[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
THE NATIONAL FLOOD INSURANCE
PROGRAM: OVERSIGHT OF
SUPERSTORM SANDY CLAIMS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
JUNE 2, 2015
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-28
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Housing and Insurance
BLAINE LUETKEMEYER, Missouri, Chairman
LYNN A. WESTMORELAND, Georgia, Vice EMANUEL CLEAVER, Missouri, Ranking
Chairman Member
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
SCOTT GARRETT, New Jersey MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico WM. LACY CLAY, Missouri
BILL POSEY, Florida AL GREEN, Texas
ROBERT HURT, Virginia GWEN MOORE, Wisconsin
STEVE STIVERS, Ohio KEITH ELLISON, Minnesota
DENNIS A. ROSS, Florida JOYCE BEATTY, Ohio
ANDY BARR, Kentucky DANIEL T. KILDEE, Michigan
KEITH J. ROTHFUS, Pennsylvania
ROGER WILLIAMS, Texas
C O N T E N T S
----------
Page
Hearing held on:
June 2, 2015................................................. 1
Appendix:
June 2, 2015................................................. 39
WITNESSES
Tuesday, June 2, 2015
Kieserman, Brad, Deputy Associate Administrator for Federal
Insurance, Federal Insurance and Mitigation Administration,
Federal Emergency Management Agency, U.S. Department of
Homeland Security.............................................. 4
APPENDIX
Prepared statements:
King, Hon. Peter T........................................... 40
Kieserman, Brad.............................................. 41
Additional Material Submitted for the Record
Luetkemeyer, Hon. Blaine:
Written statement of the Property Casualty Insurers
Association of America..................................... 50
Pearce, Hon. Stevan:
Written responses to questions for the record submitted to
Brad Kieserman............................................. 56
THE NATIONAL FLOOD INSURANCE
PROGRAM: OVERSIGHT OF
SUPERSTORM SANDY CLAIMS
----------
Tuesday, June 2, 2015
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:12 p.m., in
room 2128, Rayburn House Office Building, Hon. Blaine
Luetkemeyer [chairman of the subcommittee] presiding.
Members present: Representatives Luetkemeyer, Garrett,
Pearce, Posey, Hurt, Stivers, Ross, Barr, Rothfus, Williams;
Cleaver, Velazquez, Capuano, Green, and Beatty.
Ex officio present: Representatives Hensarling and Waters.
Also present: Representative Meeks.
Chairman Luetkemeyer. The Subcommittee on Housing and
Insurance will come to order. Without objection, the Chair is
authorized to declare a recess of the subcommittee at any time.
Today's hearing is entitled, ``The National Flood Insurance
Program: Oversight of Superstorm Sandy Claims.'' Before we
begin, I would like to thank the witness, Mr. Kieserman, for
appearing today. And I look forward to his testimony.
I will now recognize myself for 2 minutes to give an
opening statement.
In October 2012, Superstorm Sandy made landfall, damaging
or destroying 650,000 residences and resulting in $65 billion
in losses. Years later, the media reported initial causes of
fraudulent engineering reports that facilitated lower flood
insurance claims. FEMA acted, but only after public prodding,
and today is in the midst of a significant legal battle,
attempting to settle as many cases as possible. Still, no one
has been able to tell Congress or the public why these
engineering firms operated in the fraudulent manner in which
they are believed to have done.
One question we must examine is whether or not perverse
incentives exist within the National Flood Insurance Program
(NFIP). Sandy wasn't the first test of the NFIP, and
unfortunately won't be the last. Fraudulent reports and alleged
underpayment of claims that came in the wake of Sandy highlight
a significant underlying issue. Reform of the NFIP is needed
and is needed now. Today, we hear from Brad Kieserman, FEMA's
Deputy Associate Administrator for Insurance. He is the
individual charged with overseeing the Sandy settlements claims
process. It is my hope he will be able to be forthcoming in his
testimony and that he will provide this subcommittee with a
better understanding of the events that occurred following
Sandy. Time and again, we have seen Americans suffer because of
government's failures, particularly when it comes to the
National Flood Insurance Program.
At this moment, what we know is that there was negligence
and alleged fraud on the part of FEMA and certain engineering
firms and that policyholders were mistreated. Today, we aim to
garner more information on this situation, examine whether or
not such significant issues presented themselves in the wake of
similar disasters, and begin to discuss ways to fix a broken
system in an effort to ensure it does more to benefit not only
policyholders, but also taxpayers who foot much of the bill.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez, for 2 minutes.
Ms. Velazquez. Thank you, Mr. Chairman. I want to thank you
and the ranking member for convening this important hearing.
Superstorm Sandy was one of the worst natural disasters in U.S.
history and hit homeowners especially hard. From completely
destroying homes to thousands of flooded basements, this storm
wrecked havoc in my district, causing millions of dollars in
damage. In the face of such devastation, my constituents
expected Write Your Own insurance companies to honestly and
fairly assess damages and pay claims. Unfortunately, it appears
that did not happen. Mounting evidence suggests that peer-
reviewed engineering reports were altered to specifically deny
claims, citing that the damage was due to prior longstanding
problems, even though the original report stated that Sandy was
the cause.
In other more egregious cases, reports were falsified to
indicate no structural damage occurred at all, when, in fact,
it did exist. These allegations are at the heart of today's
hearing. Falsified engineering reports, underpayment of claims,
and lax oversight by FEMA paint a troubling picture that led to
significant harm for many victims who rightfully thought they
were covered. We owe it to the victims to thoroughly
investigate what FEMA knew, when they knew it, and what is
being done to fix the problem. But, most importantly, to ensure
it never happens again.
Today's hearing will further that goal. And with that, I
thank the chairman and the ranking member. And I yield back.
Chairman Luetkemeyer. I thank the gentlelady.
With that, we go to the gentleman from New Jersey, Mr.
Garrett, for 2 minutes.
Mr. Garrett. Thank you, Mr. Chairman. I would like to thank
you for conducting this important hearing, and allowing us the
opportunity to oversee the process of making those affected by
Superstorm Sandy whole. Now, I was able to personally help some
of those who suffered from the storm, personally able to help
them to dig out of the rubble, if you will. So I saw the
destruction and I saw the devastation firsthand of the storm.
And I also saw the despair of the victims. But, at the same
time, I also saw the strength and the determination of my
constituents who worked hard to rebuild their homes and to
rebuild their lives.
But after enduring the storm and the clean-up and all that
went with it, the people of New Jersey then had to face yet
another challenge: some doctored flood insurance claims that
threatened their ability to rebuild. This, quite frankly, is
unacceptable. Frankly, it is actually maddening. And I hope
that we can work together to ensure that victims are not
cheated and taken advantage of. And of course, importantly, we
need to also make sure that the taxpayer is also taken into
consideration for overpayments for Sandy and of waste and
fraud.
And with that, I again thank the chairman for the hearing.
I look forward to a discussion of how we can best serve those
who are continuing to rebuild. I yield back.
Chairman Luetkemeyer. I thank the gentleman.
I now recognize the ranking member of the subcommittee, the
gentleman from Missouri, Mr. Cleaver, for 2 minutes.
Mr. Cleaver. Thank you, Mr. Chairman. I would like to begin
by thanking the Chair for the hearing. As many in this room
know, Superstorm Sandy, which hit the United States in October
of 2012, is estimated to have been the second costliest
hurricane in U.S. history. It damaged 650,000 homes and
resulted in $65 billion in damages. Of the 144,000 insurance
claims that have been filed, 2,800 were appealed. And because I
have a boring life, last night I watched the 60 Minutes episode
on the investigation of charges that many of the insurance
claims were underpaid or doctored by engineering firms.
A number of news stories have further echoed the same
charge. In light of these grave claims, it is paramount that
this subcommittee hold a hearing to determine the severity of
these allegations, to assess FEMA's role or lack thereof in
overseeing the Write Your Own flood policy, and to discuss how
FEMA will reassess these claims and restructure their policies
in light of these allegations.
My congressional district was not impacted by Superstorm
Sandy. Mother Nature, however, does not discriminate, not by
city, by district, or by red or blue. As members of this
committee, it is our responsibility to ensure that when
disaster strikes, our constituents have the resources to
rebuild in ways that allow them to move forward with their
lives. I look forward to hearing from you, Mr. Director. And
hopefully, many of the issues we have can be resolved. Thank
you.
Chairman Luetkemeyer. I thank the gentleman.
With that, we have the gentleman from Texas, Mr. Green, for
1 minute.
Mr. Green. Thank you, Mr. Chairman. I especially thank you
and the ranking member for this hearing. Because, as you know,
on Memorial Day, in Texas, we had an inundation. And,
literally, we have had trillions, trillions of gallons of water
in Texas. And my congressional district in Houston, Texas, has
been hit. We have one apartment complex, the Rockport
Apartments, where hundreds of people have had to be relocated.
Some of the units are uninhabitable. And we also have had an
area in my district with homes that have been flooded to the
extent that people are losing everything that they have on the
first floor. Whatever they had on the first floor, I think, is
lost. I have actually gone to them. I have been in their homes.
I have seen it with my own eyes. And my hope is that we will be
able to bring some resolution to the issue of concern today.
Because we don't want to see other persons visited with these
same concerns, especially when they are suffering and are
expecting a helping hand, a hand up, not some person who is
going to defraud them.
So I thank you, Mr. Chairman. And I thank the witness for
appearing today as well.
Chairman Luetkemeyer. I thank the gentleman.
We will now hear from our witness. Today, we welcome the
testimony of Mr. Brad Kieserman, Deputy Associate Administrator
for Federal Insurance at the Federal Emergency Management
Agency. Mr. Kieserman, you will be recognized for 5 minutes to
give your oral statement, and without objection, your written
statement will be made a part of the record. And with that, you
are recognized to proceed.
STATEMENT OF BRAD KIESERMAN, DEPUTY ASSOCIATE ADMINISTRATOR FOR
FEDERAL INSURANCE, FEDERAL INSURANCE AND MITIGATION
ADMINISTRATION, FEDERAL EMERGENCY MANAGEMENT AGENCY, U.S.
DEPARTMENT OF HOMELAND SECURITY
Mr. Kieserman. Thank you, Mr. Chairman. Chairman
Luetkemeyer, Ranking Member Cleaver, and members of the
subcommittee, as you know, I am Brad Kieserman, the Deputy
Associate Administrator for Federal Insurance in the Department
of Homeland Security's Federal Emergency Management Agency. I
am grateful for the opportunity to be here today. But I will be
honest with you, I am regretful about the circumstances.
Congressman Green, your comments resonated with me. I will
tell you why, in particular, I have been very focused on Texas
over the last week or so, along with my colleague, Deputy
Associate Administrator Wright, who is here behind me. And
there is a personal reason why. In 1972, my grandparents, Ben
and Bertha Levy, lived in Wilkes-Barre, Pennsylvania, when that
community was devastated by Hurricane Agnes and the flooding
associated with it. While the flood waters did not kill my
grandparents, the experience afterwards did. I was 10 years
old. I have had a lot of opportunity, unfortunately, to think
about that and remember it since Sandy, and over the last 114
days since I have been in this job.
Because about 120 days ago, the Administrator of FEMA,
Craig Fugate, came to me and said, ``We have a problem. I need
you to go solve it for me.'' Many people ask me what happened
in Sandy. I think what happened is fairly simple to describe,
but painful. There are some people, survivors of Sandy, who
paid premiums, some for many years, for flood insurance. And
they did not get what they were entitled to. They did not get
what they deserved. Their government let them down. Their
insurance company let them down. And people came to their homes
and some of those people did wrong by those survivors.
There is a lot of talk about why it happened. People want
to talk about the incentive structure that is in place. I am
not sure I am going to be able to give you very fulfilling
answers on that today. But I will tell you why I think this
happened. Why I think this happened is because the National
Flood Insurance Program needs to be reformed. It has lost
contact, it has lost connection with its survivors, with its
customers, with its policyholders, with its premium payers. And
I will tell you this, floods are the number one disaster in
this country. You don't have to look any further than Texas,
sir, to see that. And they continue to be the number one
natural disaster in this country. And as long as that is the
case, Americans will need flood insurance to help manage their
risk. And they deserve a program they can count on.
And over the past 32 years, since we put into place the
public-private partnership that is the Write Your Own Program,
in which commercial insurance companies deliver about 83
percent of the services in the National Flood Insurance
Program, we have allowed that program to grow to be a highly
distributed network. It really lacks adequate governance. And
we have lost the capability and the capacity to detect and
monitor problems in that program. And here is the proof of
that. Two years after Sandy, a Federal court judge finally set
down in writing that he had seen reprehensible gamesmanship on
the part of some people delivering the program. And he
expressed concern that that may represent systemic wrongdoing
in the program. It shouldn't have taken 2 years to recognize
that. And it should never take 2 years to recognize that again.
There is a great book about organizational change called,
``Your Iceberg is Melting.'' It is written by Dr. John Cotter.
The National Flood Insurance Program iceberg is melting. And
what we saw in Sandy was the tip of it. The numbers don't tell
the whole story, but let me talk about the numbers for just a
moment. We had 144,000 claims for insurance filed in Sandy. We
paid out $8 billion. Of those, about 3 or 4 percent of the
people filed appeals to FEMA disagreeing with what their
insurance company gave them, 3 percent. Another 1\1/2\ percent
ultimately sued their insurance company or FEMA.
And so you can say well, those numbers indicate that the
problem is not that big. There is not really a serious issue.
But those numbers don't tell the whole story. Those numbers are
just the tip of the iceberg that is melting. And those numbers
represent individual people like my grandparents, the Levys,
and like some of our litigants, the Morellos or the Rameys, and
the others that, Congressman, you saw on 60 Minutes. And for
those people, this inability to detect their problem and react
to it in a timely way devastated their lives. We cannot allow
that to happen again. And so, we are settling claims. We are
reviewing claims. And we are going to reform this program.
I should inform the committee, in my final seconds here,
before I take your questions, that I have tendered my
resignation. I will be leaving FEMA on the 12th of June. I have
accepted a position with the American Red Cross to be the vice
president for operations and logistics. It was, literally, an
opportunity I couldn't afford to decline. I care deeply about
the work that the task force is doing. The Administrator, the
Secretary, and the Deputy Administrator of FEMA are deeply
committed to this. Mr. Wright, who is behind me, will take the
helm of the Federal Insurance and Mitigation Administration.
And he will drive forward to lead these reforms and to lead
this change. I look forward to taking the committee's questions
today. And, again, I thank you for the time.
[The prepared statement of Mr. Kieserman can be found on
page 41 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Kieserman. I
appreciate your testimony today.
And with that, I will begin the questioning by recognizing
myself for 5 minutes.
You said that the percentage of Sandy claims that remain, I
guess that were in litigation, people who weren't happy, was
about 1\1/2\ percent?
Mr. Kieserman. That is correct, Congressman.
Chairman Luetkemeyer. What percent of those have you
resolved?
Mr. Kieserman. We currently have--we began with 2,200
claims in litigation in the fall of 2014. We are down to about
900 claims in New York and about 1,100 claims in New Jersey. Of
those, through the settlement process that we began about 110
days ago, we have tentatively settled 60 percent of the cases
in New York and 40 percent of the cases in New Jersey. My goal
and expectation is that FEMA will be able to offer every
litigant in New York and New Jersey, who was in litigation as
of February when we began this process, with a fair and
reasonable settlement by the end of August of this year. And
that those who wish to litigate after that will certainly have
the opportunity to do so. But our goal is to offer every
litigant a fair and reasonable settlement. And we are well on
our way to doing that.
Chairman Luetkemeyer. With regard to the settlements,
because some of the fraud allegations and realization of it
came to light after some of the folks probably had their claims
settled, do they have the ability to go back and get further
restitution for their claim? Or do they have to present a
situation where they believe they were defrauded and then show
that they do have just cause to be considered for some further
payment? How is it going to work, I guess is the question I
need to ask.
Mr. Kieserman. It is really on a case-by-case basis. And it
depends on the release they executed and where their settlement
was at the time that this process began. There were about 400
or so cases that had been mediated with plaintiffs and defense
attorneys and a mediator and folks agreed to the settlement of
claims prior to our initiation of the process. If they signed a
release of all claims, then they are complete with the process.
A number of those cases had not been finalized at the time our
process began. And so, we are moving forward to treat them
within the scope of the process.
Chairman Luetkemeyer. You made the comment that it looks
like, quite frankly, rats off a sinking ship here with as many
people leaving FEMA as they are and the Flood Program here. We
are concerned that with this leadership leaving, maybe the bad
apples are leaving, but maybe the folks who just don't want to
deal with it are taking leave and leaving the ship without some
folks to man the rudder here.
And I am kind of concerned about the direction of the
program. What do you see? You said the program lacks
governance. Can you explain that, and how that is going to be
impacted by all the folks who are leaving, including yourself?
Mr. Kieserman. I guess I would begin by saying that my
departure is motivated by nothing other than the fact that I
have one son in out-of-State tuition at the University of
Michigan and another son who dropped out of college and dropped
back in. So I am putting two boys through school at the same
time. I have been in Federal service for nearly 29 years. And I
need to look after my family. I am not leaving for any other
reason. I am very dedicated to Secretary Johnson, Administrator
Fugate, and Deputy Administrator Nimmich. And I am very
committed to this program. I am going to the Red Cross so I can
keep helping people. Mr. Wright, who is behind me, is an
outstanding senior executive.
Chairman Luetkemeyer. Okay. But my question was, you made
the statement that the program lacks governance, we are losing
some people. You said it needs reform. So tell us what your
suggestions are going to be or would be for reforming it and
getting that governance that you testified, yourself, that it
needs.
Mr. Kieserman. I think we need to begin from the premise
that governance needs to focus on customer service and
governance needs to put the survivor first. So we need to
figure out--first of all, the structure of the Write Your Own
Program and the structure of how FEMA administers its policies
on the direct side, frankly, is an anachronism to me. So I
think we are going to have to look at that from a forensic
accounting perspective and understand the various layers that
have accrued during the years.
For example, there are 82 Write Your Own companies plus
FEMA. Between FEMA and one of those other Write Your Own
companies, we have about 35 to 40 percent of all of the
policies in force in the United States, 5.3 million total
policies. Two entities have 35 to 40 percent of those. And
then, 81 entities have the balance of the 60, 65 percent. That
business model intuitively doesn't make sense. Why can 2 handle
20 percent or 40 percent and then you have 81 to do the rest?
That is a business model that was allowed to grow over the
years. And as that business model has grown, what has happened
is that many of the Write Your Own companies and FEMA have
contracted out for these services. Because I have to tell you,
this is a contract program. There is no one out there wearing a
FEMA shirt or a U.S. Government employee shirt who is adjusting
a claim. There is no one out there providing engineering
services who is a Government employee. All of that is
contracted for.
So this is fundamentally going to be a contractual
relationship if you want to have the capacity and capability
and professionals in the field. So the question becomes, how do
you govern that network of contract professionals in a way that
is survivor-centric? Because flood insurance is another
Emergency Management Program that has to focus on the survivor.
Chairman Luetkemeyer. I am going to have to interrupt you.
My time is up. If you see the little red button on there, you
probably need to start winding up your comments because,
otherwise, I have the gavel. With that, let me turn to the
ranking member of the subcommittee, Mr. Cleaver from Missouri,
for his 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman. And Mr. Kieserman,
thank you for your service with FEMA. I am sure it hasn't been
all roses. But thank you nevertheless.
I was born and raised in Texas, following up on what Mr.
Green said earlier. And having gone to high school in Wichita
Falls, it is hard to imagine that there was mandatory
evacuation. My father lived in an area that didn't have to be
evacuated during this flooding, but all around him did. I am
thrilled over the fact that the flooding didn't hit him because
he didn't have any flood insurance. And probably most of the
people in Wichita Falls, not one of the great places of
flooding, would have insurance.
Mark Hanna of the Insurance Council in Texas has said that
he believes less than half of the homeowners, half of them,
have flood insurance. So why is it that you think most people
in this area lack flood insurance, even though this is not a
place that is going to be hit often? But do you have any idea
why?
Mr. Kieserman. Flood insurance, the purchase of flood
insurance, Congressman, is only mandatory in the special flood
hazard area, an area that is mapped for a particular hazard.
Outside of that, it is not mandatory. However, it is
interesting that nearly 25 percent of the claims we pay come
from people who are outside that mandatory purchase area. So
why don't people buy flood insurance? I suspect it is for the
same reason that people don't wear seat belts and take other
risks in life. They look at the cost-benefit analysis, probably
not unlike my grandparents in 1972, and they assess what they
believe their risk of flood is and whether they want to pay out
the premium every month. And so, I think that is one of the
reasons that people don't buy flood insurance.
Mr. Cleaver. But even if they do, there is something wrong
with the way insurance companies process claims. I was on this
committee when Hurricane Katrina hit. And a number of us,
including, I think, Mr. Green went and held hearings in New
Orleans and in Mississippi. At Senator Trent Lott's house, I
stood on the stoop of his house. That was the only thing
remaining. It was the same thing at Congressman Gene Green's
house; the only thing remaining was the stoop. Nothing else was
there. And I think many Members of Congress were completely
outraged that these two individuals were denied the insurance
company protection from this flood because, all of a sudden,
the insurance company, that was one of the biggest in the
country, said well, I'm sorry, sir, that we can't pay this
claim. You have flood insurance. And your house was not washed
away, it was blown away. So should we have blow-away insurance?
Something is not right. I am not accusing anybody of anything.
I am accusing the not-right scenario that is being played out
again and again and again after disasters. What do you have to
say to that?
Mr. Kieserman. Congressman, there is a line-drawing
exercise that I have observed as you have. In Katrina, it was
wind versus water. In Sandy, it was earth movement versus flood
damage. I have to tell you, I don't think we are particularly
good at drawing those lines. And I have seen many cases, in
just working the Sandy cases alone, where one professionally
licensed engineer will come in and say that the damage was
caused by flood and another will come in and say it was caused
by earth movement or, as Congresswoman Velazquez said, by
preexisting damage. My experience with this is that any time we
try to draw those lines, we don't always get it right, and we
end up with very frustrated customers.
And the other thing I would share with you is that many
people don't understand the insurance coverage they bought. We
need to do a better job helping them understand the product.
Because the flood insurance product is a subsidized product and
it doesn't cover everything. It has a lot of--
Mr. Cleaver. What can we do with insurance companies to
hold them more accountable for all of these problems that exist
after major tragedies?
Mr. Kieserman. I think insurance companies have to
understand and acknowledge the role that they played in Sandy
and where things went wrong there. I think they can be part of
the solution as well. And I think, to the point I made earlier
about better governance in the network, how do we hold those
companies, adjusters, agents, bankers, and others who
communicate with policyholders more accountable for helping
them understand what they are buying and what their risk is. We
all have to do a better job at risk communication. And I think
there are a number of interventions we can take there.
Mr. Cleaver. Thank you.
Chairman Luetkemeyer. I thank the gentleman. With that, we
go to the gentleman from New Jersey, Mr. Garrett, for 5
minutes.
Mr. Garrett. Thank you. Besides the insurance companies, I
have heard reports--I will just throw it out there, whether it
is true or not--that there are engineering firms, as well, that
are accused of wrongdoing. If engineering firms have been found
to act improperly, if they doctored reports or did anything
else like that, then they obviously not only have victimized
the government, but it is fair to say that they have victimized
the Sandy victims as well, wouldn't you agree?
Mr. Kieserman. Yes, Congressman.
Mr. Garrett. Right. What is the status, briefly, of those
cases right now? And do you know if there is a history with
those particular firms that you are going to speak of, of this
sort of thing?
Mr. Kieserman. Congressman, I would begin by saying that
FEMA is neither a law enforcement agency nor a regulatory
agency. And I think it is imperative to understand the role
that we play here. We deliver a flood insurance program. And
some of the participants in that program have engaged, at a
minimum, in highly irregular practices. I will leave it to the
courts and the criminal investigators to determine whether they
violated the law. The New York State Attorney General's Office
and the New Jersey Attorney General's Office are investigating,
very aggressively I might add, at least two of the engineering
firms.
Mr. Garrett. And is there a history with these firms in the
system, so to speak?
Mr. Kieserman. There are those who say that there is prior
misconduct. And, again, I think that it is up to those who say
that to prove it. But what I can say is that the president of
at least one of those firms was disbarred from the practice of
law for allegedly being involved in the commission of fraud.
That firm and that individual should never have been allowed to
participate--
Mr. Garrett. So he is responsible for his own conduct. Who
is responsible here in the government for making sure that
people who have been disbarred or who have a history of
wrongdoing not be allowed to be in this system that we have?
Mr. Kieserman. Today, Congressman, I am responsible for
that in the National Flood Insurance Program. It is for that
reason that we have withdrawn the authority of insurance
companies to make any allocation or--
Mr. Garrett. Should that have been done by someone, you or
otherwise, before Sandy occurred, making sure that if there is
a list of bad actors, that these bad actors should not be
allowed to be involved?
Mr. Kieserman. I think, first, you have to detect it before
you can deal with it--to my earlier point about the need to
build in better governance and the ability to detect and
monitor this problem.
Mr. Garrett. That is what I am asking. In other words, did
these folks that we see now are bad guys, have a history of
being bad guys that we should have known beforehand?
Mr. Kieserman. I think we should have had mechanisms in
place to know that there were problems, to know, first of all,
that the companies were not necessarily run by reputable
people. And, second of all, to identify the problems long
before a Federal judge had to tell us about it. I think both of
those things should have happened and need to be done.
Mr. Garrett. So when the judge--I didn't read the judge's
opinion, I am just going by your quotes here--said that there
was systemic wrongdoing and reprehensible conduct, I assume, I
am guessing here that the systemic wrongdoing involves not only
these bad guys, the bad engineers and the claims adjusters or
anybody else, but it sounds like there is a systemic problem
with the Flood Insurance Program, as well as this one point,
that we didn't look at for the last several decades to see who
the bad guys were. So he is saying that there is a systemic
problem in the system, right?
Mr. Kieserman. That is my understanding. And that is
certainly how I approached it when I took the job.
Mr. Garrett. Right. And so when you talk about the issues
of well, they were just bringing up that there are certain
cases, there is wind damage, certain times there are earth
movements, other times there are problems that we have heard
repeatedly storm after storm after storm. And, yet, here we are
again in 2015, and I am trying to figure out what the common
denominator is.
We know there are always going to be bad actors in the
world. That is one common denominator. But the other common
denominator is FEMA and the Flood Insurance Program in general.
That is the common denominator over storm after storm after
storm, decade after decade after decade, and as the judge calls
it, a systemic problem. That seems to be where the problem is.
And we have had these hearings before. We have reformed before.
And we just come back again time and time again with the same
systemic problem.
Mr. Kieserman. Congressman, I would say that the common
denominator to emergency management in this country is FEMA and
that FEMA helps millions and millions of people every year. And
no one should forget that. I think it is absolutely the case
that the National Flood Insurance Program needs to be reformed.
And I would tell you, back to my analogy about the iceberg
melting, there are a lot of people in the insurance business
and in the banking business and in other businesses who would
tell you there is nothing wrong, this is a small number of
claims. I am not sitting here telling you that today and
neither is Administrator Fugate or Deputy Associate
Administrator Wright. We are absolutely acknowledging that this
iceberg is melting. We are just seeing the tip of it. And it
needs to change. But I need this body and we need the others to
help maintain that sense of urgency around this issue.
Otherwise, it will just slip back again.
Mr. Garrett. I yield back.
Chairman Luetkemeyer. I thank the gentleman. Next for
questions, Ms. Velazquez, the gentlelady from New York, for 5
minutes.
Ms. Velazquez. Thank you, Mr. Chairman. Mr. Kieserman, I
hear that you admitted that FEMA knew or should have known that
there were claims of underpayment and fraud as early as 2013?
Mr. Kieserman. That is correct, Congresswoman.
Ms. Velazquez. So here you are. You said that FEMA is not
an enforcer and FEMA is not a regulator. But what do you do
when you made a statement like this, that you knew since 2013,
so what do you do?
Mr. Kieserman. I think you do three things. You offer
people a fair and reasonable settlement in litigation because
they should have never had to sue you to get what they are
entitled to. You open up the process and you offer people the
opportunity, the 142,000 people who didn't sue us and sue the
Write Your Own companies, the opportunity to have their claims
reviewed. Because, given what has come to light, they should
have that opportunity if they choose to. And then, finally, I
think you set a course in motion to reform the program and to
reform it permanently, so that we don't continue to go through
this cycle.
Ms. Velazquez. What do you do with the Write Your Own
participants? How do you hold them accountable? How do you send
a strong message that we are not going to allow this type of
behavior to ever happen again?
Mr. Kieserman. I think there are a number of steps. The
first was taking control of litigation. Normally, in the
litigation process, the Write Your Owns make the decision, FEMA
pays all the money. We have taken control of litigation and we
are settling claims. And we are doing that in ways that
probably the Write Your Owns would prefer we didn't. But we are
doing it that way anyway.
I would also say that the other thing we have to do with
the Write Your Owns is try to make those who are willing be
part of the solution. Because we will never have the capacity
as a Federal Government to deliver an insurance program to 5.3
million Americans. We are going to need the insurance industry
to help us with that. So I think we have to set a standard. We
have to set a culture of being survivor-centric. And I think we
have to be careful not to alienate the very people whom we need
to deliver the program.
Ms. Velazquez. But we need to send a strong message to
those in the industry. What type of stiffer penalties can we
put in place to hold them accountable?
Mr. Kieserman. Congresswoman, I think the first thing we
have to recognize is that before we start penalizing anyone,
there are court proceedings that are going on and
investigations going on. And I didn't wait for those, we didn't
wait for those to conclude in order to try to compensate
survivors through litigation and through claims. But I do think
it is imperative to get to dispassionate facts about who did
what and what really happened. So, for now, what I have done--
yes, ma'am. Thank you.
Ms. Velazquez. Okay. I have other questions. In March, FEMA
announced that they would reopen all 144,000 Sandy-related
flood insurance claims for review. And while this is good news,
many homeowners at the time may not have taken advantage of
other Federal recovery programs like SBA disaster loans, with
the reasonable assumption that their insurance would be
honored. In light of the fraud allegations, should we reopen
other forms of assistance for those who thought they were
covered by insurance, were denied, and missed out on applying
for a loan?
Mr. Kieserman. Congresswoman, I think that is a question
for the SBA and, to the extent that it involves grants, for HUD
and its grantees. From my perspective, we believe there was a
sufficient basis to provide people the opportunity to have
their insurance claims reviewed. And that is what we are doing.
Ms. Velazquez. It is our understanding that FEMA and SBA
have worked out a way to avoid the duplication of benefits
issued using a joint checks model. However, SBA was not the
only entity providing assistance after Sandy. Will FEMA work
with New York City to replicate that model to expedite and
lessen the burden resulting from overpayments to homeowners
from the city?
Mr. Kieserman. We have worked with New York City, with New
York State, and with New Jersey State. And we will continue to
do so. But everyone should understand that a grantor like New
York City and New York State and New Jersey stands in different
shoes than a loan maker like SBA. Policyholders assign their
rights to policy proceeds to SBA so that SBA has a secured
interest. That is not the case for the grant makers.
So I would say that if anybody took an SBA loan, we are
working with SBA, and if SBA determines there is a duplication,
then folks can use their insurance policy proceeds to pay down
their loan. But if folks took a grant from one of the HUD CDBG
grantees, then it is going to be imperative for them to decide
whether they want to go through this process. Because they very
likely already received funds for the exact same purpose we
would give them money. And they will have a debt when that is
over.
Ms. Velazquez. Going back to the handful of engineering
firms that seem to be at the root of the Sandy fraud cases, how
does FEMA currently conduct oversight over third-party
contractors? And how, again, are these firms held accountable?
Mr. Kieserman. Recognizing the time, the oversight is
conducted through what are called operational reviews that are
conducted for a week every 3 years. They are wholly inadequate
in my view. There are other existing forms, like monitoring for
improper payments. But, again, I think we have lost sight of
the network. And these are not adequate mechanisms. But those
are the ones that are in place.
Ms. Velazquez. Thank you, Mr. Chairman. I yield back.
Chairman Luetkemeyer. I thank the gentlelady. Her time has
expired. With that, we go to the gentleman from Florida, Mr.
Posey, for 5 minutes.
Mr. Posey. Thank you, Mr. Chairman. Mr. Kieserman, thank
for your candid responses. I very much appreciate it. Somebody
joked earlier--you mentioned that one of your sons dropped out
of college temporarily, and somebody said that if you asked him
why, he is so straightforward, he would probably tell you. That
is a real compliment. We don't get a lot of that. We get a lot
of people who like to dodge answering any questions or giving
straight yes-or-no answers. So hats off to you for that. Thank
you. And good luck at the Red Cross.
What amount do you think was knowingly paid in losses to
non-Sandy related property?
Mr. Kieserman. I don't have a number for that, Congressman.
I will have to get back to you on that one. I honestly don't
have a number for that at all. I'm sorry. Especially after
those nice compliments, I feel bad. But I don't know the
answer.
Mr. Posey. I shouldn't have said anything. Are you aware
that some were knowingly paid that were non-Sandy related?
Mr. Kieserman. I was not aware of that, sir.
Mr. Posey. Like millions of dollars for new roofs on
museums within a stone's throw of this building?
Mr. Kieserman. I don't know that those were flood insurance
funds as opposed to funds from other agencies. But we can get
back to you on that.
Mr. Posey. Yes. And I am looking at the whole Sandy
package. I know there was a lot of pork in there when I read it
that wasn't related. And I know that the Rules Committee felt
it was not in order to require an amendment that said all
Sandy-related losses have to be related to Sandy. I know that
is good congressional sense. But it is not good common sense.
And so my question to you is, how do you think Congress can
better exercise its ability to perform oversight in the future?
Members of Congress are really good at sitting back and patting
ourselves on the back, saying we have it under control, until
we have a catastrophic loss here, there, or elsewhere. And
then, of course, it is the insurance industry's fault. It is
the agency's fault. It is everybody's fault but Congress. What
do you think Congress can be doing actually to be more engaged
to make sure we don't have this kind of dysfunction when the
time comes?
Mr. Kieserman. Congressman, I think you hit the nail on the
head. We all tend to pay attention to the catastrophic. But the
reality is that in an average loss year for insurance or an
average disaster year for the country, that is the time to be
paying attention. That is the time to hold hearings. That is
the time to ask questions. That is the time for the agency to
be looking at its organization. That is the time for that to
happen. Because when the catastrophic occurs, it is all hands
on deck and we are just trying to deal with the moment. I think
the key, as you pointed out, is having that level of attention
when it is a non-catastrophic event.
Mr. Posey. Exactly. Do you have any suggestions as to how
we might engage that? Are there experts that we should bring in
to do an audit? Do you think an Inspector General is
sufficient? How do we look at doing a dry run? Do they have
that? And who analyzes the results of those things?
Mr. Kieserman. I think GAO has done phenomenal work. And I
would urge you to continue their use. I have reached out to GAO
and they have begun an audit on our program to help us
understand the forensics of where the money goes. I am a big
believer in ``follow the money'' and that will help you
understand the organization. And I think GAO can be a great
asset to this body.
Mr. Posey. Has there been--certainly we have all heard of
people who dropped the ball, who didn't do their job.
Unfortunately, some of them were Federal employees. What has
been the level of discipline for those employees who did not
perform as they should have in this situation?
Mr. Kieserman. As you know, there are several senior
employees who have chosen to resign or retire as a result of
this. And by doing that, I think they recognize their role and
create space for others to come in and make change. There are
some less senior employees whom I have asked the Inspector
General to investigate so that we can, again, give everyone the
process they are due, survivors, employees, contractors,
everyone, so that we can understand. So I have asked the
Inspector General to look at the performance of several
employees whom I believe had information about this and should
have alerted senior leadership earlier in the process. I am
awaiting those investigations.
Mr. Posey. I would hope that you would also include those
members who have resigned and moved on. We had similar problems
with Madoff at the SEC. And the Secretary came in here and
actually told me, ``We haven't disciplined anybody yet. But it
might make you comfortable to know that X number of people
resigned.'' Well, it really doesn't make me comfortable. They
probably have similar high-paying positions in other agencies
that we are paying. And it is like saying that when a pedophile
changes neighborhoods, the problem is solved.
Mr. Kieserman. I agree, Congressman. Accountability doesn't
stop when you leave the agency. I doubt it will stop for me.
And it shouldn't stop for others. I can tell you that the
States Attorneys General that are looking at this and the
Inspector General are looking at anyone who is involved,
regardless of their current employment status.
Mr. Posey. Okay. Mr. Chairman, I hope we will get a report
and an update on that. Even if he is gone, I would like to see
the results of that for our committee. Thank you.
Chairman Luetkemeyer. Absolutely. I thank the gentleman.
And his time has expired. With that, we go to the gentleman
from Texas, Mr. Green for 5 minutes.
Mr. Green. Thank you again, Mr. Chairman, and I thank the
ranking member as well. I have been in Congress for a number of
years. And I must say that I agree with Mr. Posey. Mr.
Kieserman, sir, your testimony has been brutally frank. I
rarely hear the level of frankness that I have heard with your
testimony. So I am grateful, as well, that you have been
forthright. Now, I do have a couple of concerns. One, with all
that you have said, I want to make it clear to all who are
hearing your testimony that you do not contend that we should
end FEMA. I think I am hearing you say we should mend it, but
not end it. Is that a fair assessment?
Mr. Kieserman. That is a very fair assessment, Congressman.
I think you need a very strong National Flood Insurance
Program. The private market does not appear ready to step in.
Americans and businesses, small businesses need access to flood
insurance, 5.3 million Americans are doing it now and need it.
I don't know where they get it if we are not here. So I think
we need to strengthen the National Flood Insurance Program.
Mr. Green. Thank you. I had the opportunity this past
weekend in Houston, Texas, to talk about FEMA and the various
programs on a radio station. And we had a caller who appeared
to be a young lady. Her indication was that she had paid her
flood insurance regularly, wasn't behind, there was no lapse in
the program in terms of her payments. And she indicated that
she was very much distraught, perhaps not in these words,
because the program did not reward her as she thought it should
when she had fulfilled all of her obligations. And I am laying
this out as a predicate for this question. Is it true that the
penalty for overpaying a victim is more severe than the penalty
for underpaying? I am trying to find some rational reason for
the behavior that we are talking about today. Can you comment
please?
Mr. Kieserman. Yes, Congressman. It is not the case that
the penalty, if you will, for overpaying is more severe than
the penalty for underpaying. The penalty is for not paying the
correct amount, over or under. And that was not true 4 years
ago. But it is true today, based on some changes that were done
after Katrina. As far as what the reason is behind the conduct
of engineering firms that alter reports or any of that, I don't
have an answer for you. It is really difficult to understand
why.
What I would offer to you is this: I think it is imperative
that the system that we use to detect that kind of conduct
needs to be strengthened. Because whatever the ``why'' is,
until we understand the scope of it, we are not going to be
able to fix it.
Mr. Green. I rarely try to get an explanation for
irrational behavior. But usually when fraud is involved, there
is some reward someplace in the system. And I am trying to find
that gravamen, if you would, that reward that is in the system.
Are you indicating that at this point, you too have not been
able to locate the reward that someone would receive?
Mr. Kieserman. I have not. And I have brought forensic
accountants in to help me. It is why I have asked GAO to come
in. I have spoken with the Attorney General's Office in New
York, in particular, because I know they are looking at the
same question. I do not have an answer for you because I do not
understand why anybody would do some of the things that are
alleged.
Mr. Green. All right. Mr. Chairman, with the remainder of
my time, I would just like to focus on Houston, Texas, and
recent events. We have had a catastrophe. We have had much
property damage. Lives have been lost. And it is our job, as
Members of Congress, to do all that we can to assist our
constituents. But I also want to indicate that in Houston, I
saw something that was very heartwarming. I saw a symbiosis
develop. The mayor's office was involved and the mayor herself.
The Governor immediately acted. The Red Cross, the agency that
you are going to move to--and, by the way, I salute you if this
is what you want to do--was very much involved. We even had the
Mormon Church providing translators for persons who needed some
assistance. We had a Chinese community center housing people
who were victims of the storm. I want to just commend those in
Houston who have done an outstanding job.
But I also want those who are still suffering to know that
we plan to do all that we can to be of assistance to them,
especially people who are out of their homes now and have no
place to go. Some will, but many do not. And it is important
that we do all that we can to help and that they not be
defrauded in this time of need. It is exceedingly important.
Mr. Chairman, I thank you so much for the time. And I yield
back.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentleman from Virginia, Mr. Hurt, for
5 minutes.
Mr. Hurt. Thank you, Mr. Chairman. I thank the Chair for
holding this important hearing. Mr. Kieserman, I am Robert
Hurt. I represent Virginia's 5th District in southern Virginia.
What I hate to see, and I know we all agree on this, is one
more reason why the American people don't trust the Federal
Government. And this is a perfect example of that. The people
that I represent weren't affected by Hurricane Sandy directly.
But certainly, the same distrust and terrible behavior reflects
and affects them much in the same way.
I guess my question, just building on Mr. Green's line of
questioning though, it just seems impossible that you don't
have some idea what it is that would motivate these agencies of
the government, the engineering firms, or the adjusters to
undervalue the damage. There has to be some incentive that can
be adjusted to get to that. So it is hard for me to believe
that you don't have any idea.
Mr. Kieserman. Congressman, I have talked to plaintiffs'
attorneys, I have talked to judges, I have talked to insurance
companies and adjusters and engineers whom I believe are
credible, trustworthy people, and they don't have any idea. It
is--
Mr. Hurt. What could it possibly be?
Mr. Kieserman. I think there are separate pieces here.
Where the adjusting piece is concerned, there is software that
all adjusters use. And in the NFIP, there are multiple
softwares that people are using. One of the things that I would
change as a reform is I would go to a single software. I don't
think you should have multiple types of software because they
can result in different outcomes for different people. There
should be consistency. So if there are errors in the software,
errors in the algorithm, that can result--
Mr. Hurt. But fraud necessarily requires an intent. So if
there is intent to defraud the policyholder--I guess my
question is, is having software that is inconsistent, that is
not intentional, necessarily intentional. It could be, I guess.
But that doesn't make sense to me.
Mr. Kieserman. No.
Mr. Hurt. All right. What about on the engineering side?
There are these allegations that reports were doctored. What is
that about?
Mr. Kieserman. Right. So I think the best I can tell you is
this that I do not understand why an individual at an
engineering back office would take their report from a licensed
professional engineer, alter it, not consult with that
engineer, and then append that engineer's signature and seal.
Mr. Hurt. Lazy?
Mr. Kieserman. Lazy is one--Congressman, I will be honest
with you, I am back to ``follow the money.'' I have to believe
that somewhere, someone at some engineering company thought
that they would either get more business if they found
causation by flood less percent of the time, or maybe they
thought they would get less business if they found otherwise.
Maybe there is a money connection here we are just not seeing.
But we haven't seen it.
Mr. Hurt. Okay. But is that an incentive that is imposed by
the Federal Government or by the Flood Insurance Program?
Mr. Kieserman. I don't know. And I don't think anyone else
does either. This is one of the reasons why these Attorney
General investigations are critical. We simply do not have the
facts.
Mr. Hurt. But who makes those decisions? I guess going back
to Mr. Garrett's question, who makes the decisions about which
engineering firms that are chosen? And does efficiency or
lowest amount of claims or dollar amount of claims--is that an
incentive for hiring these folks?
Mr. Kieserman. I don't have any reason to believe that is
the case. But I do--so you asked me who makes the decision. The
Write Your Own insurance companies and FEMA's direct side agent
decide who to bring in for engineers. And most of the insurance
companies, like FEMA, contract their work out to about nine
vendors in the United States. So we are talking about 82 Write
Your Owns. The reality of it is, there are about nine vendors
and one or two companies who are doing most of the work here.
And so what incentives do they have to hire bad engineers or to
hire engineers who are going to defraud people? I don't know.
Mr. Hurt. Who gets the money? That is the question. I am
asking you that.
Mr. Kieserman. Right. The money flows--and this is the
point--back in layers. So the contracting firms, the vendors
get money. The Write Your Owns get money. The engineering firms
get money. And this is why we need to follow the money. Because
here's where we should be, we should be making sure that every
person who has paid a premium and is insured and has a loss
caused by the flood, that they get their money. That is where
we should be focused right now. And that is where, I think, we
need to make sure that the program is focused, to make sure
that every person who has a loss gets every dollar to which
they were entitled.
Mr. Hurt. Amen. Really quick, we only have 10 seconds, the
fact that you have opened up 142,000 other cases, does anybody
have any idea what that process in and of itself will cost? And
are there concerns about that--any additional cost?
Mr. Kieserman. The total cost of the claims review right
now I estimate at about $40 million. And that is all the costs
associated with running it, standing up, and doing all the
work, and adjudicating claims. But, Congressman, to your
earlier point about public trust and integrity, the cost of
losing that trust is far greater than $40 million.
Mr. Hurt. But we shouldn't be here in the first place.
Mr. Kieserman. That is right.
Mr. Hurt. All right. Thank you. I yield back.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentleman from Massachusetts, Mr.
Capuano, for 5 minutes.
Mr. Capuano. Thank you, Mr. Chairman. And thank you, Mr.
Kieserman. I think you are 100 percent right, obviously, to
follow the money. This is a money thing. Where it is, I don't
know any more than you know. But I am just wondering do,
engineers or whomever get paid by the number of parcels they
review?
Mr. Kieserman. In some cases, yes, Congressman, that's the
model.
Mr. Capuano. So that the more they do, the more they get
paid. And the more you do, the quicker you are, the less
detailed you are. And when you bring that back to the home
office to say, here are my 100 reports for these hours' worth
of time, if you say no, no one is going to tell you to go back
out and check it because there is no payment to be made. If you
say yes, and they say, hey, Fred, I am not so sure, maybe you
ought to go check that one again, if we don't get paid for it.
I am not saying that is here. But there is clearly money
involved. You are 100 percent right to chase it.
Mr. Kieserman. Congressman, I think you have a great point
there. And all I would add is that just a few weeks ago in open
court, there was evidence introduced that the billing process,
even though it was a parcel-by-parcel structure--they billed a
flat rate. And that was introduced in open court. So that is
being investigated as potential fraud as well.
Mr. Capuano. We all look forward to the results of all
that. Thank you. I want to talk to you about some of the bigger
issues. There are some of us who have continued to look at the
flood insurance situation, not individually Sandy, but,
obviously, lessons learned from Sandy. But also how we keep
this thing alive, how we improve it, how we make it work. I
just have a question for you. If I had a home on the Jersey
shore, and I ran away because I was told to leave, and I came
back and my house was gone, do you think I would really care if
it was swept away by the ocean tides or the wind or shifting
sands or little mice? My house is gone. Do you think it should
matter?
Mr. Kieserman. I, Brad Kieserman, don't think it should
matter, Congressman. But I will tell you this, as somebody
managing a Federal program, the actuarial difference between
what it costs to limit causation to flood versus what it costs
to deal with other issues is significantly different. And we
are going to have to figure out how to manage that and how to
educate the public about what they are buying.
Mr. Capuano. I understand. The Flood Insurance Program, as
you say in your testimony, was created for classic floods, rain
and only rain, like what is going on in Texas right now. It
wasn't necessarily created for hurricanes where there is wind
and rain simultaneously. And it wasn't created for tornadoes.
I would argue that one of the things we need to look at is
natural disaster insurance, as opposed to simply flood
insurance, therefore, getting rid of all the nonsense about was
it rain, was it not. We heard it in Katrina. We are hearing it
again in Sandy. And to be perfectly honest, I understand the
technicalities of why it has to be done. But from my
perspective, I think it is stupid for us to require it; a
disaster is a disaster. And whatever specific item caused your
specific loss, in my opinion, shouldn't matter.
I guess I have another question. During your work, is there
a difference if--I don't live on the shore of New Jersey. You
know what? I have a small restaurant. I open it up 6, 7, 8
months a year, try to make as much as I can to feed my family
and send my kids to college. A hurricane comes along, and my
business is blown away. Should that be treated differently than
a homeowner?
Mr. Kieserman. I acknowledge that there are a lot of public
policy issues there. But if you are asking my opinion, my
opinion is that if you are a small business and you have a
loss, you should be able to get your loss adjusted and make
sure that you get the money you need. You are the economic
engine of the community. Why would we do anything other than
treat them the same?
Mr. Capuano. I would agree with you. Yet, I know you know
that when we ``fixed'' our problem with flood insurance, we
didn't fix it for small businesses.
Mr. Kieserman. So we are now looking at the number of small
businesses that we have. There is a study going on right now to
identify how many small businesses are actually in the program.
And that will help us understand better how we can better
adjust their claims.
Mr. Capuano. And when Sandy hit did it--well, you tell me,
again, I am not terribly familiar with the Jersey shore, but is
everybody who owns a house on the Jersey shore, are they all
wealthy? Is Donald Trump the only one who owns a house along
the Jersey shore? Or are there some working-class people who
have struggled hard to get maybe a small, tiny little piece of
the pie?
Mr. Kieserman. I met a lot of working-class people, blue-
collar folks, and people who have worked for a long time to get
their homes, who were impacted by that--
Mr. Capuano. And some of those might be second homes. They
actually might live in downtown Newark and have struggled to
get a small, little piece on the Jersey shore so their family
can get out of the city on occasion.
Mr. Kieserman. That is right.
Mr. Capuano. Yet, we didn't treat them well either. They
are not covered by the fix that we had either, is that right?
Mr. Kieserman. Right. The primary residences are the main
focus of the National Flood Insurance Program. Secondary homes
are treated differently. I take your point about why people
have second homes. But the public policy decision--
Mr. Capuano. I know. I am struggling with the public
policy, I am not struggling with it, I actually think this is
easy. Second homes--Donald Trump has a second home. It is too
bad if he loses it. But I am not going to cry a lot. But that
is not most people who own a second home. And I am sure that in
your work on the Jersey shore, you have seen that. And I know
you have seen it. I know you saw it in Katrina. I know you see
it every time there is a disaster in areas where there are some
second homes. And I guess my time is over. And I appreciate it.
Thank you very much, Mr. Kieserman.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentleman from Florida, Mr. Ross, for 5
minutes.
Mr. Ross. Thank you, Mr. Chairman. And, Mr. Director, thank
you for being here. I come from a State that is surrounded on
three sides by water. And we are used to a little bit of
flooding. And we are used to some wind storms. We are also a
donor State to the National Flood Insurance Program. We
probably contribute more in terms of premiums than we ever get
back in terms of claims. And my concern is is that we have
created this model, that we use the word ``insurance'' when, in
fact, what we have created is a relief model, relief being a
post-event distribution of dollars in order to try to correct
and resolve the damage, as opposed to insurance, which is a
pre-event, actuarially-assessed, capital-based program.
And so now in the NFIP, as we have seen happen in Sandy and
what we have seen in other areas throughout the country, is we
really have a relief program. And, actuarially, I am concerned
that we are not assessing the value of the risk. Because the
risk is what the risk is, and you understand that. If you
choose to live next to an ammunition factory, you don't want to
light a match. That is the risk of living there. If you choose
to live in an area that is under a floodplain, there is a risk
there. And so what we have to do is we have to somehow balance
a market to make sure that we have a capital that will come in
and bear that risk at the price that is appropriate. But also
we have to do, from a policymaking point of view, what is
necessary to do, what we refer to as mitigation. Because if it
is going to be a true insurance program, then we have to
realize that the pre-event investment is going to save us on
the post-event contribution. In other words, studies have shown
that for every $1 in mitigation, you receive a $3 benefit in
value when it comes to relief.
My question to you is, what is going on in terms of
mitigation? Is there anything you specifically recommend that
homeowners can do in terms of trying to mitigate against
potential flood problems, whether it be structural
improvements, whether it be waterproofing a basement, or things
of that nature.
First of all, that risk, if it is borne by the individual
homeowner and they are aware of that risk, they are aware of
the value of that risk, they have a tendency to want to make
sure that they themselves manage that risk and protect that
risk. Mitigation is the area. I would love your comments on
that.
Mr. Kieserman. I think it is critically important, whether
it is homeowners or small businesses or public infrastructure
that everyone prioritize mitigation, as you said, pre-storm and
pre-event, because that is the way you truly buy down risk. You
can either reduce risk, you can avoid risk or you can ignore
it. We shouldn't be ignoring it.
Mr. Ross. Right. I agree.
Mr. Kieserman. So in order to mitigate, if I am the
homeowner, I can dry floodproof, I can elevate, I can look at
structures to reduce flood flow into my home. Those are all
measures you can take. Frankly, again, it is not an option for
everyone, but some people can choose to relocate, especially if
they are in a floodplain, and those are decisions that people
have to make.
Mr. Ross. Has it been your experience that when people are
incentivized financially to make mitigation improvements, they
will do so?
Mr. Kieserman. Sometimes, but there is more than just
irrational actors involved in this. There is emotion involved.
As the Congressman from New Jersey said earlier, sometimes
people work their whole life and that is their parcel and they
are not going to leave it. And so, I think it is both.
Mr. Ross. I agree. But if given that emotional feeling, you
would want to protect it and part of that protection is knowing
that you have been incentivized to mitigate against them. For
example, whether I have a tax-free savings account that I can
use solely to put in that waterproof basement or put up those
berms to keep from--
Mr. Kieserman. Right.
Mr. Ross. Those would be good options, would they not?
Mr. Kieserman. I think they would be good options that are
worth considering, along with the fact that to the extent that
we can help people make good mitigation decisions, we can help
educate people about how they can mitigate the risk and buy it
down and how they protect their investment. That's a role all
of us can play, including the banking industry and others.
Mr. Ross. The housing industry, the banking industry,
everybody.
Mr. Kieserman. Yes.
Mr. Ross. I think this isn't just solely a government
responsibility.
Let me ask you also, when we did the fix last year to the
Biggert-Waters bill, we put a provision in there, I believe,
that would allow for the disclosure of publishing of the
science or the actuarial analysis that is being done. Has any
of that been disclosed or has any of it even been requested by
anybody on the outside?
Mr. Kieserman. I don't know if the disclosures have been
done. We will get that for you. There are a number of studies
going on, on the actuarial soundness of the NFIP. But the
reality of it is, this is a subsidized product. And I agree
with everything you said prior about this being a hybrid
between disaster assistance as a relief program and an
insurance program. It is not pure insurance. It is not
actuarially sound, and frankly, I don't think it will be. If it
were actuarially sound, the private industry would sell it.
Mr. Ross. And we should get the privacy industry in there,
and if we can let them assess that risk because there is
opportunity for that capital to be there.
Mr. Kieserman. Yes, I agree. There is potential here,
especially as we look at reform at a layered approach. It
doesn't just have to be the National Flood Insurance Program. I
think there are opportunities out there for reinsurance and
other layers so that people can buy down their risk with
private products, and that this product is really the last line
of defense not the first.
Mr. Ross. Exactly. The market of last resort. My time is
up. Thank you very much.
Mr. Kieserman. Thank you, Congressman.
Chairman Luetkemeyer. I thank the gentleman. That was an
interesting line of questioning. I enjoyed that. Very good, Mr.
Ross.
With that, we go to the gentlelady from Ohio, Mrs. Beatty,
for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman, and I thank our
ranking member, as well.
Let me say to the witness, thank you. Usually, around here,
it is bad news that travels fast about a witness. But I got a
call saying we have a good witness, and both sides are saying
that. So I expect you to carry that knowledge to your next
position when you leave.
We have heard a lot about the situation here and we have
also heard a lot about FEMA. So my question is, FEMA has asked
the Inspector General to make recommendations to help improve
its oversight role. Can you shed any light or share with us,
are there any efforts to improve that role currently, or will
FEMA take any actions on its own in the interim?
Mr. Kieserman. Congresswoman, we have established a task
force at FEMA that I have had the honor to lead for the last
100 or so days. Mr. Wright will be taking over the overall
operation here in a few weeks.
One of the three things the task force is doing is working
near-term reform. We are not going to wait for others. We are
going to move forward. We would like to move with our partners,
but we know that there is a sense of urgency here and that we
have to maintain that. One of the challenges that we have is
that we have 75 Federal employees trying to oversee an
enterprise of what really amounts to 6 million people when you
take into account the 5.3 million policyholders.
So some of the things we can do, and I would just raise for
Congressman Green from Texas, I do intend to establish before I
leave this job a hotline so that your constituents and others
who may be affected by floods this season can call us until we
have a more robust network that allows us to detect and monitor
these potentially systemic problems. I want to make sure people
have a place to go before they have to appeal their claim to
their insurance company, before they have to sue. We will have
that established before I leave office here in the next week-
and-a-half. So that will be the first thing that we do.
We are going to work with our Write Your Own companies and
others to see how we can better structure our oversight. We
have withdrawn on their authority to pay for engineering
services without our preapproval. That will help us do a better
job at screening the engineering companies. We are going to
immediately increase our policyholder education so that people
understand what they bought. That is one of the things I have
seen, Congresswoman, is that people are very surprised at times
of loss because they don't really know what they bought. We
need to work that piece.
Adjustor training. The adjusters that we have brought in
for the claims review process have received very special
training. We are going to expand that to all adjusters over the
course of the next year or so, so that all the adjusters can
get the sort of training that we have that makes them more
sensitive to the needs of survivors.
That is just a few of the things that we will be doing. The
reform team has come up with well over 50 ideas that I am sure
Mr. Wright and I will be talking about over dinner on Sunday
night.
Mrs. Beatty. Thank you so much.
Mr. Chairman, I yield back. If Mr. Cleaver needs some of my
time, I would be willing to give him those minutes.
Chairman Luetkemeyer. We will recognize the gentleman from
Missouri.
Mr. Cleaver. Thank you. Thank you, Mrs. Beatty.
My concern is, a lot of it is the fact that FEMA is
apparently going to open up 144,000 claims and that is very
close to, if not the same as, the number of claims originally
filed, although only 2,800 were appealed--2,800 of those claims
that were filed were appealed. What precedent will you be
setting for the storms of the future, and is this a corrective
step?
Mr. Kieserman. Congressman, this is a corrective step. It
recognizes that there were deficiencies in the delivery of the
program. So, I think two things have to happen: one, you have
to provide redress for that now; and two, you have to correct
the system going forward so that this doesn't happen again and
you don't have to provide that type of redress.
And just to clarify, we are providing everyone who was
impacted by the storm and filed a claim with the opportunity to
have their claim reviewed, it is their choice to opt in. Some
people have gotten what they needed. Some people are fatigued
by this and are just done with government, and that is fine.
Some people got money from SBA or got money from HUD and their
needs were met.
This is really for people who believe they were underpaid
and didn't have a form of redress. If you are litigating, you
are not eligible for the process. If you had an appeal and it
was closed, unless we can find wrongdoing, you won't be
eligible for the services.
Mr. Cleaver. We had a problem with Wall Street. They
intentionally, the word was mentioned, committed fraud. Nobody
has gone to jail. Nobody has even gone on trial for almost
sending this Nation into another depression. Do you have any
feeling about what will happen if we can prove without a doubt
that insurance companies were committing fraud? Will someone be
prosecuted? Will there be prosecutions, like if they robbed 7-
Eleven?
Mr. Kieserman. I have no doubt that there will be
prosecutions if there was evidence of that. But I will tell
you, Congressman, that I think what you are going to see is
evidence of subordinate entities doing that activity, not
insurance companies. We will see.
Chairman Luetkemeyer. Time has expired.
With that, we go to the gentleman from Pennsylvania, Mr.
Rothfus, for 5 minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
And I would like to pick up on a little bit of that line of
questioning and also follow up on what Mr. Hurt was saying.
Because I am still trying to get my arms around incentives that
might be out there. And maybe if we could talk a little about
the transaction that happens for the homeowner. Who is the
homeowner going to interact with in the process?
Mr. Kieserman. Congressman, in the review process or--
Mr. Rothfus. When the claim gets filed.
Mr. Kieserman. Right. So the first thing a homeowner does
is that they call their agent and they say, I have had a loss.
And then what happens next is the agent works with the
homeowner and the insurance company to send an adjuster out. So
that adjuster is the center of gravity for all of this. That is
first contact, meaningful contact with an insurer.
Mr. Rothfus. And the adjuster then sends out the engineer?
Mr. Kieserman. The adjuster will call for an engineer if
there is an issue with respect to causation of structural
damage. Adjusters are not trained generally to assess
structural damage. And so if they see that, they will bring an
engineer in to say, hey, did the flood cause the damage, it is
a--
Mr. Rothfus. So the engineer comes out, does a study, then
somebody back at the office somehow changes that study or the
evaluation?
Mr. Kieserman. Certainly those are the allegations of what
occurred in Sandy, and I have seen evidence that that happened
on multiple occasions. Should that happen? What I am told by
professional engineering firms is that the notion of peer
review doesn't involve the change in real time of reports. It
involves a later look for QA, for quality assurance and quality
control. It is not what has been alleged to have happened in
Sandy.
Mr. Rothfus. These engineers are licensed in a particular
State?
Mr. Kieserman. That is a great question. In Sandy, some of
the engineers who performed functions were not licensed in the
State where they were working. Some of the engineers who
reviewed in the back office were not licensed in the State
where the residence was located. And some engineers weren't
licensed at all. In fact, some of the people doing this were
biology majors.
Mr. Rothfus. Are the processes that were followed in Sandy
typical for how other claims will come in for NFIP?
Mr. Kieserman. I don't know the answer to that, sir,
because if we knew the answer, we would have prevented this up
until now, which is why we are putting some of these measures
in place in Texas and elsewhere so this doesn't happen again.
Mr. Rothfus. Has FEMA's Inspector General been engaged to
review this matter at all?
Mr. Kieserman. Yes.
Mr. Rothfus. What is the scope of that review?
Mr. Kieserman. Sir, I think you have to ask the Inspector
General, given their independence, but within the first week of
taking the job I put a full referral package together. And I
will just add that I met with plaintiffs' attorneys, the lead
plaintiffs' counsel in this case. He was very generous in
giving us information about his cases that we shared with the
Inspector General and with the State's attorney in New York and
New Jersey, so that they don't have to spend time reinventing
the wheel on the investigation.
Mr. Rothfus. In the claims process, what interaction is
there between WYO, an engineer, an adjuster, and any individual
at FEMA?
Mr. Kieserman. Minimal, and it varies from Write Your Own
to Write Your Own. Some of them use different models in terms
of the services they buy from vendors. In some cases they get
complete service from a vendor and they have minimal
interaction. FEMA's first interaction in most cases with an
insured is in the appeals process when the insurance company
has denied a claim and an insured comes to us. And as I said in
Sandy that happened--
Mr. Rothfus. Do you know whether the Inspector General is
asking or has asked for information from FEMA employees who may
have any information about what happened prior to an appeal?
Mr. Kieserman. I do not know the answer to that.
Mr. Rothfus. In your testimony, you stated that NFIP has no
consistent or reliable method to identify systemic problems,
preemptively identify and address claims or appeals with
similar adjustment issues, or recognize patterns from warning
signs by policyholder complaints, congressional correspondence,
appeals, and other data. What is being done about that?
Mr. Kieserman. Several things. So to begin with, we are
putting significant resources on bringing in the information
technology that we would need. I am sure within the next year
we will be setting a standard for data collection, this next
year or 2 years a standard for data collection, so that
insurance companies and others give us a standard that we can
work through. We will set up this hotline so that we have the
ability now to connect the dots and sort of clear the signal-
to-noise ratio, which has been a problem.
But I think the real focus here is going to have to be the
development of a customer service unit that focuses on the
customer. And whether that is a combination of secret shopper
or customer interviews, we cannot rely on adjusters and WYOs or
anyone else to be assessing the services the customer is
getting. We have an obligation to assess the customer service.
Mr. Rothfus. Thank you. I yield back.
Chairman Luetkemeyer. I thank the gentleman.
We will now go to the ranking member of the full Financial
Services Committee, Ms. Waters from California, for 5 minutes.
Ms. Waters. Thank you very much.
I am sorry that I was not able to be here at the same time
that Chairman Hensarling was here, because first of all, I
would like to express my deep concern about what is going on in
Texas and inquire about what is being done to make sure that
the citizens are being taken care of and that bodies are being
located that may not have yet been identified as lost.
But I would like to ask Mr. Kieserman here today, have you
had an opportunity to talk with our chairman, to explain to him
what you know about what has happened in Texas and how severe
that is?
Mr. Kieserman. No, Congresswoman, I have not had that
opportunity.
Ms. Waters. Perhaps he has not had the time to make that
call to you, but I would ask you if you would offer yourself to
the chairman to explain to him exactly how devastating the
storms have been in Texas, and what it is going to take to
compensate those who have been displaced, whose homes have been
destroyed, on and on and on.
I think it is very important. You may know that during the
time that we were involved with the reauthorization of the
National Flood Insurance Program, perhaps the chairman did not
feel that we needed to reauthorize that program. And I am not
asking you to convince him of anything. I am just asking you to
share with him exactly what has taken place in Texas. This may
cause him to rethink what he feels about the National Flood
Insurance Program. So I appreciate that.
Now, having said that, the NFIP is in the red with a
staggering debt of $24 billion. Most people assume that is
because of subsidies written into the program, but
historically, the program had been self-sufficient. I believe
we should be taking a close look at the administrative cost of
the program.
And I would like to ask, to what extent has FEMA revised
its WYO compensation practices to address concerns identified
in prior GAO reports? For example, a 2009 GAO report found that
FEMA consistently overpays WYOs for operating expenses. The
WYOs currently receive 30 percent of premiums just for
operating expenses yet they hold none of the risk. So what, if
any, is your timeline for better aligning the cost and expenses
of the WYO program?
Mr. Kieserman. Congresswoman, we have literally just met in
the last week or so with GAO, who are now opening a very
specific engagement on WYO compensation. And we gave them a
substantial amount of input about our concerns, some of which
we shared with you about the compensation framework.
I would offer just two points, if I might. First, I
respectfully disagree that WYOs don't share in the risk. While
it is true that they don't financially share in terms of the
pool of money from which claims are paid, I think if you asked
any of the 25 or 27 or so companies that are in litigation in
New York and New Jersey today, they would tell you they share
considerably with respect to reputational harm.
And frankly, I want them to share in that risk with FEMA
and with the government. That is what we need in our partners
regardless of whether they are contractors or Federal entities.
And many of those Write Your Owns, Congresswoman, have, in
fact, stepped up now that the evidence is becoming clearer.
Some still need some additional persuasion.
The other point that I would make with you is that 30
percent, while it sounds like a large number, when you look at
the industry-wide standard for overhead, it is not that far
out. I believe we can get that number down and get service up,
but I do want to put that in context. So I think our goal needs
to be working with GAO and working with the Write Your Owns to
cut layers out of this that we don't need 32 years into the
program.
We may end up reducing the number of WYOs or changing the
structure of that, but there are ways for us to reduce costs
while still increasing services, and I want to work with GAO
and our partners to do that. And I know Mr. Wright is committed
to that as well.
Ms. Waters. Thank you very much. This is not in my notes
for today, but it has been in my head for a long time. Because
I am so concerned about the premium costs of this insurance to
our constituents, I would love to forgive the whole $24
billion, wipe it out. I know that is an unrealistic wish,
perhaps, but what do you think about a bold idea like that?
Mr. Kieserman. Without getting myself in too much trouble
10 days before I leave Federal service, what I would say is
this: This is not an actuarially sound program, and it was
never designed to be. If a program could be delivered in an
actuarially sound way, private industry would have taken care
of it, and we wouldn't be involved.
The notion that there is $23 billion in debt, as you said
when you began, the Write Your Own program and the NFIP
generally have run solvent with the exception of 9 years out of
about 34 years. And one of those is Katrina. And I will just
leave with this comment: The NFIP was as much a victim of
Katrina as everyone else who was a victim of Katrina. It
literally blew us out of the water.
Ms. Waters. Thank you very much. I yield back the balance
of my time.
Chairman Luetkemeyer. The gentlelady's time has expired.
With that, I recognize the gentleman from Texas, Mr.
Williams, for 5 minutes.
Mr. Williams. Thank you, Mr. Chairman.
And thank you, Mr. Kieserman, for your testimony today.
As you can imagine--well, first of all, I am from Texas.
And Wimberley, Texas, is in my district. And you are very
familiar with that. So as you can imagine, we are feeling for
our fellow Texans as they are experiencing historic flooding,
and this hearing to me is very timely.
As you said in your testimony today, millions of Americans
are physically and financially vulnerable to floods. A week's
worth of flooding in my district, quite frankly, has brought
that statement very close to home. As you probably know, the
President just recently approved Governor Abbott's request for
a major disaster declaration just last week; he approved it
very quickly. The residents in Hays County, Texas, in my 25th
district, which I represent, are beginning that process.
Now, it goes without saying that I have a vested interest
to make sure we get it right and that we fix the problems we
have discussed this afternoon. I will tell you, shortly after
this, I called your FEMA office and talked to the regional
director. He was very much on top of the job. He got with us.
They were on the ground, and I appreciated that very much and I
have made that public.
So I guess I would say my first question to you is, you
mentioned, of course, that we have 142,000 claims which you are
reopening. And you said that is approximately $40 million, is
that right?
Mr. Kieserman. That will be the cost to do the work. That
is not necessarily the outflows of policy--
Mr. Williams. Okay. Now, what does that do to your budget?
Mr. Kieserman. There is no impact, Congressman, on our
borrowing authority or our cash on hand. We have sufficient
funds available on hand without having to borrow additional
funds.
Mr. Williams. But Sandy did strain your resources?
Mr. Kieserman. Sandy did constrain our resources, yes.
Mr. Williams. All right. So when I go back home to Texas,
you are going to have plenty of room to help my Texans get done
what needs to be done, right?
Mr. Kieserman. We have sufficient funding available right
now to deal with the disasters in Texas and Oklahoma and
elsewhere. And I would also just point out that we did extend
the period to file proof of loss by an additional 6 months to
give people space and time to do that. We know it is going to
take them time to get back into their homes, and it is going to
take time to find all the damage. So they will have now up to
240 days in order to file their proof of loss, and that should
help.
Mr. Williams. All right. Next question is, you have talked
about reforms and the reforms you are doing now to make things
better. And you talked in pretty good depth about that. Is it
safe to say that all the reforms you talked about that you are
making, that you talked about making today, will my
constituents in Texas begin to see it tomorrow?
Mr. Kieserman. I think that your constituents in Texas can
count on the fact that we are hyper attentive to what is
happening in Texas and Oklahoma and flooding this year because
of what we have seen happen in Sandy; Mr. Wright and I and the
leaders in our team are hyper attentive to this. That is why we
are going to establish a hotline, that is why we have extended
the proof of loss, and that is why we are going to be watching
very closely on the ground from Washington in working with our
Write Your Owns to reduce any sort of risk that this could
happen again.
Mr. Williams. So we have learned from the past, and we can
be reassured that what we are talking about today won't happen
again in Texas and Oklahoma?
Mr. Kieserman. We are going to take every step we can,
Congressman, to prevent that from happening.
Mr. Williams. Because we have already had 5,000 claims in a
short period of time, and you know there are going to be a lot
more. So we really want to get it right.
Mr. Kieserman. We do.
Mr. Williams. I come from a retail background, and I think
it is important that you--and I told your guys this when we
talked last week that, please understand, these people are
customers. They are customers. And they need to be treated as
such. And they deserve good, they deserve on-time service with
very few hassles. And I hope all of your folks will understand
that.
Thank retail and give them the opportunity to realize the
benefits that they have coming to them and begin to get their
lives back. Texans are resilient people and they just kind of
need to know the rules. But I hope we have remembered from what
has happened so we won't see this happen again. But I do thank
you for your service, and I will look forward to working with
your agency as we move forward to fix our needs back home in
Texas.
Mr. Chairman, I yield back.
Chairman Luetkemeyer. The gentleman yields back.
With that, we recognize the gentleman from Kentucky, Mr.
Barr, for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman. And Mr. Kieserman, thank
you for your testimony here today, and thank you for your
forthrightness in acknowledging that there is a problem with
the National Flood Insurance Program. I, too, saw the 60
Minutes spot with your interview and with the really sad and
tragic story of the victims of the mismanagement with the
program. And obviously, the stories that were told in that 60
Minutes spot and some of the testimony that you are offering
here today demonstrate that the program does indeed need
reform, there are governance issues, and there is a lost
capacity to monitor some of these insurance carriers and the
engineering firms that made some egregious, egregious errors.
In that interview that you had with 60 Minutes, one of the
points you made was that you had seen evidence of fraudulent
reports and criminal activity by unlicensed engineers in August
of 2013. I know you came in after that, but you saw that as
soon as you came into your position of authority with the
agency and that was why you referred the matter to the
Inspector General.
My question to you is, when do you believe evidence was
available to your predecessors at FEMA that there was a
problem? You indicated that there were signals in August, in
late 2013. When were your predecessors made aware of the
signals, or even worse, the actual evidence of misconduct by
partnering insurance companies and engineering firms?
Mr. Kieserman. Congressman, I think members of the staff
had information in their possession by October, November of
2013, so one year after Sandy struck, that would have led a
reasonable person to conclude that there was at a minimum,
irregular activity going on that warranted investigation. We
did not act on that. I don't know that my predecessors were
ever briefed on that. In fact, I don't think they were.
It is one of the reasons that I think I need to reform that
particular part of the program, because it is often the first
time we touch the customer, that we have customer contact, and
we have to get it right. And we didn't get it right.
Mr. Barr. Okay. And the Inspector General, have there been
findings issued yet?
Mr. Kieserman. The Inspector General received a referral
from FEMA after a Senate hearing in July of 2014. The criminal
side declined to investigate. The programmatic audit side
opened up an audit investigation. In defense of anyone who
declined to investigate, I have to tell you, I don't think that
all the pieces were clear. I think there was a high level of
noise to the signal. There were lots of other things going on
in the system until plaintiffs' attorneys really began to
marshal the facts and do their jobs in court in New York and
New Jersey.
And frankly, when the plaintiffs' attorneys did that, it
became very evident what was happening. And so we ended up
relying on the courts and plaintiffs' attorneys and judges.
Mr. Barr. What is the current liability of the NFIP? Is it
$23 billion?
Mr. Kieserman. It is $23 billion currently in actuarial
debt.
Mr. Barr. So there is enormous pressure on this, as you
concede, an actuarially unsound and designed to be actuarially
unsound Flood Insurance Program.
Mr. Kieserman. Right.
Mr. Barr. But there is enormous pressure to deal with that
liability at the agency. So my question to you is, is there any
evidence, to your knowledge, that FEMA is responsible for
pressuring the engineering firms or the insurance companies to
cram down these claims?
Mr. Kieserman. I haven't seen a shred of evidence of that,
Congressman. Not a shred.
Mr. Barr. Okay. Part of the problem, and by the way, the
seventh vote that I cast as a Member of Congress in January of
2013 was whether or not we were going to raise the borrowing
limit for the National Flood Insurance Program in the aftermath
of Superstorm Sandy.
And one of the problems that many of us had with simply
raising the borrowing limit without reforms was that you create
this pressure at the agency to not pay claims that people are
entitled to. Perhaps we need to reform the program so that
there is a little bit of better pricing involved so that you
don't have this pressure at the agency to deal with that issue.
My question to you is, why would you not entertain
reforming the program so that there would be better pricing of
the risk?
Mr. Kieserman. I think it is a balance between properly
pricing the risk and making sure that it is affordable, because
if people can't buy it and they can't get policies, then we
have no revenue to pay claims. So, it is a little bit of a
catch-22.
I think in the end, it really does come down to fully
understanding the risk, which is the importance of mapping and
the other programs to do risk identification, and then figuring
out how do you get to a price that people can afford that
properly balances the risk. This goes to the layers that
private insurance can provide.
Mr. Barr. My time has expired, but if you are not properly
pricing the risk, you are subsidizing risky building.
Mr. Kieserman. I would say that you are not properly
pricing the risk. You are, in one case, dealing with people
being able to afford it but then you have to look at the
balance of whether you are subsidizing other risk. I agree with
you. It is a public policy balance issue.
Mr. Barr. My time has expired. I yield back.
Chairman Luetkemeyer. The time of the gentleman has
expired.
With that, we recognize the gentleman from Ohio, Mr.
Stivers, for 5 minutes.
Mr. Stivers. Thank you very much.
I certainly appreciate you being here, Mr. Kieserman, and I
know your days are kind of numbered at this point, and I
appreciate your forthrightness, especially with regard to the
third point in your policy about reforms. I appreciated your
forthrightness there and in answering Mr. Ross' questions from
Florida about the status of the program, and clearly it is not
actuarially sound.
There is clear, adverse selection in flood insurance
because the only people who buy flood insurance are people who
are guaranteed to file a claim at some point. Instead of
spreading risk around, we spread the plate around, and there is
never enough money and the taxpayers end up subsidizing. And
that is always going to be somewhat the nature of the program;
I understand that.
But I want to focus on your reform efforts, because I think
there is a way to be more efficient, to actually manage the
risk better. And I know you have been working on it for a
while. I am curious if Mr. Wright has been engaged in these
efforts, because frankly, some of the things you talked about,
about reinsurance, and making sure that the Flood Insurance
Program has some private sector engagement on pricing that I
think will help everybody understand what the true risk is and
help as you do that delicate balance of pricing to ensure
accessibility, while also making sure that we charge as close
to an appropriate amount as we can.
So I guess my question is, has Mr. Wright been involved?
Mr. Kieserman. Congressman, Mr. Wright has been involved,
and I have to say that in addition to being my colleague and my
friend, he has one of the highest degrees of business acumen in
a government executive that I have ever encountered. He has
been the Deputy Associate Administrator for Mitigation now for
several years, and he has been involved in the National Flood
Insurance Program in all of its aspects for several years.
He also has at his disposal now a nearly 100-person task
force, about a quarter of which is focused on reform, and that
is all they come to work to do every day is to analyze this
program and develop reform. Mr. Wright is probably the most
capable person to drive this forward. He is far more capable in
that area than I am. All I do is fix things that are broken. I
am not very good at long term.
Mr. Stivers. This thing is broken and needs to be fixed.
Mr. Kieserman. And he will do that.
Mr. Stivers. I wish you would be around a little bit
longer.
But the other concern I have is, if we don't step up our
premiums quickly enough, it does not give incentives for the
State and local governments to change their building standards
and where they build. Because if we heavily subsidize through
taxpayer subsidies, coastal properties or risky properties, I
should say, because they are not all coastal, where we
shouldn't be building, then we don't fix the real problem.
The real problem is we have some things built in high-risk
areas that frankly shouldn't be built. And I will single out
one State in one area; Ward 9 in New Orleans probably should
not have been rebuilt.
Mr. Kieserman. Congressman, Mr. Wright has been
instrumental in leading the effort to develop a Federal risk
management standard for flooding, which has been implemented
through Executive Order. It will affect Federal investment as
opposed to State and local-only investment. But that is
leadership by example, and it is a way to ensure that we are
putting in money in ways that mitigate risk and don't have us
repeating this over and over again.
Mr. Stivers. Which is helpful, and it is a start of what we
need to do. But if we raise the premium to a number closer to
the actuarial standard and what the real cost of the risk is,
then it would discourage people from rebuilding in some areas
where they shouldn't rebuild. And I would like to encourage
you, while I don't want to kick people out of their ancestral
home, if their ancestral home is 3 feet below sea level and
there is an ocean right there, that is a problem.
Mr. Kieserman. I appreciate that, Congressman.
Mr. Stivers. So if we can work with you on any of the
legislative changes, Mr. Wright, that need to be made--
Mr. Kieserman. Absolutely.
Mr. Stivers. And I know a lot of things that you need to do
will require legislative language. It does not require
legislative language to train your adjusters and agents better
or to align your management at litigation better, which I think
can help the process along. It also probably does not--I don't
think it requires legislation to require certification of your
engineering firms that are filing reports, some of whom might
have done so fraudulently.
So I think there are a lot of things you have latitude to
do to fix your processes, but to the extent that you need any
legislation, my staff and I would love to help. I know there
are other Members who are taking leadership roles already, but
I am happy to help any way I can. And I just wanted to say that
really for Mr. Wright's benefit.
And I wanted to tell you, Mr. Kieserman, good luck at the
American Red Cross. I am sure you will do a great job there.
That is a very important organization. And as a soldier who
gets to see some of their notifications and what they do with
blood and other things, I really appreciate what they do there
as well as the natural disaster piece. So thank you for that.
And my time is up.
Mr. Kieserman. Thank you, Congressman.
Mr. Stivers. And I yield back.
Chairman Luetkemeyer. The gentleman yields back.
We will now go to the gentleman from New Mexico, Mr.
Pearce, for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
Mr. Kieserman, I appreciate your testimony, especially
with the straightforward approach you take to explaining the
problems that the agency faces.
As I was listening to Mr. Ross describing that Florida is
surrounded on three sides by water, I realized that New Mexico
is surrounded by water too. We have about 2,000 miles of buffer
on the east side, and about 1,000 miles of buffer on the west
side, Central America, Mexico, and Texas to the south of us,
but other than that, we are surrounded by water.
The problem that I have is that as we found the problems of
Katrina, then we begin to raise the rates on people in New
Mexico and so we went first to, I think, from a 250-year event
to a 500-year and a 1,000-year event. Who makes the choice to
do that?
Mr. Kieserman. The rate structure is established in part in
legislation and then in part by the actuarial structure of the
program. So particularly after the legislation of the last
several years, there is a mandatory rate structure that we have
to follow.
Mr. Pearce. But who decides the flood event rather than--
Mr. Kieserman. I'm sorry?
Mr. Pearce. Who decides the flood event rather than
increased premiums?
Mr. Kieserman. That is a process of mapping, and the way
that we assess risk is by creating flood maps. And FEMA is
responsible for the creation of flood maps with the
participation, the very active participation of communities to
help them understand their risk.
Mr. Pearce. Okay. But then the agency--is it the National
Flood Insurance Program that eventually decides that they are
going to go with those flood maps or not?
Mr. Kieserman. Yes, that is correct. And the community is a
part of that as well.
Mr. Pearce. Just be aware that I have a constituent who
lives 7,000 feet above main sea level on a mountain, 3,000 feet
above the little stream that is about as big as the pencil here
running down, way down there, and he has to pay flood insurance
because he is in the 1,000-year event level.
So we are charging people who live on the top of a mountain
in New Mexico, where the last time it rained was during that
NOAA event, so we are charging them so that the people on the
coast can rebuild houses that have been destroyed before at
less-than-market value. And that is the problem. The average
wage in our district is about $31,000, so we are taking from
people making $31,000 a year in order to subsidize people with
oceanfront property and that is a problem. And I don't think
that it is going to change, because I think your agency is,
frankly, going to do the same thing regardless of if you are
there or not.
I was interested in your answers to Mr. Williams. You said
you are going to watch very closely to reduce the risk in
Texas. Does that mean you are going to audit the vendor? You
are going to review the engineering reports? What? What are you
going to do differently?
Mr. Kieserman. We are going to put an audit regime into
place in near realtime so that we--and, of course, you need to
understand the flow of events. Everything doesn't happen on day
one. Many people won't even file a claim for another 3 or 4 or
5 months, and that is one of the reasons why we have extended
the period for proof of loss.
So this program has a habit of sometimes using the phrase--
it is probably inappropriate here, and my staff is probably
cringing--it is a little bit of the pig in the belly of the
snake, right. And it takes a while for these pieces to move
through and then suddenly it pops up later on and it is all but
forgotten in the media, but then we have problems.
I want to get in there early now. I want to take a look at
what is going on. I want to make sure we are monitoring the
flow of claims, monitoring the process of engineering, do
secret shopper and check with people and see how that is
working and create this hotline. I think that combination of
audit interventions will help us significantly reduce the risk
of any improper conduct or wrongdoing, along with alerting our
Write Your Owns, which we have done through a bulletin to what
our expectations are with respect to adjustment of claims and
engineering.
Mr. Pearce. You had mentioned then in answer to a previous
question that one of the problems in Sandy was--and then you
listed a series of problems with the engineers, and one was
that they weren't licensed in the State in which they were
operating. Now, that may be a technicality, but have you
figured out that those people who weren't registered were a
source of the problem?
Because what I typically see as bureaucracies find a reason
and just something to say, okay, okay, we have found the reason
and let's go on. I suspect that if they are licensed engineers,
if they weren't corrupt, that their stuff may have been
somewhat correct. It may not have been perfect. Did you drill
down on that at all?
Mr. Kieserman. We have drilled down on that some, and I can
tell you that at least in the case of one of the engineering
firms that had a substantial part of the business, the
individual who changed the report and then affixed the seal--
Mr. Pearce. That is not a matter of being registered in
another State. That is a matter of corruption.
Mr. Kieserman. That is certainly a matter of not being
licensed at all. I agree.
Mr. Pearce. Have you gone back in the history of any of
these people who have had problems, submitted previous reports
5, 10, 15 years ago? Are you checking that far back on the
people with problems?
Mr. Kieserman. We are not checking that far back on people
with problems. And I don't know whether the States' attorneys
general are checking that far back on people with problems. One
of the things we are doing is looking at people who had their
claims adjusted with Irene or Lee just a year before Sandy to
see whether adjusters or engineers came in at that point and
identified preexisting damage. If there was no preexisting
damage a year before, it is a little difficult to believe there
was some new long-term preexisting damage that was discovered.
Mr. Pearce. Yes, at the end of the day, people have to
implement changes, and that I am a little bit worried about.
But I do appreciate your approach, and I appreciate your
service.
Thank you, Mr. Chairman.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we will recognize the gentleman from New York,
Mr. Meeks, for 5 minutes.
Mr. Meeks. Thank you, Mr. Chairman.
Thank you, Mr. Kieserman. And I apologize; I was running
around. It has been a busy day. But I represent the Fifth
Congressional District in New York, which is basically the
Rockaways in Jamaica Bay which was really devastated by
Hurricane Sandy. And so I want to make sure I have the
procedures and everything down because last month, a number of
individuals in my constituency began to receive mail from the
postal service informing them about the review process dealing
with some of the claims of underpayment and fraud.
So first, I just want to make sure that I am absolutely
clear on what the process is. As I understand it, the
homeowners who feel that they were, that they under settled,
will get a 1-800 number that they will call to request a
review, and a caseworker, I think, will be assigned to them to
complete the file and that takes 30 to 45 days. And then it
will be sent to an adjuster, who will then contact the
policyholder within the next 7 to 10 days, and that puts us at
55 to 60 days out when there should be some kind of
correspondence there, I guess.
And then a final decision with payment will be made in the
next 7 to 21 days after the adjuster submits findings and
determines the constituent is either eligible for additional
payment or out of riders. Is that correct?
Mr. Kieserman. Congressman, that is mostly correct, with
just a couple of adjustments, no pun intended, if you would.
The caseworker who will be assigned will be an NFIP-certified
adjuster who has been specially trained by our program. So the
caseworker is the adjuster. There is not another layer in
there.
In terms of how long it will take to process claims, cycle
time will depend on input. So right now, we are receiving about
300 to 400 calls and emails a day, that is not just the 1-866
number people can call, that is on the Web page. They can also
go online and they can register online and then we call them
and collect the information and ensure they are eligible.
No one should be in the process for more than 90 days. Our
target will be to have a significantly lower turnaround time,
but it will depend on cycle time and complexity of the issue.
But otherwise, I think you got that pretty much right, sir.
Mr. Meeks. And there are already resources, because
sometimes you get these things set aside because it could be
over 142,000 letters, from my understanding, in potential
cases. So have resources already been set aside so that we can
make those timeframes and have the appropriate individuals who
are going to do the inspections--are those resources all there?
Mr. Kieserman. Yes, Congressman. So 95,000 letters have
gone out as of today. We will send out another 40,000 or so out
over the next 2 weeks. By June 11th, all the letters will be
out. People don't need to wait for their letters. They can call
now or they can email now if they had a Sandy claim. We have
600 human service specialists--these are people who answer the
phone and do intake--fully trained and ready to do this. I have
gotten some very positive feedback from your colleagues about
your constituents' interactions with them. And I have gone back
to them and told them I want them to keep all that up.
We have 140 adjusters on staff. And yesterday or today we
are awarding a contract for neutrals, because one of the things
you didn't mention is that if an insured is not satisfied with
what their adjuster caseworker has developed, they can, in
fact, get the services of the complete third party neutral that
we will provide at our cost to really make a final decision on
this one.
Mr. Meeks. Good point. I meant to ask that question with
regard to neutrals.
Mr. Kieserman. Yes, sir.
Mr. Meeks. But let me follow up then more about the appeals
process. Are there mechanisms in place or being developed to
identify genuine claims and mitigate prior to legislation? Is
that occurring?
Mr. Kieserman. One of our top priorities, and where we are
working right now, is to overhaul the appeals process. And I
would say generally, it is the entire NFIP dispute resolution
process; it is not just appeals. It is how people are treated
in the field with an adjuster. It is how people are treated
when they call their insurance company. It is the entire
dispute resolution network that is there. We are moving to
overhaul all that.
The FEMA appeals network, though, will be appointing a new
lead here in the next few weeks, and we will be contracting to
bring people into help us do business process improvement with
that now.
Mr. Meeks. So those individuals will sit within the FEMA
organizational structure?
Mr. Kieserman. They do.
Mr. Meeks. Okay. And they are decided--well, let me, in the
past, when the victims filed appeals in the past, could you
tell me, do you have any idea what the success rates were?
Mr. Kieserman. 15 percent, Congressman. If you were a
survivor, the average rate of appeal is about 3 to 5 percent of
all claims filed are appealed. And of those, only 15 percent do
we generally recommend to the Write Your Owns that they come up
with a different answer. That does not necessarily indicate to
me that the process works well. It indicates to me that people
may be fatigued by the process and they may be worn down by the
process.
I don't think we have any internal or intrinsic view to
though know whether that means we have a well working process
or not. What I saw in the aftermath of Sandy with whether
appeals detected wrongdoing or not concerned me enough that I
wanted to overhaul the program, and the Administrator has
directed me to do so.
Mr. Meeks. Thank you very much. I am out of time, but I
want to thank you for your testimony and wish you success.
Mr. Kieserman. Thank you, Congressman.
Chairman Luetkemeyer. The gentleman's time has expired.
We would like to thank Mr. Kieserman for being here today.
Thank you for your testimony. You have been very frank, very
forthcoming, and we certainly appreciate it.
You mentioned several times, reforms that you would like to
see. I know I asked the question about it. You have also talked
about a reform task force that you put together. If we can get
you to give us some information on the task force, the parties
that are involved, what you are trying to do with it, that
would be fantastic.
I understand that either yourself or some of your staff are
going to sit down with the committee staff shortly, in the next
week or two here, and discuss some reforms. We certainly want
to continue to look forward to that opportunity.
And also, if you have other ideas, to be willing to put
them into a letter form or to inform your staff when they meet
with our committee staff to see what your suggestions would be.
Sometimes you need to be talking with the people who are in the
eye of the storm to figure out what is going on and what we
need to actually do to change things.
But we certainly appreciate all of that. I wish you well--
Mr. Kieserman. Thank you.
Chairman Luetkemeyer. --in your new occupation. I know Mr.
Wright has an awfully big set of shoes to fill. I wish him well
and look forward to working with him in the future.
I know one of the issues that was of concern to me that was
brought up today was the mapping. I, like Mr. Pearce, have
homes in my district that are sitting literally hundreds of
feet above a floodplain and yet they are in a floodplain. So we
have some work to do there, and we will look forward to working
with you on that.
The Chair notes that some Members may have additional
questions for this witness, 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 this witness and to place his 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, this hearing is adjourned.
[Whereupon, at 3:59 p.m., the hearing was adjourned.]
A P P E N D I X
June 2, 2015
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