[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]




                    OPPORTUNITIES FOR A PRIVATE AND

                     COMPETITIVE SUSTAINABLE FLOOD

                            INSURANCE MARKET

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                         HOUSING AND INSURANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                           NOVEMBER 19, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-101



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAAZQUEZ, New York
PETER T. KING, New York              BRAD SHERMAN, California
EDWARD R. ROYCE, California          GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma             MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia  RUBEEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey            WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas              CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California            DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota          AL GREEN, Texas
KEVIN McCARTHY, California           EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin
BILL POSEY, Florida                  KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK,              ED PERLMUTTER, Colorado
    Pennsylvania                     JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri         JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan              TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin             BILL FOSTER, Illinois
ROBERT HURT, Virginia                DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida              STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
                 Subcommittee on Housing and Insurance

                   RANDY NEUGEBAUER, Texas, Chairman

BLAINE LUETKEMEYER, Missouri, Vice   MICHAEL E. CAPUANO, Massachusetts, 
    Chairman                             Ranking Member
EDWARD R. ROYCE, California          NYDIA M. VELAAZQUEZ, New York
GARY G. MILLER, California           EMANUEL CLEAVER, Missouri
SHELLEY MOORE CAPITO, West Virginia  WM. LACY CLAY, Missouri
SCOTT GARRETT, New Jersey            CAROLYN McCARTHY, New York
LYNN A. WESTMORELAND, Georgia        BRAD SHERMAN, California
SEAN P. DUFFY, Wisconsin             GWEN MOORE, Wisconsin
ROBERT HURT, Virginia                JOYCE BEATTY, Ohio
STEVE STIVERS, Ohio                  STEVEN HORSFORD, Nevada
DENNIS A. ROSS, Florida


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    November 19, 2014............................................     1
Appendix:
    November 19, 2014............................................    23

                               WITNESSES
                      Wednesday, November 19, 2014

Brown, Don, Florida Property Insurance Expert....................    10
Ellis, Steve, Vice President, Taxpayers for Common Sense.........     6
Gray, Jordan N., Senior Vice President and General Counsel, WNC 
  Insurance Services, Inc........................................     8

                                APPENDIX

Prepared statements:
    Brown, Don...................................................    24
    Ellis, Steve.................................................    28
    Gray, Jordan N...............................................    31

              Additional Material Submitted for the Record

Neugebauer, Hon. Randy:
    Written statement of the American Bankers Association and 
      American Bankers Insurance Association.....................    37
    Written statement of the Big ``I''...........................    47
    Written statement of the National Association of Mutual 
      Insurance Companies (NAMIC)................................    51
    Written statement of the National Association of Professional 
      Surplus Lines Offices (NAPSLO).............................    56
    Written statement of the Property Casualty Insurers 
      Association of America (PCI)...............................    60
    Written statement of the Reinsurance Association of America 
      (RAA)......................................................    61
    Written statement of SmarterSafer.org........................    62
Ross, Hon. Dennis:
    Letter from Kevin McCarty, Florida Insurance Commissioner, 
      dated July 11, 2014........................................    63

 
                    OPPORTUNITIES FOR A PRIVATE AND

                     COMPETITIVE SUSTAINABLE FLOOD

                            INSURANCE MARKET

                              ----------                              


                      Wednesday, November 19, 2014

             U.S. House of Representatives,
             Subcommittee on Housing and Insurance,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:01 p.m., in 
room 2123, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Luetkemeyer, 
Garrett, Westmoreland, Hurt, Ross; and Capuano.
    Also present: Representative Murphy.
    Chairman Neugebauer. Good afternoon. This hearing of the 
Subcommittee on Housing and Insurance will come to order. The 
title of today's hearing is, ``Opportunities for a Private and 
Competitive Sustainable Flood Insurance Market.'' We will have 
opening statements limited to 10 minutes on each side. I also 
ask unanimous consent that members of the full Financial 
Services Committee who are not members of the subcommittee, and 
who have joined us today, will be entitled to participate. 
Without objection, it is so ordered.
    One of the things that is going to happen is probably right 
after we do the opening statements--and I don't know if we will 
get through the testimony of the panel before the next round of 
votes is called--but the plan is, is when they call votes we 
will briefly adjourn. We will go over, vote, and get back as 
quickly as we can and continue with this very important 
hearing.
    As I mentioned, the title of today's hearing is, 
``Opportunities for a Private and Competitive Sustainable Flood 
Insurance Market.'' One of the things that this Congress has 
done in the past is, it initiated a flood insurance program. 
Because what they found was, there was not a ready market for 
that at that particular time.
    Along the way, the Congress also decided that we needed to 
provide for private companies to participate in the market. And 
then, this Congress also decided that in the future, the 
taxpayers shouldn't have to subsidize people who live in areas 
that are higher-prone to flooding. And we said that they should 
start to pay actuarial rates.
    I think one of the reasons that this hearing is so 
important is that if we are going to move towards a private 
participation in the marketplace, we have to get the government 
out of the way, and we need to facilitate the ability for the 
private sector to be a part of this.
    I am very pleased that today we are going to be examining 
H.R. 4558, which is the Flood Insurance Market Parity and 
Modernization Act of 2014. And I would like to thank the 
cosponsors, Mr. Ross and Mr. Murphy, for their work on this.
    Why is this important? One of the things that choice brings 
is competitive pricing. And if you have the government 
dominating an area, it doesn't really allow for a lot of 
private participation. So, one of the things we want to see is 
for consumers to have choices.
    The other reason this is important is that it would be good 
to transition out of the taxpayers backing up the flood 
insurance market and letting private capital back that up. Why 
that is important to the taxpayers is, we have seen that when 
the government is involved in the insurance business it prices 
risk politically rather than actuarially. We think it is a 
novel idea to let the marketplace price the rules risk, and we 
want to provide a pathway to do that. As you probably know, 
currently the flood insurance program is in the hole and the 
taxpayers have had to ante up about $24 billion to subsidize 
people who, unfortunately, were not paying an actuarial rate 
for their insurance.
    What we will learn today about H.R. 4558 is that it has 
some common-sense approaches to providing for private 
participation in the flood insurance market. One of the things 
we don't need to do is send a signal to lenders, for example, 
that there is only really one source for flood insurance. There 
are multiple sources for flood insurance. And one of the things 
we have heard from the industry, the people in the insurance 
business, is we have seen in some areas where the people in the 
insurance business don't want to go and participate in those 
markets. But particularly, the flood insurance market is, quite 
honestly, a part of the market where we have seen an interest 
in that participation.
    So I thank the witnesses for being here. And, again, I want 
to thank Mr. Ross and Mr. Murphy for their thoughtful bill. 
With that, I will turn to my ranking member, and my good 
friend, Mr. Capuano, for his opening statement.
    Mr. Capuano. Thank you, Mr. Chairman. I will be brief. I 
came to learn because, like with many things, I don't know much 
about this. But I know a couple of things. And the one thing I 
know is that we have flood insurance because we haven't found a 
better way to do it. That is why we have government-backed 
flood insurance. We have a better way to do it if we want to 
have--make sure that no one can afford it. That kind of defeats 
the purpose of flood insurance.
    So I am open to any education on how we can have private 
enterprise do this and keep it affordable. Now, it is kind of 
funny. Over the last year or so, it turns out that apparently 
as a liberal Democrat, I have now become the poster child, or 
one of the many poster children for corporate welfare because I 
support TRIA and I supported the flood insurance bill and other 
such things.
    But that is one way to put it. To me, the other way to put 
it is, how do I get necessary insurance coverage to people who 
need it, that is affordable? And if it is not affordable, it 
doesn't matter how good the coverage is; nobody will buy it. 
So, for me, that is what I am open to learn. I would love to 
hear how the numbers work and why it would not be corporate 
welfare for us to change the system we have.
    And I look forward to the testimony, thank you.
    Chairman Neugebauer. I haven't seen that poster. I would 
like to.
    Mr. Capuano. I thought you had one.
    Chairman Neugebauer. No. Now, I turn to the vice chairman 
of our Housing and Insurance Subcommittee, Mr. Luetkemeyer from 
Missouri, for 1 minute.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    My district includes many communities that sit in the 
floodplains along major rivers, streams, and lakes. In fact, 
one lake in my district has more miles of shoreline than the 
State of California. So you can see how big a problem this is 
to me. I hear from my constituents about the National Flood 
Insurance Program (NFIP) nearly every day, and it is clear that 
the NFIP is broken.
    I owe it to the families and business owners living in 
those communities, and we owe it to all Americans, to create a 
flood insurance program that is stable, fair, accessible, and 
cost-effective. It cannot continue to be a program that exposes 
taxpayers to endless risk, and it doesn't have to be.
    To create a more stable and cost-effective program, we need 
to allow the private market to enter the space instead of 
inhibiting its ability to do so. The bill introduced by my 
colleagues from Florida does just that.
    Today, we will hear from experts whom I expect will tell us 
that there is room for the private market in the flood 
insurance space. And we need to encourage this market so we can 
deliver a better product to our constituents. I look forward to 
hearing from our panelists.
    And I yield back, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    And now, the chairman of our Capital Markets Subcommittee, 
Mr. Garrett from New Jersey, is recognized for 2 minutes.
    Mr. Garrett. Thank you. And I thank the chairman for 
holding this hearing on how we can improve the market for flood 
insurance across this country. And I would also like to thank 
all of the witnesses who are here, as well.
    Speaking as someone who is literally on the ground, who has 
viewed the devastation and helped do some of the hands-on 
cleanup of our last storm in the State of New Jersey, I know 
the importance of a well-functioning flood insurance market. 
Unfortunately, we have a government-backed flood insurance 
program that simply is not working. In fact, we know that in 
the wake of Hurricane Sandy, Congress had to bail out the 
National Flood Insurance Program to the tune of nearly $10 
billion to make good on the promises the Federal Government 
made to the flood-ravaged homeowners here.
    The facts seem to suggest that Uncle Sam makes for a 
terrible risk manager, let alone an insurance executive with a 
monopoly on the marketplace. Congress must do what we can to 
encourage Uncle Sam to step aside and let the private market 
assume some of the risk rather than let the risk fall on the 
U.S. taxpayer?
    I am interested to hear what changes Congress can make to 
the current law to remove obstacles that discourage private 
participation in the flood insurance marketplace.
    My initial sense is that an abundance of red tape, future 
regulatory uncertainty, and the shadow of the current National 
Flood Insurance Program all combine to continue to make private 
capital stay on the sidelines. So at the end of the day, we 
need to make some changes.
    The NFIP isn't fair to homeowners who rely on a bankrupt 
system in time of catastrophe. Nor is the current system fair 
to taxpayers, who ensure the program remains on a dry financial 
footing.
    And with that, I yield back.
    Chairman Neugebauer. I thank the gentleman.
    The gentleman from Virginia, Mr. Hurt, is recognized for 2 
minutes.
    Mr. Hurt. Thank you, Mr. Chairman. Thank you for holding 
today's hearing to consider legislative reforms to the National 
Flood Insurance Program.
    Our current government-provided flood insurance system has 
proven ineffective, inefficient, and costly to taxpayers. While 
Congress has previously been successful in implementing modest 
reforms to the NFIP, we still face a situation where Congress 
has chosen to solidify the NFIP's broken balance sheet with 
little hope for returning it from the red.
    With $24 billion in debt, and the potential for moral 
hazard created by the program as it is currently structured, it 
is critical that this subcommittee work to pursue significant 
reforms. These reforms will allow us to chart a new course for 
the NFIP, and put the program on a more sound financial 
footing. Hardworking taxpayers deserve a Federal flood 
insurance program that is fiscally responsible.
    We must enhance the program's integrity, make it self-
sustaining, increase private market coverage, and reduce the 
risk to taxpayers across this country. We can no longer settle 
for the status quo of a flood insurance program that crowds out 
the private sector in order to subsidize insurance premiums for 
a few Americans at the expense of the rest of the country.
    Going forward, this subcommittee must be a leader in the 
effort to reform the NFIP to a private, competitive, and 
sustainable flood insurance market. I would like to thank our 
distinguished witnesses for appearing before the subcommittee 
today, and I look forward to your testimony on the concepts for 
NFIP reform.
    Thank you, Mr. Chairman, and I yield back the balance of my 
time.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Florida, Mr. Ross, one of the 
lead sponsors of this piece of legislation, is recognized for 2 
minutes.
    Mr. Ross. Thank you, Mr. Chairman, and thank you for 
holding this important hearing about an issue to which I am 
deeply committed. And that is providing Florida and American 
homeowners more affordable consumer options in the flood 
insurance marketplace.
    I would also like to thank our distinguished panelists 
today for their testimony. And I would especially like to thank 
Representative Patrick Murphy for joining me in introducing 
this Flood Insurance Market Parity and Modernization Act of 
2014, which we will be discussing this afternoon.
    Mr. Chairman, the implementation of the Biggert-Waters 
Flood Insurance Reform Act of 2012, or BW-12, has proven to be 
problematic. Before Congress acted earlier this year to provide 
relief for homeowners with National Flood Insurance Program 
policies, I was hearing reports from my constituents of 
$15,000-a-year increases in premiums.
    The intent of BW-12 was to give consumers additional 
insurance policy options beyond the National Flood Insurance 
Program. However, today homeowners are trapped in a system that 
forces them to purchase the taxpayer-backed Federal insurance 
product from a program that was already $24 billion in debt at 
the end of 2013.
    So why is the Flood Insurance Market Parity and 
Modernization Act of 2014 necessary? Section 239 of BW-12 made 
clear that the intent of Congress was to allow homeowners the 
option to pursue private flood insurance. Unfortunately, BW-12 
narrowly defined acceptable flood insurance programs, thereby 
limiting the flexibility of State regulators to license private 
flood insurance products. These restrictions prevent innovation 
and consumer choice.
    With Florida homeowners in mind, Representative Murphy and 
I introduced legislation that redefines private flood insurance 
to remove Federal restrictions and requirements on coverage. In 
doing so, we would return the full authority of determining 
acceptable coverage of insurance policies to State regulators.
    Florida's insurance commissioner, Kevin McCarty, has 
offered his support of this common-sense legislation. At this 
point, I would ask unanimous consent to submit his letter dated 
July 11, 2014, for the record.
    Chairman Neugebauer. Without objection, it is so ordered.
    Mr. Ross. Mr. Chairman, allowing more consumer choice in 
the government-dominated flood insurance market creates 
competition and results in better policies and pricing that 
will benefit homeowners.
    With that in mind, I look forward to this hearing, and I 
yield back my time.
    Chairman Neugebauer. I thank the gentleman.
    And now the other lead sponsor of this important piece of 
legislation, the other gentleman from Florida, Mr. Murphy, is 
recognized for 2 minutes.
    Mr. Murphy. Thank you, Mr. Chairman. I want to thank 
Chairman Neugebauer and Ranking Member Capuano for today's 
hearing on how we can make flood insurance more affordable for 
middle-class families. I would also like to thank the witnesses 
for their testimony and their time, and my good friend and 
fellow Floridian, Mr. Dennis Ross, for his in-depth 
understanding of insurance issues and his commitment to giving 
Floridians a choice.
    The National Flood Insurance Program has served as a 
critical lifeline for many families in my district, enabling 
them to have peace of mind and protect their homes which, for 
most middle-class families, is their most valuable asset.
    Stepping in and creating a market where there is none for 
affordable options for middle-class families I believe is an 
appropriate use of government. I believe that together we can 
and should protect our homes and our housing market.
    However, what happens when government is the only game in 
town and stands in the way of what promises to be a viable 
private market? We saw these results on full display: families 
waiting on FEMA to decide what is affordable; entire 
neighborhoods waiting on Congress to act to shield them from 
impossible rate hikes; no customer service hotline and no 
ability to switch carriers. I don't believe that any of us, 
especially those of us who defend the NFIP and support the 
goals of this program, want to do this to our constituents.
    Excessively prescriptive, top-down statutory Federal 
requirements are crowding innovation and consumer choice out of 
the market. Biggert-Waters correctly intended to foster the 
creation of a private market. Sadly, in this area, the law has 
fallen short.
    I could not be happier to work with Mr. Ross and my 
colleagues on both sides of the aisle to explore and improve 
the bill before us to protect consumers, foster innovation and 
choice, and ultimately do what is right for middle-class 
families.
    I yield the balance of my time.
    Chairman Neugebauer. I thank the gentleman.
    We will go to our panelists. And I would just remind our 
panelists that your oral testimony will be limited to 5 
minutes, but your complete written testimony will be made a 
part of the record.
    Our panel today consists of: Mr. Stephen Ellis, vice 
president of Taxpayers for Common Sense; Mr. Jordan Gray, 
senior vice president and general counsel of WNC Insurance 
Services; and I will turn to Mr. Ross to introduce our third 
panelist.
    Mr. Ross. Thank you, Mr. Chairman. It is a distinct honor 
for me to introduce our third panelist, with whom I had the 
honor of serving as a legislator in the Florida House of 
Representatives. A former independent insurance agent and past 
chairman of several House insurance committees in the Florida 
legislature, Mr. Don Brown.
    Chairman Neugebauer. I thank the gentleman.
    And Mr. Ellis, you are now recognized for 5 minutes.

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

    Mr. Ellis. Thank you, Mr. Chairman. Good afternoon, 
Chairman Neugebauer, Ranking Member Capuano, and members of the 
subcommittee. I am Steve Ellis, vice president of Taxpayers for 
Common Sense (TCS), a national nonpartisan budget watchdog. 
Thank you for inviting me here today to testify on H.R. 4558, 
the Flood Insurance Market Parity and Modernization Act of 
2014, and issues involving the private flood insurance market.
    A little bit of background. Since the late 1980s, the 
National Flood Insurance Program teetered on either side of 
solvency, covering shortfalls with Treasury borrowing and 
repaying the loans in years of surplus. Then in 2005, the 
inevitable happened, a catastrophic loss year, and the program 
was roughly $18 billion in debt to the Treasury. That was 
followed by the Super Storm Sandy losses in 2012, and now the 
program is more than $24 billion in debt to taxpayers. To put 
that into perspective, FEMA data indicates that in 2013, the 
5.6 million policies in the program resulted in $3.5 billion in 
premium to insure $1.3 trillion worth of property.
    The U.S. Government Accountability Office has estimated 
that approximately 20 percent of policies are explicitly 
subsidized and paying only 35 to 40 percent--45 percent of 
their actual full-risk premiums. As this subcommittee well 
knows, reforms to the NFIP were enacted in 2012 to increase 
premiums to more risk-based rates which would not only help 
program solvency, but also help policyholders better understand 
their risks and to take measures to mitigate that risk. Despite 
some concerns, TCS supported the 2012 legislation, while also 
favoring additional efforts to help address affordability 
issues.
    Unfortunately, earlier this year Congress reacted to a 
vocal minority and largely rolled back the 2012 reforms that 
could have led to more actuarial rates. To obtain a mortgage, 
property owners in special--in designated special flood hazard 
areas, typically those with a 1 percent chance of flooding in 
any given year, are required to purchase flood insurance. As 
long as it met NFIP coverage standards, private flood insurance 
could be an alternative to Federal flood insurance to meet the 
mandatory purchase requirement. As the shift to more risk-based 
rates under reform neared, the private markets started to 
strengthen. States like West Virginia and Florida enacted 
legislation to regulate new private flood insurance 
alternatives in their States.
    However, the 2012 flood insurance bill went further than 
before and attempted to quasi-regulate what exactly constituted 
private flood insurance by including a proviso that private 
flood insurance be ``at least as broad'' and essentially mirror 
NFIP policy. This resulted in lenders rejecting some private 
policies as not meeting legal requirements. For example, a 
homeowner may want to purchase a higher coverage limit with a 
higher deductible than is available under NFIP. Current law 
would result in that policy being rejected by the lender as not 
meeting the legislative private flood insurance definition.
    The whole point of allowing private flood insurance 
alternative is to create competition and choice in the 
marketplace and reduce the possible burden on the taxpayer. 
Furthermore, insurance is regulated at the State level. The 
Federal Government leaves decisions on homeowners insurance and 
car insurance to the States. They should do the same for 
private flood insurance alternatives.
    This is why Taxpayers for Common Sense supports the 
aforementioned H.R. 4558. This legislation would remove the 
restrictive and confusing language, and define private flood 
insurance as an insurance policy that is issued by an insurance 
company that is licensed or approved in the State where the 
property is located.
    This does not remove the mandatory purchase requirement in 
minimum coverage level. This just allows insurance 
commissioners to regulate the product in their State the way it 
is done for other insurance lines.
    One recommendation that TCS has would be to clarify that if 
a homeowner opts for uninterrupted coverage through a private 
policy, the homeowner should not be treated as having a lapse 
in coverage under NFIP. This would allow the homeowner to 
return to NFIP if they desire, without penalty. The only reason 
a policyholder will opt for private insurance over NFIP is 
because the private insurance offers a better product, a better 
price, or both.
    To stifle the private market would be akin to the Federal 
Government forcing policyholders to pay more for their 
insurance. In addition to the definitional issue, the existence 
of subsidized Federal flood insurance is a barrier to the 
development of a robust private market. Simply put, NFIP 
occupies the space where the private sector would operate. It 
is true that the NFIP was created because there wasn't a 
functioning private insurance marketplace. But that was nearly 
50 years ago. It almost goes without saying that technology and 
modeling have advanced dramatically.
    Imagery and mapping technology have similarly developed. 
The reinsurance and financial instruments to manage risk are 
much larger and more diversified. Many countries in the world 
have private flood insurance either bundled into property 
insurance or as a separate, or add-on, coverage. These are 
typically backed by reinsurance. In fact, the United States is 
one of the only countries with a State-backed separate policy 
of flood insurance.
    The development of a private flood insurance market in the 
United States would serve to shift some of the post-disaster 
recovery and rebuilding burden from taxpayers to the private 
sector and those who choose to live in high-risk areas.
    It could also be a powerful tool to encourage mitigation in 
the face of increased disasters and sea level rise. The 
National Flood Insurance Program is $24 billion in debt to the 
taxpayer. While the decision to repeal many of the 2012 reforms 
was a setback, Congress could enact H.R. 4558 to at least let 
private flood insurance have a chance.
    Thank you very much.
    [The prepared statement of Mr. Ellis can be found on page 
28 of the appendix.]
    Chairman Neugebauer. I thank the gentleman.
    Mr. Gray, you are now recognized for 5 minutes.

STATEMENT OF JORDAN N. GRAY, SENIOR VICE PRESIDENT AND GENERAL 
             COUNSEL, WNC INSURANCE SERVICES, INC.

    Mr. Gray. Chairman Neugebauer and members of the 
subcommittee, thank you for the opportunity to testify today. 
My name is Jordan Gray. I am senior vice president and general 
counsel of WNC Insurance Services. My testimony today is on 
behalf of my company, WNC, and my full testimony has been 
submitted to the subcommittee in writing.
    Founded in 1962, WNC is an independent managing general 
agency and surplus lines broker representing several A-rated 
private flood insurance carriers. Today, WNC serves nearly 
3,000 small and mid-market community banks and credit unions, 
hundreds of independent agents and brokers, and thousands of 
homeowners and businesses, providing insurance products and 
services, including private flood insurance.
    WNC is grateful for the National Flood Insurance Program. 
The NFIP is the entrepreneurial catalyst that created an 
important industry. The industry is now ready for the next 
phase of its growth and evolution: privatization.
    WNC is also grateful for the Biggert-Waters Flood Insurance 
Reform Act of 2012. Biggert-Waters is evidence that both sides 
of the aisle can work together to--
    [Audio drop.]
    Was my testimony that bad?
    [laughter]
    Chairman Neugebauer. It does that to me, too.
    Mr. Gray. --both sides of the aisle. We are pleased with 
this idea. We support H.R. 4558. It is a simple bill that 
provides an appropriate fix to an unintended consequence of 
Biggert-Waters. One unintended consequence of Biggert-Waters is 
that it makes it more difficult for lenders to accept private 
flood insurance in satisfaction of the mandatory purchase of 
flood insurance requirement, thereby impeding the long-
established public policy goal of private market involvement in 
flood insurance cited in Biggert-Waters.
    What was intended to liberate both borrower and lender 
alike has now placed them in a straitjacket of regulatory 
compliance, mandating that bankers become insurance 
professionals and insurance professionals become bankers, 
leaving these industries in confusion.
    So what does this confusion look like? Here is an example. 
When a loan is about to close, there is a mandatory purchase 
obligation if the property is located in a special flood hazard 
area. But the problem is that the Federal flood policy only 
provides $500,000 of coverage for the $5 million building at 
risk.
    So the borrower purchases a private policy. The carrier and 
the broker are certain that this private policy is exactly what 
the borrower needs. The borrower takes the policy to the lender 
to close the loan, but the compliance department tells the 
borrower that it cannot accept the private policy if it doesn't 
follow the National Flood Insurance Program general property 
insurance form exactly as written. The lender is frustrated 
because it knows that it must comply with the regulations or 
face potential fines and penalties, but it doesn't really have 
the expertise to tell what is truly a good policy.
    The borrower is frustrated because they cannot purchase the 
product they want, and cannot close the loan on time. The 
carrier and the agent are frustrated because they have a 
perfectly good product that fails to meet a perceived or actual 
technical definition of private flood insurance. But yet the 
policy will perform as good, or better than, the Federal policy 
when a loss occurs.
    The solution is simple. Give lenders and borrowers the same 
discretion to evaluate flood insurance as they have to evaluate 
all insurance products. H.R. 4558 does this.
    In conclusion, there is a private market waiting to provide 
flood insurance. There is a hopeful lending market looking for 
some regulatory relief. There are eager policyholders looking 
forward to quality coverage becoming widely available in the 
private market. H.R. 4558 is the next step.
    And I thank you for the opportunity to testify today.
    [The prepared statement of Mr. Gray can be found on page 31 
of the appendix.]
    Chairman Neugebauer. I thank the gentleman, and apologize 
for the slight interruption there.
    Mr. Brown, you are now recognized for 5 minutes.

   STATEMENT OF DON BROWN, FLORIDA PROPERTY INSURANCE EXPERT

    Mr. Brown. Thank you, Mr. Chairman. It was my intention as 
I open my remarks to refer to you by your name. But, Mr. 
Chairman, because of my Southern accent I was really afraid to 
maybe--that I might mess it up.
    Chairman Neugebauer. Mr. Brown, it is very easy. It is 
``RAND-D.''
    Mr. Brown. Mr. Chairman, Ranking Member Capuano, and 
members of the subcommittee, thank you for having me here 
today. My name is Don Brown and I currently work as a lobbyist 
representing insurance and reinsurance companies in the State 
of Florida. Previously, I served in the Florida House for 8 
years, and was an insurance agency owner for 28 years.
    When the NFIP was established, of course, flood was 
generally considered an uninsured peril and few private 
companies were willing to write the risk. There was no history 
of loss, no models for flood, and generally the insured knew 
much more about their potential for loss than the insurance 
company.
    A flood is no longer an uninsurable risk, and the private 
market is no longer unwilling to write flood. There are several 
reasons for this development. In the last few years, commercial 
flood models have been developed that have given insurance 
companies a wealth of information regarding flood risk. 
Consequently, there has been an influx of capital into the 
reinsurance and insurance arena. And that capital is interested 
in underwriting flood risk. These developments provide new 
options for consumers when buying flood insurance.
    One additional consumer benefit to the development of a 
private flood market is that it is regulated by State insurance 
departments, which have a long history of consumer protection 
as their very foundation.
    I believe there will always be a need for a program like 
the NFIP, but there is plenty of flood risk out there that can 
be written by private companies. And I can tell you that many 
of my clients are eager to write flood policies. There are 
three obstacles that I believe the bill before you today 
addresses, but it is important that we recognize these.
    The first obstacle is that the law currently permits 
several different Federal agencies, as many as five, to 
regulate flood companies. These agencies could issue different 
requirements even years in the future that would throw the 
private market into disarray. This creates uncertainty and has 
a stifling effect on the private market. H.R. 4558 addresses 
this problem by removing some of that uncertainty. Please allow 
me to expand briefly on the notion that uncertainty can be an 
impediment to the formation of a healthy private insurance 
market.
    In his landmark book, ``Risk, Uncertainty and Profit,'' Dr. 
Frank H. Knight defined the difference between risk and 
uncertainty like this: Risk is present when future events occur 
with measurable probability. Uncertainty, on the other hand, is 
present when the likelihood of future events are indefinite or 
incalculable. Dr. Knight goes on to explain in his book that in 
addition to uncertainty about our natural environment, in this 
case the weather, political and regulatory uncertainty can also 
impede private capital formation. Today the greatest 
impediment, in my opinion, to capital formation in the private 
flood market is political and regulatory uncertainty.
    The second obstacle that the law defines: coverage to 
include deductibles. Deductibles are not usually considered 
part of coverage when discussing a policy of insurance. As 
someone who sold insurance policies for decades, I can tell you 
that when I discuss coverage with a customer, I am usually 
talking about the exclusions and the conditions precedent, not 
the point at which the coverage actually attaches.
    The problem is this: It is unclear if private companies can 
offer additional options regarding deductibles and still have 
the policy considered to be comparable coverage to the NFIP. 
The term ``deductible'' should be removed from the law so that 
consumers have a wide variety of options.
    The third obstacle is what I will call ``grandfathering''--
it has been referred to earlier in the testimony--of subsidized 
rates for NFIP consumers who go to a private carrier. Under 
current law, it is not clear how the NFIP would rate a policy 
when a property moves from the NFIP to the private carrier and 
then wishes to come back to the NFIP. Clarifying that a 
customer can return to the NFIP on the same glide path that 
they are currently on would make me, as an agent, feel more 
comfortable selling a private flood policy.
    Notwithstanding the unprecedented capital inflow to the 
global catastrophe market over the last several years, one 
other obstacle to the expansion of a private flood program 
would be to impose a new tax on the reinsurance market. In my 
written testimony, you can read further about my comments on 
that regard.
    In conclusion, I want to thank the committee for all your 
work, all the work you have done on flood insurance to date. 
Amazing progress has been made, and I do believe there is an 
opportunity for a vibrant private flood market. Thank you for 
your time and for inviting me to testify before you, and I 
would be happy to answer any questions.
    Thank you.
    [The prepared statement of Mr. Brown can be found on page 
24 of the appendix.]
    Chairman Neugebauer. I thank the gentleman. And we now have 
three votes so we are going to recess until right after votes. 
The Chair intends to start the hearing back up ASAP, as soon as 
we get back. So I ask Members to continue to vote and hurry on 
back. And with that, we are in recess.
    [recess]
    Chairman Neugebauer. The subcommittee will come to order. 
Thank you for your patience. What should have been a 30-minute 
exercise turned into nearly an hour exercise. I guess we are 
trying to stretch out this little bit of work that we were 
doing as to make it look like we are working a lot harder, or 
something. Each Member now will go into questions for the 
panel. Each Member will have 5 minutes. I will begin that 
questioning now.
    The NFIP program was created in 1968. And at that 
particular time, as I think one of the witnesses mentioned, 
there wasn't credible data and it was hard to predict, and it 
made it difficult to underwrite those risks. But things have 
changed today, and we have the data, the mapping has been done. 
Are there any other barriers that you see outstanding there 
that would keep us from moving back to a private system? Is 
there a missing piece here? I will start with Mr. Ellis.
    Mr. Ellis. Yes, Mr. Chairman. I think one of the missing 
pieces is being addressed by this bill. And that is, actually, 
this clarification as to what is private flood insurance and 
how can it be implemented or how will it meet the mandatory 
purchase requirement. And I think that is one of the things 
that this really clarifies. Because even before Biggert-
Waters--Biggert-Waters really codified some of the informal 
criteria that FEMA had that also was sort of limiting the 
acceptance of private insurance coverage as an alternative for 
the mandatory purchase requirement.
    So I think this is one of the big hurdles. And then, 
obviously, the other big hurdle will be the private sector has 
to make a profit. And, if you have a subsidized Federal 
program, particularly in the case of the pre-firm properties, 
it is going to always keep those people, those properties, in 
the program and inhibit the development of a private 
marketplace.
    Chairman Neugebauer. Mr. Gray, Mr. Brown, anyone want to 
elaborate on that?
    Mr. Brown. I would just simply concur that the uncertainty 
that I spoke about is really the greatest impediment to the 
private market coming in. I can assure you that interest has 
been expressed. In fact, just before I came today I got an e-
mail from one of my clients. Let me just share it with you. I 
won't attribute it, but they said the real private market 
really, really, really wants to cover risk in the United 
States. It is getting boring only paying flood claims in most 
of the rest of the world.
    The private market pays flood claims everywhere else, but 
not here. The impediment is that when there is enough 
certainty--I think of uncertainty in the context of Dr. 
Knight's statement. If you think of it as a spectrum and, on 
the one hand, you have risk and on the one hand you have 
uncertainty, the extent to which you move across that spectrum 
from uncertainty to risk is the extent to which capital will 
come in and take the place of a government program. So the more 
certainty that Congress can provide about what coverage is 
going to be required, and provide some flexibility, is the 
extent to which the private sector will step in and take up 
this risk.
    Chairman Neugebauer. One of the things that--unfortunately, 
we are in a situation right now where the Federal Government 
controls about 90 percent of the mortgage market. And 
obviously, in the mortgage finance area, in many cases, there 
are requirements that properties in certain flood areas are 
required to carry flood insurance. If you have an FHA loan, I 
guess you have to have the loan guaranteed by Freddie Mac and 
Fannie Mae--those have to. Have you detected any bias out 
there, where those agencies are, say, looking more favorably 
upon an NFIP policy versus a private policy?
    Does that prejudice, do you think, exist in the 
marketplace? Do we need to address that? Does anybody have any 
data or thoughts on that?
    Mr. Ellis. Mr. Chairman, it is true that even though there 
is this mandatory purchase requirement it is not incredibly 
well-enforced by the lenders. I think it is less than half of--
estimated less than half of the properties that are required to 
have it actually do. And so, in some cases, it is that the 
person gets the insurance to get the loan and then drops 
coverage a few years later. The lender is not necessarily 
enforcing it, particularly if it has gone into the secondary 
market. So, the GSE is one of the things--if they were pushing 
the lenders more to require just flood insurance--whether it is 
Federal or private--that would actually help drive that 
marketplace, as well.
    Chairman Neugebauer. So what you are saying is, enforcing 
the servicers to make sure that they are complying with that?
    Mr. Ellis. Yes, Mr. Chairman. And they are actually--in the 
2012 bill, there were actually increased penalties for lenders 
that were not doing that. And it is just this question of 
whether there is actually this enforcement and oversight.
    Chairman Neugebauer. And how do we--Mr. Brown, you have 
been in the insurance business and had an agency for a number 
of years. And what happens in a lot of business, is it just 
gets more comfortable. Would you say across the country that 
the agents are more comfortable selling an NFIP policy versus a 
private policy, because the NFIP has been a long-established 
program? And if so, how do we break that mold?
    Mr. Brown. I think one of the most important ways to break 
that mold is what we are doing right here today. And that is, 
bringing clarity to the fact that coverages can be offered by 
admitted carriers in States where the State regulator has 
certified that the coverage being offered is something that 
would serve their constituency. And yes, there is, I believe, 
some built-in bias in favor of the program because it is a 
known quantity. And the extent to which we can make the private 
offer of flood coverage a known quantity is the extent to which 
we are going to have success moving this risk from the 
government to the private sector.
    Chairman Neugebauer. When you look at where the insurance 
industry is spending its money they talk about we want to 
insure your house, your car, your life, your health insurance, 
your business, et cetera. Do you think if the industry felt 
like there was a better opportunity for expansion in that area 
that they would be more focused on promoting the fact that they 
offer private flood insurance?
    Mr. Brown. I don't think there is any question of that. And 
that goes hand-in-hand with the willingness of the reinsurance 
market to step in and take some of that risk. Yes, there are 
some uncertainties. They haven't been doing flood. They don't 
have access to as much data as they might have in the case of 
wind risk because they have been doing wind risk for a long 
time. But there has to be a starting place, and once companies 
get comfortable with--based upon the developments of the new 
models, I believe that they will--it won't be a rapid move into 
this marketplace, but it has to start somewhere. And I think 
the more certainty we can bring to it, the more likely we are 
going to see this develop.
    Chairman Neugebauer. I thank the gentleman. My time has 
expired.
    And now the vice chairman of the subcommittee, Mr. 
Luetkemeyer, is recognized for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. I want to quickly 
ask a question of Mr. Brown here. I recognize that there have 
been concerns expressed about the consumer protections in 
private flood insurance. However, I think it is important to 
bear in mind that even as an insurer becomes insolvent, a 
State-guaranteed fund system would step in to provide 
policyholders support. Do you think consumers are better 
protected through the provisions included in H.R. 4558 or by 
private flood insurance generally than they are through the 
NFIP?
    Mr. Brown. Interesting question. I spoke with some folks 
back in Florida today to determine how we handle--how our 
Florida insurance guarantee fund would respond to flood claims. 
And what I have learned is, it confirmed what I thought I knew. 
But what I learned is that private offers of flood coverage, 
whether it is offered on an allied lines basis or as a part of 
a homeowners policy, is covered under our insurance guarantee 
fund in Florida if it is offered by an admitted carrier.
    Mr. Luetkemeyer. And it is a State-approved plan?
    Mr. Brown. It is a State-approved plan.
    Mr. Luetkemeyer. Okay. I would assume so. My guess is 
that--or, really, my question is, that provides the backstop, 
really, the State guarantee fund provides the backstop for an 
insurance solvency problem that could arise with a catastrophe 
of some sort that causes an insurance company to go belly up as 
a result of paying all the claims. And--
    Mr. Brown. That is correct.
    Mr. Luetkemeyer. --as long as you have taxpayers on the 
hook for an NFIP policy, that probably is not a concern. But 
the fact that we have a guarantee fund there would allay that 
one fear.
    Mr. Brown. That is correct.
    Mr. Luetkemeyer. I think it is a point we need to make. 
Okay. I am kind of concerned about--I am interested. This 
sounds like really good stuff, and I am really excited about 
the gentlemen from Florida and their work on the bill here. But 
I am kind of concerned, curious anyway, with regards to adverse 
selection. It would seem to me that the private sector would be 
ready to take on some of the less risky parts of the business. 
And something that is sitting in the middle of a hurricane or 
tornado belt of some sort would be where they want to stay away 
from. Is that something that concerns you? Is the modeling that 
goes on with the private companies here--are they taking that 
into consideration?
    Are they just going to cherry-pick and then force all the 
worst pieces, or most exposed pieces of property into the 
government program. Which would mean those--they are going to--
because of adverse selection have more risk there, and 
therefore more cost and raise the premiums accordingly?
    Mr. Brown. I think that is a reality. And, in fact, if you 
think about, originally--as government moved into the space--in 
Florida we have had a lot of experience with Citizens Property 
Insurance Carrier, a company which took risk when there was not 
enough capacity in the marketplace. But government programs are 
really intended to take those risks as a facility of last 
resort. So--
    Mr. Luetkemeyer. So you are saying--excuse me for 
interrupting here. But you are saying, then, that you would see 
a continued need for the Federal Flood Program? That there 
wouldn't be a way to wean them out of this space here, and take 
it over completely by the private sector?
    Mr. Brown. I think in the foreseeable future, in the 
midterm, there is going to continue to be a need for some form 
of NFIP program until this transition can mature and develop. 
How long, I don't know. But I do believe that there are going 
to be some properties which may just simply not be 
economically--it doesn't make economic sense because they are 
receiving such a heavy subsidy now. We are probably trapped 
with some of those.
    Mr. Luetkemeyer. Okay. This is a hypothetical question, but 
do you see that by doing this--if the private sector cherry-
picks all of the less exposed properties, and the more exposed 
properties are underwritten by the Federal Government--the 
Federal Government is, by the very inference, then, 
incentivizing building, or expanding your real estate holdings 
or whatever, in areas that are more prone to flooding, which 
would mean that they are incentivizing people to be able to do 
things in areas for which eventually, we as taxpayers, are 
going to pick up the tab.
    Mr. Brown. Unfortunately, that is a part of the original 
design of the NFIP program. Whether intended or not, when 
government creates a program, and they conspire if you will, to 
cloak the true cost of that program there are perverse 
incentives that are created. Price does far more than 
compensate a seller for his goods and services. It communicates 
valuable information about the appropriateness of human 
behavior.
    Mr. Luetkemeyer. One quick question, if I could indulge the 
chairman for a second. You talked about the rest of the world. 
Was it Mr. Gray who talked about the rest of the world, or Mr. 
Ellis, that there are insurance companies that insure other 
places in the world. And so are they doing that, as well? Are 
they cherry-picking everything, or are they insuring everything 
across-the-board, and accepting all the risks and underwriting 
accordingly?
    Mr. Ellis. At least in the studies that I have read, there 
are different models of how to do this. Whether it is a bundled 
policy, so it is within your homeowners insurance, and then it 
is laid-off risk to the private sector. Some of them have some 
government involvement. It is a whole bunch of different 
things. But there is enormous amount of appetite for risk in 
the catastrophe realm and for the reinsurance. And so, the 
marketplace is there. In the last 7 years, reinsurance rates, 
in an aggregate, have gone down. And so there is this amount of 
appetite for risk which is pushing some of this interest in 
getting into the marketplace.
    And then just to your earlier comment, Congressman, I just 
want to add that most States have service in insurer's last 
resort, even on homeowners insurance. So there is always this 
sort of potential leftover that is going to be an issue. But I 
would also argue that would then concentrate the policymaker's 
mind, Congress' mind, on dealing with some of these underlying 
issues and the subsidies because it isn't being masked by a lot 
of these property owners who are paying more they actually 
should, more than a market price, to be a part of the flood 
insurance program.
    Mr. Luetkemeyer. Very good. I appreciate the chairman's 
indulgence.
    Thank you, my time is up.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Virginia, Mr. Hurt, is 
recognized for 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman.
    Mr. Brown, I was intrigued by your last answers to the 
questions posed by Mr. Luetkemeyer, talking about the--what is 
built into the sort of structure of the National Flood 
Insurance Program to begin with, and how people are allowed to 
make decisions that may not make good economics. And I think at 
the heart of what we are talking about, really--that gets to 
the heart of it. And so I commend Representatives Ross and 
Murphy for putting this forward, and I am glad to hear your 
testimony today.
    I guess my question, though--my first question would be, 
okay, so we know what the economic realities are, and risks 
are. But there is also a very real moral hazard that translates 
into--if you are encouraging somebody to live in a place that 
is dangerous, it is not just dollars and cents, it is not just 
insurance policies, it is not just insurance companies, it is 
not policyholders. You are encouraging them to do something 
that is risky to their life. And to the property. And I wonder 
if you could talk about that.
    Mr. Brown. Yes. Frederic Bastiat, in the middle 1800s, 
wrote a book entitled, ``The Law.'' And in that book, he says 
this: ``There is this common tendency among all people, when 
they can they choose to live and prosper at the expense of 
others.'' The essence of what he is getting at is that when you 
cloak the true cost of something you are depriving individuals 
of the signals that would otherwise cause them not to engage in 
that behavior.
    And when government does that, they actually--it can rise 
to the extent that it creates a life safety issue. Yes, when 
someone hears that they can insure their property for $1,000, 
and they move into a floodplain, they might make that decision 
a lot more cautiously if it were going to cost them $10,000.
    So there is no question that it has an effect on human 
behavior. In some cases, it is knowingly, and in some cases, 
the government is going to be blamed when there are life safety 
issues that arise and they said, well, I thought it was okay 
because the government subsidized my coverage.
    Mr. Hurt. Thank you. My next question would be to Mr. Ellis 
and Mr. Gray. I was wondering if you could talk a little bit 
about--we are talking about, because of the bill that has 
been--considering today will be forward-looking and reform 
going forward, I guess my question would be, how do we deal 
with the shortfall, the problem that we currently have? Can you 
talk a little bit about what you think that we can do to 
accelerate getting the program into the black? And if you--
maybe, Mr. Ellis, I will start with you.
    Mr. Ellis. Thank you, Congressman. It is a big hole. You 
are talking right now--the last year, I think I mentioned in my 
testimony, the premiums that came in were $3.6 billion. You 
have a $24 billion hole. Obviously, there are claims that are 
being paid; that the program hasn't actually reduced any of the 
debt since 2010. And that is owed with interest. And so, you 
are looking at an enormous hole. The borrowing authority, I 
think, is about $30 billion after the additional funding that 
went in through Sandy so that it has room to borrow more. There 
was a surcharge in the bill.
    I think it is--part of the reason that we opposed forgiving 
that debt, which was something that was being debated, is 
because it helps concentrate the mind. If you eliminated the 
debt, the program wouldn't change that much at all. And I think 
it is important to keep that there, and I think it is a 
challenge that we all are going to have to--I don't have any 
silver bullets in dealing with $24 billion, and I didn't come 
here with $24 billion in my pocket. So I think that is going to 
be a real challenge, going forward.
    Mr. Hurt. Thank you. Mr. Gray, quickly? In 30 seconds?
    Mr. Gray. Sure. I think it is mitigation and risk 
spreading, and trying to get the private market involved. And 
the sooner you can do that, then the better off our society is 
in handling the monster debt that we have right now.
    Mr. Hurt. Thank you, Mr. Chairman. I yield back the balance 
of my time.
    Chairman Neugebauer. I thank the gentleman.
    And now the gentleman from Florida, Mr. Ross, one of the 
primary authors of this bill, is recognized for 5 minutes.
    Mr. Ross. Thank you, Mr. Chairman. We talk about the $24 
billion of debt that NFIP has. And it begs the question, if we 
are going to transition to a private market, is there 
sufficient capacity in the capital markets to do this? I will 
ask you, just going down the line, beginning with Mr. Ellis.
    Mr. Ellis. As I indicated before, there is an appetite for 
risk, particularly in the reinsurance markets. And there is an 
interest of insurance, and we saw that--for instance, in your 
State, Mr. Ross--when they--when you--right after Biggert-
Waters there was an interest in trying to write flood insurance 
and growth in that marketplace. And so, clearly, there is an 
appetite for risk. How great that appetite is, it is not 
entirely clear. But there is definitely a significant appetite 
for that risk.
    Mr. Ross. Would you agree, Mr. Gray? As a broker, do you 
feel that there is sufficient capacity to meet the need at the 
NFIP?
    Mr. Gray. There is capacity out there, and lots of it. Now, 
how long that stays and what the pricing looks like, who can 
say? But right now--
    Mr. Ross. There definitely is. Would you concur, Mr. Brown?
    Mr. Brown. Yes.
    Mr. Ross. Now, Mr. Gray, you spoke on something just a 
second ago with regard to mitigation. And I think that is 
something that needs to really be addressed here. There are 
studies that have been done that for every one dollar of 
prevention in the mitigation, you save $3 or $4 from relief 
after the post-event relief. And I think that the NFIP has not 
been necessarily stellar in advocating mitigation. Let's face 
it, you get discounts in homeowners for storm shutters, you get 
discounts for ABS if you--in your automobile. There are 
discounts that you--that the consumer gets as a result of 
mitigating any risk.
    But that is more a function of not the private sector, 
would you not agree? And, I guess, Mr. Gray, what I want to ask 
you is, could you expound on how the private sector entering 
the market can impact the extent of greater mitigation in 
flood?
    Mr. Gray. Sure. Remember, insurance is only one piece of 
this puzzle that we have been looking at.
    Mr. Ross. Right.
    Mr. Gray. And you have mentioned some of those other 
pieces. The private market coming into, and appropriately 
pricing the risk would hopefully encourage homeowners and 
others who are involved in this process to take a look at what 
they can do to actually save on their premium dollars. And 
certainly, if the program is functioning properly--where there 
is more than just reinsuring the same risk over and over again, 
and suffering repetitive losses over and over again--then I 
think you will see some improvement in the properties, where 
people will abandon what becomes economically unfeasible 
properties.
    Mr. Ross. And economically, or actuarially speaking, would 
you say that there is more than one way to value risk?
    Mr. Gray. Well, sure.
    Mr. Ross. And, unfortunately, now you have only one 
valuation of risk that is being done, and that is by NFIP.
    Mr. Gray. Yes, it is whatever the government says that 
valuation is.
    Mr. Ross. Right. And then, supposedly, they are supposed to 
start sharing some of that with us. But we will see where that 
goes.
    Mr. Brown, you are very familiar with the State regulatory 
schemes. I think McCarran-Ferguson has been good for the 
insurance markets. It has been very good for the consumers. And 
one of the things that State regulatory environments provide is 
strong consumer protections. Would you have any comments as to 
what would be in the benefit of the consumer in terms of 
protections if we were able to pass a bill such as this that 
allowed for the licensing of private carriers into the market?
    Mr. Brown. In particular with regard to claims paying, I 
think what happened in New Jersey is a lesson that we can 
learn. States have an extensive consumer protection in place. 
And they also have unfair claims practices in place which 
protect consumers for all coverages offered in that State 
except NFIP coverage.
    Mr. Ross. So if a consumer has a problem with an NFIP 
policy, they can't go to their State regulator. They have to go 
to NFIP and hope that they can get it resolved.
    Mr. Brown. That is correct. And I would tell you, from my 
experience as an agent, as a legislator, and as a lobbyist, 
that in Florida, in particular, regulators are very interested 
in doing what is right for consumers. If I had a flood policy 
in a floodplain, I would much rather rely upon my State 
regulator than having to go to the NFIP.
    Mr. Ross. I appreciate that.
    Mr. Ellis, you spoke just briefly about the consumer 
protections. You also spoke about the grandfathering in. And I 
think the situation we are in is that if we were just starting 
fresh today, we would redesign how a private market should be 
able to cater to, and influence, behavior in terms of building 
and not building in high-risk areas. But since we are dealing 
with reality, and we are trying to wean people off of a 
government program, I agree with your assessment--in fact, I 
agree with Mr. Brown's assessment--that there must be a safety 
net in there that allows for the consumer to go back if it 
doesn't work out in the private market.
    And if you would just expound on that in the few seconds 
that I have left, if you could.
    Mr. Ellis. Sure. It is just that--basically, just trying to 
clarify that if you went from the NFIP policy to what was 
deemed to be an equivalent private flood insurance policy, and 
then went back to NFIP or wanted to go back to NFIP, there 
wouldn't be interpreted a lapse in coverage as long as it was 
continuous. And so in that respect, I think it has that 
protection for the policyholders. It envisions that we are not 
going to get rid of NFIP tomorrow nor maybe should we, at this 
point.
    Mr. Ross. Right.
    Mr. Ellis. And so, I think that is just a recognition that 
you have to have.
    Mr. Ross. Thank you.
    I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the other gentleman from Florida--one of the major 
sponsors of this piece of legislation, Mr. Murphy--is 
recognized for 5 minutes.
    Mr. Murphy. Thank you, Mr. Chairman.
    Mr. Gray, just following up on Mr. Ross' comments there, do 
you think there is any reason to believe that the State 
insurance regulators need any help from Congress when so many 
other types of insurance are based at the State level? Do you 
see this as any different?
    Mr. Gray. No, I don't. I think State regulators are well 
able to take a look at the carriers and license holders that 
are within their borders and manage audits, and control and 
regulate those folks. Make sure that the citizens of the State 
are protected.
    Mr. Murphy. And can you tell me, in your opinion, how the 
mechanics of this would work at the State level in the context 
of private flood insurance? And whether you think State 
insurance regulators could assure that the private flood 
insurance policies provide no less coverage than that available 
through NFIP?
    Mr. Gray. I think it is important to understand what the 
idea of no less coverage means. And trying to create a cookie-
cutter approach to that is not really how State regulators 
work. They take a look at the policy forms and the rates that 
are being charged, and take a look at the justifications that 
the carrier provides for those rates, and then make a 
determination, or ask questions, for future determination on 
the nature of that risk. And then ultimately, they approve or 
deny the rate regulation or form regulation.
    Mr. Murphy. And, I think, more to the point of each State 
being different, you have river flooding in Missouri and flash 
floods in Colorado and storm surges in Florida and sea level in 
Miami--we have a road, Alton Road, in Miami Beach, which is 
underwater all the time now, I guess to the point here that the 
States are going to know best.
    Mr. Gray. That is absolutely correct. Certainly, the local 
jurisdictions are going to understand the nature of their risks 
within their borders better than somebody who is trying to fit 
a single approach to 50-some jurisdictions.
    Mr. Murphy. Okay. And, Mr. Brown, Biggert-Waters includes 
several provisions intended to encourage the development of the 
private flood insurance market. And the law also makes clear 
that private flood insurance should provide no less coverage 
than available through NFIP. In light of the sort of American 
system of insurance regulation, how do you make certain that 
the private insurance provides no less coverage--similar to 
what I asked Mr. Gray--than NFIP? And how does this process 
compare to what you do for homeowners policies and compliance?
    Mr. Brown. Okay. And some of the same answers apply here. 
And that is that when State regulators are allowed to certify 
on this, at the State level that coverage being offered in 
their State complies with the requirement that the coverage be 
similar to, and no less than, I believe there is the answer. 
They have the most knowledgeable team to make a determination 
as to whether or not somebody is trying to offer a stripped-
down policy. What I think you are going to find is that 
companies who come to this marketplace are going to offer 
coverages that are not even available now under the NFIP.
    For instance, if you have an above ground swimming pool at 
your home and the thing ruptures and water gets into your 
house, it is not covered under the NFIP policy. I think you 
will see enhanced coverages. And there is one exception to 
this, and I think--I want to be very clear. Coverages, in a 
traditional context, does not include deductibles. The ability 
to offer alternate deductibles is a management tool, a cost 
management tool, that has been used for decades by insureds and 
agents when recommending coverages.
    So I would encourage you, when you make a final 
determination of what you want to do here, is to not tie 
States' hands on the ability of carriers in the private sector 
to offer alternate deductibles.
    Mr. Murphy. Good point.
    Anybody can answer this. It relates to timing. One of my 
frustrations, especially with the Congress now, is that--the 
lack of clarity and certainty. If this were to be a logjam and 
nothing happens for 5 years, Mr. Gray, I think in your comments 
you alluded maybe to the point that this may disappear if we 
don't act soon. That this market, the private market may 
disappear. Is that what you were getting at, or do you think 
there is always going to be this market in the private sector?
    Mr. Gray. I think that we need to keep it moving. There is 
an appetite for the risk and there are some at least view 
within the insurer world that this is something that is an 
opportunity that they would be interested in writing. I want to 
make clear, though, when I say that State regulators are able 
to take a look at these risks and regulate them locally, I 
wholeheartedly believe that. But I also believe that regulation 
should be according to the State's purview of what is important 
rather than the Federal Government telling the States you have 
to make this policy look like an NFIP policy.
    Mr. Murphy. Thank you.
    Chairman Neugebauer. If the gentleman has additional 
questions, I would yield him additional time.
    Mr. Murphy. I'm good.
    Chairman Neugebauer. Okay. I think Mr. Luetkemeyer had an 
additional question he wanted to ask.
    Mr. Luetkemeyer. Yes. Thank you, Mr. Chairman. Just one 
follow up for Mr. Ellis. Maybe I misunderstood what you were 
saying awhile ago, but you said something about mandatorily 
being forced to purchase health--or flood insurance. Can you 
explain what you are talking about there? Because I--
    Mr. Ellis. There is a--under existing law, there is a 
mandatory purchase requirement if you live in the special flood 
hazard area to purchase flood insurance. It is generally still 
what people call the 100-year floodplain or the 1 percent 
floodplain.
    Mr. Luetkemeyer. Right.
    Mr. Ellis. And so, that exists. It isn't, as I was 
indicating to the chairman, forced as much as they are saying. 
I think the estimates from GAO is as little as 50 percent of 
the people who should be purchasing flood insurance under the 
law are actually purchasing flood insurance that their lender 
should be requiring.
    Mr. Luetkemeyer. Okay. I understand what you are saying. 
But I would think that the regulators who look at the loans 
that the banks or credit unions or whoever are making would be 
the best judge of whether that actually needs to have flood 
insurance on it. Because you may just--you may have a half a 
million dollar home, but you may have a $10,000 mortgage 
against it, sits in a floodplain. The lot is worth more than 
the--
    Mr. Ellis. I--
    Mr. Luetkemeyer. So there is no need for the flood 
insurance. I am not sure that I agree with your premise, unless 
you are talking about--
    Mr. Ellis. It is not my premise. It is just the law. I am 
just pointing out what the existing law is right now, which is 
there is a mandatory purchase requirement for high-hazard 
areas.
    Mr. Luetkemeyer. Okay, I guess--do you--with the private 
insurance market trying to take over, do you support continuing 
to have mandatory purchases of it when you could live in a 
floodplain, or you leave that up to the individual--
    Mr. Ellis. If you don't have a mortgage, you don't have to 
have it. The question is, are we protecting the--if you have a 
federally-backed mortgage, are we protecting the Federal 
Government in that context, as well. And so, I think it is an 
issue worth discussing about the mandatory purchase 
requirement. But at least in this context, I was just basically 
saying that if you purchase private flood insurance, that 
should meet your mandatory purchase requirement. Which has been 
one of the limitations in the past, is that it is not 
interpreted to actually meet that requirement.
    Mr. Luetkemeyer. Okay, thanks for your clarification.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman. I think one of 
the observations about increasing the take-up rate for private 
insurance is, if we get the Federal Government actually 
charging actuarial rates would help do that, bring some 
competition to that process. So, I am hopeful.
    I think we have had some great testimony here today. I want 
to thank the witnesses for their time and for their patience. I 
want to also thank Mr. Ross and Mr. Murphy for a very 
thoughtful piece of legislation. I think this is something that 
has bipartisan support, common sense. And while we may not be 
able to act on this in the 113th Congress, I would hope that 
this is something that we will work on in the 114th Congress.
    I think there was--hopefully, there was not the thought 
that when we did that little adjustment to flood insurance, we 
had fixed flood insurance on a permanent basis. We have not, as 
the point--the fact that we still owe $24 billion and have a 
$30 billion line of credit.
    And so, certainly, these discussions need to continue. I 
would also like to ask unanimous consent, without objection, to 
submit statements for the record from the American Bankers 
Association, the National Association of Mutual Insurance 
Companies, the Property Casualty Insurers Association of 
America, the Independent Insurance Agents and Brokers of 
America (Big ``I''), the National Association of Professional 
Surplus Line Offices, and a letter from the Reinsurance 
Association of America.
    Without objection, it is so ordered.
    I would also like to thank the witnesses again.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And with that, with no additional business, we are 
adjourned.

    [Whereupon, at 4:01 p.m., the hearing was adjourned.]

                            A P P E N D I X



                           November 19, 2014

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