of the retroactive extensions, we 
strongly believe that in order to provide certainty to the marketplace 
as well as avoid damage to our fragile economy, Congress should pass a 
long term extension.
    Even the short term extensions passed over the last several years, 
while thankfully staving off expiration of the program, caused their 
own economic damages. Every time the program is set to expire, WYO 
companies send notices to their consumers about the pending expiration, 
agents must then communicate to their clients about what the 
ramifications of an expiration would be (as well as oftentimes 
providing real time legislative updates on extension legislation), 
banks must prepare for how and if to enforce the mandatory purchase 
requirement of an expired program, and Realtors and mortgage bankers 
must discuss with their customers how and if to proceed with home loan 
closings. While not nearly as damaging as an actual expiration, the 
uncertainty and the increased work-load caused by short term extensions 
justifies a long term extension of this critical program.
    It is for these reasons that IIABA strongly urges the Senate to 
include a 5-year extension in any NFIP reform legislation.

Flood Insurance Reform and Modernization Act of 2007
    As you know, the Senate in May of 2008 passed the Flood Insurance 
Reform and Modernization (FIRM) Act of 2007 by an overwhelming vote of 
92-6. The Big ``I'' strongly supported this legislation and urges the 
Committee to use its text as a starting point for writing a reform and 
reauthorization bill in this Congress. In addition to a 5-year 
extension, the 2007 Senate FIRM Act included common sense reforms to 
the program that were intended to put it on the path towards financial 
sustainability. Some of these common sense reforms strongly supported 
by the Big ``I'' include the phasing out of many subsidies and the 
increase in the elasticity band for annual premium increases.
    The Big ``I'' has for many years asked Congress to explore phasing 
out subsidies in the NFIP altogether and strongly supports these 
provisions found in the 2007 Senate FIRM Act. Almost 25 percent of 
property owners participating in the NFIP pay subsidized premium rates. 
These subsidies allow policyholders with structures that were built 
before floodplain management regulations were established in their 
communities to pay premiums that represent about 35 to 40 percent of 
the actual risk premium. The subsidized rates were deliberately created 
by Congress in 1968 in order to help property owners during the 
transition to full-risk rates. However, after 43 years the Big ``I'' 
believes it is time to start phasing out this significant 
subsidization.
    In addition to the fact that subsidized rates torpedo any hope that 
the NFIP could ever be actuarially sound, FEMA estimates that 
subsidized properties experience as much as five times more flood 
damage than structures that are charged full-risk rates. Customers that 
are paying a full actuarial rate have a vested interest to take 
measures to reduce the economic damages associated with floods. In 
contrast, those with subsidized rates have less incentive to mitigate. 
The Big ``I'' supports phasing out subsidies for commercial buildings, 
second and vacation homes, homes experiencing significant damage or 
improvements, repetitive loss properties, and homes sold to new owners.
    The Big ``I'' also strongly supported the Senate's proposal to 
increase the ``elasticity band'' with which FEMA can increase premiums 
in any given year. Currently the annual elasticity band for premium 
increases is a maximum of 10 percent on any property. The legislation 
would have proposed to increase this band to 15 percent, which will 
hopefully allow the program to move even more properties towards 
actuarially priced rates. The Big ``I'' hopes that any new reform 
legislation will include both the removal of many of these subsidies 
and the increase in the elasticity band for premium adjustments.

Additional Recommendations
    The Big ``I'' urges the Senate to consider modernizing the NFIP by 
increasing maximum coverage limits and by allowing FEMA to offer the 
purchase of optional business interruption and additional living 
expenses coverage.
    The inclusion of optional business interruption coverage is 
particularly important to Big ``I'' members and their commercial 
customers. If a flooding catastrophe causes a business' premises to be 
temporarily unusable, that business may have to relocate or even close 
down temporarily. Property owners are still required to pay employees, 
mortgages, leases and other debts during this process, and these 
ongoing expenses can mount up quickly for a business on reduced income 
or no income at all. For property insurance policies, business 
interruption insurance provides protection against the loss of profits 
and continuing fixed expenses resulting from an interruption in 
commercial activities due to the occurrence of a peril. The inclusion 
of an optional business interruption provision at actuarial rates will 
provide stability to the local economies in the areas affected by flood 
damage and will offset Government disaster relief payments should the 
flood peril result in widespread destruction across a region. Business 
interruption coverage, and the security and peace of mind it provides, 
is important to our members and to small businesspeople across America.
    The Big ``I'' also strongly supports the option for a consumer to 
purchase additional living expenses. Additional living expenses 
coverage would allow the consumer to purchase, at an actuarial price, a 
dollar amount of coverage for such expenses as hotel, food, replacement 
clothes, etc., should the consumer be dislocated from his or her 
residence. This provision will provide consumers with greater security 
during the often bewildering post-flood period, and will do so in an 
actuarial basis as opposed to relying solely on FEMA grants and 
assistance.
    Both the optional business interruption and additional living 
expense coverages are common in the private market for other perils, 
but are specifically excluded for flood insurance and are not currently 
available through the NFIP. Unfortunately, this gap in coverage leaves 
consumers unprotected and in many cases confused, as consumers falsely 
believe that they are either covered for such losses by their private 
insurance or their NFIP policies.
    The business interruption and additional living expenses coverage 
were not present in the 2007 Senate FIRM Act, but we urge the Committee 
to reconsider their inclusion in the new reform legislation. In 
particular, we urge the Committee to consider modifications made to 
language in the House of Representatives that we feel rein in any 
potential for an impingement on the private market or a deleterious 
effect on taxpayers. New language added this year imposes three 
important factors that must be met before FEMA could consider offering 
the coverages: that FEMA charges actuarial rates for the coverage, that 
FEMA makes a determination that a competitive private market does not 
currently exist, and that FEMA certify that these coverages will not 
result in any additional borrowing from the Treasury. Additionally new 
language was added that limits the amount of optional business 
interruption coverage at $20,000 and additional living expenses at 
$5,000. The Big ``I'' supports the goals of each of these conditions 
and the limits and believes their addition should put at ease any 
concerns that stakeholders may have over their inclusion. In fact, the 
CBO recently released its score of the House bill and specifically 
noted that they do not anticipate the business interruption and 
additional living expenses provisions to have any impact on Federal 
revenues.
    Finally, also chief among our additional recommendations is the 
proposed increase in the maximum coverage limits. The NFIP maximum 
coverage limits have not been increased since 1994. An increase in the 
maximum coverage limits by indexing them for inflation will better 
allow both individuals and commercial businesses to insure against the 
damages that massive flooding can cause and will increase the program's 
popularity and take-up rates. The CBO score on the House reform 
legislation also found that indexing maximum coverage limits to 
inflation would have no effect on Federal revenues.

Privatization of the NFIP
    Some observers have argued that the program should be eliminated or 
completely privatized. These arguments center on the assumption that 
the private market could step in and offer flood insurance coverage. 
However, the IIABA has met with many insurance carriers who 
categorically state that the private market is simply unable to 
underwrite this inherently difficult catastrophic risk, especially in 
the most high-risk zones where it is needed. IIABA would always prefer 
to utilize the private market, and our members would almost certainly 
prefer to work directly with private insurance carriers rather than a 
Government agency. However, where there is a failure in the 
marketplace, as there is in the case of flood insurance, we believe it 
is imperative that the Government step in to ensure that consumers have 
the protection they need. This was the reason the NFIP was first 
created in 1968, because the private market could not offer flood 
insurance and a series of high profile floods had consumers turning to 
direct Federal disaster assistance as their only recourse. We see no 
evidence that the private marketplace is any more prepared or capable 
of underwriting flood risk in 2011 than they were in 1968.
    We do not, however, oppose any Government studies on private market 
capacity. We believe that these studies will likely show that the 
private market cannot properly underwrite flood risks, but if it can be 
demonstrated that a private market could emerge in some way, we would 
welcome that discussion.

COASTAL Act
    The Big ``I'' appreciates Senator Roger Wicker's (R-MS) efforts to 
address the complicated issue of loss allocation of wind versus water 
damage on total loss properties following named storm events. Hurricane 
Katrina clearly demonstrated both the devastating power of hurricanes 
as well as the havoc they can wreak on homeowners that are left with 
nothing more than slabs of concrete where their home once stood. 
Independent insurance agents pride themselves on standing with their 
consumer throughout the entire claims process, and the difficult and 
often lengthy loss adjudication process between flood damage and wind 
damage following Hurricane Katrina was clearly an undue burden on many 
consumers. It is important that a clear method of allocating these 
losses in both a fair and timely manner is developed, and we look 
forward to continuing to work with Senator Wicker and this Committee on 
developing such a process.

Conclusion
    The IIABA is very pleased that the Committee is conducting today's 
hearing on comprehensive flood insurance reform and we urge the Senate 
Banking Committee to quickly develop legislation and send it to the 
full Senate for action. As we have stated, we believe the Flood 
Insurance Reform and Modernization Act of 2007 is a useful starting 
point for developing new legislation, and urge the Committee to also 
consider adding provisions allowing the offering of optional business 
interruption and additional living expenses at actuarial rates. We hope 
very much that this hearing will contribute to additional action taken 
by Congress to pass flood insurance reforms and to ensure the stability 
of the NFIP.
                                 ______
                                 
 STATEMENT SUBMITTED BY CRAIG POULTON, CEO OF POULTON ASSOCIATES, INC.

    My name is Craig Poulton. I am the CEO of Poulton Associates Inc. 
which is located in Salt Lake City Utah. Poulton Associates is engaged 
in the business of property and casualty insurance brokerage. Our 
organization acts as the administrator of the Natural Catastrophe 
Insurance Program. The Natural Catastrophe Insurance Program is 
available in all 50 States through over 2,500 independent insurance 
producers. Under the Natural Catastrophe Insurance Program the perils 
of flood, earthquake and landslide may be insured for both personal and 
commercial properties through Certain Underwriters at Lloyds (London). 
Thank you for allowing us to participate in this hearing.
    With the exception of insurance policies backed by the Federal 
Government through the National Flood Insurance Program (NFIP), the 
Natural Catastrophe Insurance Program is the largest provider of 
primary flood insurance coverage in the United States with well over 
$2.2 billion in property values being insured for the risk of flood on 
a primary basis.
    Perhaps the most illuminating thing I could point out for your 
consideration is that after 7 years of aggressively marketing the 
Natural Catastrophe Insurance Program we have been able to capture only 
about one-tenth of one percent of the flood insurance market 
represented by the 5.5 million risks insured through the NFIP.
    One might initially suppose that we have been, by and large, 
unsuccessful in our efforts to penetrate the primary flood insurance 
market because the insurance coverage we offer is somehow less 
appealing or the pricing is much higher than that available through the 
NFIP. This is not the case; in fact our product is widely recognized by 
laypersons and insurance professionals (including the over 2,500 who 
market the product) as being superior in both coverage and pricing to 
the insurance coverage available through the NFIP.
    Flood zone borrowers will often explore alternatives to the NFIP by 
looking for competitively priced privately backed non-NFIP policies. 
They often find that our policy is more attractive than the NFIP 
policy; since they have been informed that they have the option to 
choose private flood insurance, they do so and submit it to the lender 
to comply with the Mandatory Purchase Requirement. Often, just hours 
prior to loan closing, the borrower is informed by the lender that the 
coverage they have elected and paid for will not be accepted to satisfy 
the terms of the Mandatory Purchase Requirement.
    Often the lenders' paradoxical rational is that the policy is a 
non-NFIP private policy and is therefore not acceptable, even though as 
required under the Act, it was the lender who informed the borrower 
that private coverage may be available. The lender will explain that 
their Federal regulator/auditor will not accept anything but NFIP 
coverage, even if the coverage provided by us is in the best interest 
of the property owner and the lender from a coverage and pricing 
standpoint.
    The borrower is then forced to either cancel our policy and 
purchase an NFIP policy, or walk away from the purchase arrangement. As 
one would expect, the borrower rushes to cancel our policy and purchase 
NFIP coverage.
    The reason we have been relatively unsuccessful in our efforts is 
that, even though Congress obviously intended for the NFIP to be a 
stepping stone to the assumption of primary flood risk by the private 
market, the NFIP and Federal Lending Regulators have combined to 
preclude our program from being accepted by the mortgage banking 
community as a satisfactory replacement for NFIP insurance.
    This unfortunate circumstance results from the fact that regulators 
at the NFIP publish a booklet known as the ``Mandatory Purchase of 
Flood Insurance Guidelines'' typically referred to as the Mandatory 
Purchase Booklet. This booklet contains a series of six guidelines 
describing what a private insurance policy should look like in order to 
be acceptable in the place of an NFIP policy. In addition the booklet 
includes the following instruction, `` . . . a lender should understand 
and comply with FEMA's criteria for selection of private insurer and 
the form of Coverage.''
    The problem is that having published these guidelines FEMA/NFIP 
officially refuses to interpret them. No one has been designated by 
FEMA or the NFIP to interpret these guidelines. Like any law the 
guidelines need someone to interpret them. In the United States 
Congress makes laws and the courts interpret those laws when necessary. 
In this case, FEMA/NFIP has acted to create what has been taken for the 
law but has provided no one to interpret it or adjudicate differences 
of interpretation.
    Federal Lending Regulators have implemented the Mandatory Purchase 
Booklet guidelines in such a way that FEMA is now perceived as a de 
facto private flood insurance regulator among Federal Lending 
Regulators and regulated lenders. In FEMA's efforts to issue 
appropriate rules and regulations, FEMA has created an impression of 
authority which is absolute but leaves Federal Lending Regulators and 
regulated lenders in the dark as far as which private insurance 
policies are acceptable. As a default position, most lenders simply 
elect to preclude all private insurance policies from being accepted in 
the place of NFIP insurance policies.
    I don't think it is too difficult to see why with an attractively 
priced product providing broader coverage, we have been unable to 
compete effectively against NFIP. Federal Lending Regulators, being 
without expertise in insurance regulation, take what they see as the 
most conservative position: that if a private insurance policy is not 
identical to the NFIP policy, it is not acceptable. This, of course, 
limits consumer choice, forces taxpayers to assume even more flood risk 
and limits competition.
    Consider, in concert with all of this, that virtually all insurance 
regulation in the United States is accomplished by State insurance 
regulators and that the NFIP policy, which is not State regulated, has 
many provisions that would not be allowed in most States. Now, consider 
the fact that NFIP guidelines are implemented by Federal Lending 
Regulators in such a way that they require private, State regulated 
policies to be exactly like the NFIP policy. This puts us in a classic 
``Catch 22'', with no way to compete without violating a perceived 
Federal regulation or a very real State regulation.
    As part of the notification process, Congress requires the lender 
to provide written notification to the borrower which includes, `` . . 
. a statement that flood insurance may be purchased under the national 
flood insurance program and is also available from private insurers.'' 
And yet, Federal regulation has made private flood insurance 
effectively unavailable.
    You may find the following examples and observations about the 
unintended consequences which have been born of the current regulatory 
paradigm revealing.
    Because the NFIP guidelines are so vague, bank regulators reject 
private policies because the private policy contains State mandated 
cancelation provisions beneficial to the insured but not ``allowed'' by 
the bank regulator's interpretation of the NFIP guidelines and NFIP 
cancellation provisions. For example, NFIP will not refund any premium 
if the insured cancels the policy; however, private carriers must 
return the premium in order to comply with State law.
    Additionally, NFIP forces each detached structure to be insured on 
a separate policy. State regulators disallow the practice of selling 
multiple insurance policies on the same property when it could be done 
more inexpensively under a single contract. Bank regulators 
consistently require that the home and the garage and the shed and the 
chicken coop and the rabbit hutch be insured, each under its own 
insurance policy because ``that is the way NFIP does it.'' This occurs 
even though private insurance policies such as ours typically provide 
automatic coverage on the garage, shed, chicken coop and rabbit hutch 
at no additional charge under a combined limit.
    The FEMA private insurance guidelines have some obviously foolish 
requirements such as that found in Section 5. Private Flood Insurance, 
f. Legal Recourse, which says: ``The policy must contain a provision 
that the insured must file suit within 1-year after the date of written 
denial of all or part of the claim.'' The result of this provision is 
to force a private insurer to limit the recourse of the buyer because 
``that is the way NFIP does it.'' This results in requiring the private 
insurance company to adopt a provision which is directly against the 
public interest, as well as being against the interest of each 
policyholder.
    In direct contradiction of the congressionally mandated requirement 
that notification of the availability of private insurance is to be 
given to all borrowers, agencies such as Fannie Mae and the FHA 
specifically require that the borrower obtain a National Flood 
Insurance Policy to satisfy the Mandatory Purchase Requirement. The 
Fannie Mae regulations state that flood policies should generally be 
issued directly by the NFIP, or alternatively, a policy may be obtained 
by licensed property and casualty insurance company authorized as a 
``Write Your Own'' (WYO) participant. The Federal Housing 
Administration Handbook states, ``Insurance under the NFIP must be 
obtained as a condition of closing and maintained for the life of the 
loan for an existing property when any portion of the residential 
improvements is determined to be located in a SFHA.'' Thus, Fannie Mae 
and the FHA have summarily limited choice to NFIP flood coverage only 
for millions of borrowers.
    NFIP's Lender Compliance Officers and Federal Lending Regulators 
consistently recognize the validity of privately backed insurance 
policies known as ``force placed'' primary flood coverage on properties 
where the borrower has not furnished flood insurance to satisfy the 
Mandatory Purchase Requirement. FEMA estimates that these non-NFIP 
policies placed by the lender equaled approximately 100,000 to 200,000 
risks in 2004. These policies obtained by the lender are typically 
placed with Lloyd's of London under a more restrictive form to the one 
we offer. Yet regulators take no issue with lenders purchasing flood 
insurance on this more restrictive Lloyds of London coverage form, 
while they deny individual borrowers the same freedom of choice. 
Shouldn't consumers have the same option as is allowed to the bank in 
choosing the best coverage they can find?
    Stretching believability by comparison, our most widely purchased 
policy which provides coverage for flood, earthquake, and landslide has 
often been rejected by Federal Lending Regulators because we cover MORE 
PERILS than the NFIP policy. The NFIP will only cover flood while our 
policies routinely cover multiple perils. This circumstance is stunning 
and this interpretation of the guidelines is clearly not in the 
interest of the consumer, but it continues to happen because, ``that's 
not how NFIP does it.''
    Our program has many other enhancements not available under NFIP 
such as much higher limits of coverage, a broader policy definition of 
flood, coverage for additional living expense for homeowners and 
business income and extra expenses for property owners, coverage for 
increased cost of building materials and coverage for finished 
basements and basement contents, to name a few. In addition, we offer 
coverage for the perils of earthquake, flood and landslide at a 
competitive price when compared to flood only coverage from NFIP. When 
our flood insurance is purchased, it is most often provided in 
combination with coverage for earthquake and/or landslide, thus 
insulating the Federal balance sheet from loss due to the need to 
provide disaster recovery assistance for losses from the perils of 
earthquake and landslide. When you think of this in relation to the 
fact that Federal Lending Regulators cite to much coverage as a reason 
to reject our policy, it is just staggering. We have submitted as part 
of this testimony a brief comparison of the NFIP policy and the policy 
form most purchased by consumers under our program.
    By establishing the National Flood Insurance Act, Congress clearly 
intended that regulators should encourage, not discourage, the 
acceptance of private flood insurance by financial institutions in 
addition to, or in lieu of, NFIP coverage.
    Regulatory practices should foster and support free market 
participation and creativity, rather than limiting the consumer to NFIP 
products. Insurance products and services should be allowed to enter 
the market unfettered by over-reaching regulatory mandates and 
guidelines, thus benefiting consumers by giving them options that meet 
their needs while spreading the risk of flood loss.
    It seems to us that the current situation can be most easily and 
simply corrected by directing FEMA and all Federal Lending Regulators 
to recognize that, like all other private property insurance policies, 
private flood insurance is regulated by the States. State regulators 
should be charged with the interpretation and enforcement of the 
existing Private Insurance Guidelines published by FEMA along with any 
applicable State regulations. In this way, Congress will provide for 
interpretation of all regulations by qualified regulators who can bring 
consistency and harmony to the process of regulating private flood 
insurance. This course of action will improve outcomes for all 
concerned while actually reducing the cost of administration for all 
parties, especially the Federal Government. It will be crucial to 
disallow FEMA from creating any additional guidelines in order that 
unmanageable complications do not destroy the ability of State 
regulators to modify, coordinate, and synchronize Federal and State 
regulations in the long term.
    In many developed countries, flood risk is entirely shouldered by 
the private market. Because the NFIP has been allowed to become ``the 
only game in town'' for so many years, the vast majority of people are 
not even aware that private primary flood insurance is available in the 
United States. If decisive actions to support the private market are 
not taken by Congress soon, over time, there will be no private 
alternative to taxpayer funded flood insurance in the United States. By 
taking action now, Congress can spread the assumption of flood risk 
more widely, provide consumers with real options, and give taxpayers 
greater protection from unnecessary exposure to federally funded flood 
insurance losses.
    Thank you.

    
    
 STATEMENT SUBMITTED BY THE PROPERTY CASUALTY INSURERS ASSOCIATION OF 
                                AMERICA

Introduction
    The Property Casualty Insurers Association of America (PCI) 
believes that the National Flood Insurance Program (NFIP) is a 
necessary public policy program that should be continued. Currently, 
the flood program is set to expire at the end of September this year.
    We commend Chairman Johnson, Ranking Member Shelby, and the Members 
of this Committee for taking up this issue in a timely manner. We would 
urge you to pass legislation providing for a long-term reauthorization 
of the NFIP as soon as possible. There have been ten short-term 
extensions of the program since September 30, 2008, and there were four 
``lapses'' in the program in 2010, causing significant disruption in 
the vulnerable housing markets at a time when the U.S. economy and 
particularly the housing sector is struggling to recover from the 
recent financial crisis.
    While significant reforms in the NFIP are needed, we believe that 
such changes should be kept to a minimum. There are more than 5.6 
million NFIP policyholders in the U.S., and a long-term reauthorization 
of the program is essential to help provide stable protection for the 
country's property owners.
    PCI believes the most important reforms are as follows, and several 
were addressed in the legislation that passed in the Senate in 2008 (S. 
2284):

The Program Should Be Reauthorized on a Long-Term Basis (e.g., for 5 
        Years)
    The program has been extended on a short-term basis a total of 10 
times since its original expiration on September 30, 2008, and is set 
to expire again on September 30, 2011. A long-term reauthorization will 
ensure that there will be no gaps in coverage, which occurred four 
times in 2010 alone, each one longer than the previous.
    Gaps in coverage caused significant disruption in the housing 
markets. Home buyers in flood zones with a federally backed mortgage 
are required to purchase flood coverage before the property can be 
closed on, and last year, over 40,000 real estate transactions were 
delayed because of the NFIP expirations.
    The following are specific changes in the program that should be 
addressed as Congress considers improvements in the program:

Fix the Rate Structure
    The rates charged for certain properties in the NFIP have been 
subsidized since its inception in 1968. It is time that these subsidies 
end and that the true cost of insuring property in hazardous areas is 
reflected in the premiums for those properties. These properties should 
not continue to be subsidized by other NFIP policyholders or U.S. 
taxpayers.
    Long term reauthorization passed by the Senate in the 110th 
Congress included raising the maximum annual rate increase from 10 to 
15 percent (and up to 25 percent until the appropriate premiums are 
being charged). This is critical as we believe that the premiums should 
reflect the risk of loss. The previous bill also increased the minimum 
deductibles which we believe more appropriately represents deductible 
amounts in the private market for homes and businesses. Increasing the 
deductible amount should also help from a fiscal standpoint as smaller 
losses would be absorbed by the policyholder and the vital protection 
provided for significant losses would be protected.
    PCI also believes that a reserve fund, setting aside 1 percent of 
total potential loss exposure as proposed in the 2008 legislation, is 
important. Increasing the rates is the first step; however, the program 
must begin to further offset the significant subsidy (which FEMA states 
is 40-45 percent for pre-FIRM properties). The rates need to be closer 
to the true market rate before any discussion related to the private 
industry taking on flood risk can take place.
    PCI estimates that flood insurance premiums would potentially need 
to double, and in some cases triple if the private insurance market was 
to write this business on a primary basis (see attached). Proposals to 
end the NFIP's primary flood underwriting are unrealistic given the 
current steep subsidies and the recognized unwillingness of many 
homeowners to purchase coverage even when mandated and at highly 
subsidized rates.

Depopulate the NFIP Direct Program
    In 2010, the second-largest WYO program participant decided that 
the cost of participation and the litigation exposure were too great 
given the current reimbursement amount. PCI is opposed to any reduction 
or other proposal that would further impact the number of WYOs 
participating in the program.
    The departure of the second largest WYO participant created another 
problem, a 700 percent growth in the amount of business being written 
in the NFIP ``direct'' program. When a WYO insurer decides or is forced 
to leave the program, there are two options for these policies through 
an agreement with the departing insurer and the NFIP: (1) contracting 
with one or more other WYO insurers to assume the business at renewal; 
or (2) placing it in the ``direct'' program administered by the NFIP. 
The ``direct'' program had roughly 125,000 policies at the beginning of 
October, 2010. With the departure of this large WYO insurer and a 
decision by that insurer to put the business in the ``direct'' program, 
the program will now have more than 900,000 policyholders, making it 
the largest servicing entity in the program. This could create 
significant problems regarding staff handling claims following a major 
flooding event.
    PCI believes that this ``direct'' business should be redistributed 
and administered by private insurers who are part of the WYO program. 
As previously mentioned, the WYO program has been a significant success 
with regard to increasing the awareness and purchase of flood insurance 
nationwide. The number of policyholders in the program has more than 
tripled and taxpayers, policyholders, and the Federal Government 
benefit from the private insurance industry infrastructure. PCI would 
encourage you to look at a legislative approach to reduce the size of 
the NFIP ``direct'' program such as setting a cap and pushing policies 
eligible to be written by WYO participating insurers back into the 
private sector. We pledge to work with you and interested stakeholders 
on this important issue.

Address Servicing Issues
    The ``Write-Your-Own'' (WYO) program, established in 1984, has been 
very successful increasing participation in the NFIP; however, it has 
also been the subject of legislative discussion over the past few 
years. There have been issues related to loss settlement, expense 
reimbursement and participation in the NFIP by WYO insurers.
    Following Hurricane Katrina, there were significant issues related 
to the settlement of wind and water losses. However, many of these 
issues would have been addressed by the application of the NFIP appeals 
process that was included in the Flood Insurance Reform Act of 2004. 
Unfortunately, that process was not ready when Katrina hit.
    S. 2284 called for a National Flood Insurance Advocate as one way 
to address policyholder issues. PCI is opposed to the creation of yet 
another Federal Government office that would, essentially, be charged 
with appeals and other responsibilities addressed by the flood 
insurance legislation enacted in 2004. This would be duplicative of 
existing methods available to NFIP policyholders. That legislation also 
required that insurers file information with the NFIP related to any 
claims related to wind losses. This is inappropriate. Many insurers are 
not involved with the NFIP program at all. This provision would further 
the Federal regulation of entities already very heavily regulated at 
the State level. In fact, any concerns expressed by a policyholder with 
regard to the handling of the claim fall under and can be addressed 
through other methods and by State claims settlement practices acts.
    A new legislative proposal calls for allocation of wind and water 
damages by a Federal agency after the event as a way to solve this 
problem. PCI does not believe that this approach is viable or 
appropriate. It calls for the use of this process only with regard to 
``indeterminate losses'' (i.e., where the cause cannot be determined) 
for total losses (e.g., ``slab'' claims). We believe that despite the 
restrictive language, it will be used for other flood or wind loss 
related claims as well. While well-intentioned, this proposal has the 
effect of federally regulating private insurance entities that, more 
likely than not, are not even involved with the Federal NFIP.
    The allocation sets up the expectation for policyholders that, once 
the percentages are determined, the total of the payments will equal 
100 percent of the loss. In fact, due to the many coverage differences 
between the property insurance policy and the NFIP policy (e.g., the 
aforementioned additional living expenses included in a homeowners 
policy), this will not be the case. It may also create more litigation 
since there are specific State laws that require claims to be settled 
within a specific time frame. Those time frames are typically 
significantly shorter than the proposed 90 days to establish the 
allocation formula. The formula would also allocate based a general 
geographical area, not a specific property location. Finally, we know 
following Hurricane Ike (2008), some allocation formulas were used 
following this event. This method was later challenged through 
litigation that has just been settled for $200 million. We would be 
happy to discuss other issues related to this approach with Members of 
the Committee.
    The expense reimbursement has also been the subject of debate 
without any changes that would help reduce costs. Following Katrina, 
the NFIP worked with the WYO participating insurers to revise the 
claims expense reimbursement when significant catastrophes occur. The 
NFIP reduced the amount of the claims expense reimbursement where the 
number of losses are significant and insurers and the NFIP benefit from 
some economies of scale. Another issue is that the number of actively 
writing WYO participants continues to drop.

Fix the Maps
    We understand that numerous issues have surfaced regarding the 
certification of levees and the ongoing map modernization efforts. We 
believe that a phase-in for these purchasers as well as the 
reestablishment of the Technical Mapping Advisory Council are important 
steps in addressing these significant issues for consumers, 
communities, the States and policyholders. We would ask that our 
industry be represented by inclusion of a representative of a flood 
insurance servicing carrier (a ``Write-Your-Own'' company) on this 
Council.
    PCI would encourage the extension of the Flood Insurance Reform Act 
of 2004 program for Severe Repetitive Loss Properties. It is time to 
buy-out, or otherwise charge the appropriate premium for these 
properties that continually flood and are rebuilt time after time.
    PCI also supports the inclusion of nationally recognized building 
codes in the floodplain management criteria. This would require FEMA/
NFIP to work with the building code councils to include this 
information. It would provide for better construction of properties and 
help minimize damage from a variety of perils, including flood as well 
as reduce the repetitive loss properties over time.

Include Additional Living Expenses and Business Interruption
    We believe that including some minimum protection, with the 
appropriate risk-based premium charge, for additional living expense 
coverage for residential properties as well as optional business 
interruption coverage is important and should be part of any reform. 
Additional living expenses help consumers and business interruption 
coverage helps business owners immediately move forward after a flood. 
This is a significant difference between the coverage that has been 
traditionally provided by private market property policies and the lack 
of such coverage in the flood policy. This has also been the subject of 
policyholder problems and litigation where there are losses under a 
flood policy as well as under a private or State policy providing 
windstorm protection.

Conclusion
    PCI is very pleased that the Committee is taking up this important 
issue at this time in an effort to provide for a long-term 
reauthorization of the program before another lapse occurs. We are 
eager to work with the Committee on legislation that would put the NFIP 
on a more sound financial footing by eliminating rate subsidies and 
addressing mapping issues. Finally, we believe that minimizing Federal 
intervention in private entities and providing private WYO insurers 
with the tools to service NFIP policyholders and the Government with 
access to and the economies of scale of our members' infrastructure is 
extremely important.
    Therefore, we would support passage of reauthorization and reform 
legislation and pledge to work with you to improve the National Flood 
Insurance Program. Thank you.
