[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]


                    HOW TO CREATE A MORE ROBUST AND
                  PRIVATE FLOOD INSURANCE MARKETPLACE

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                         HOUSING AND INSURANCE

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            JANUARY 13, 2016

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 114-68
                           
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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:
    January 13, 2016.............................................     1
Appendix:
    January 13, 2016.............................................    41

                               WITNESSES
                      Wednesday, January 13, 2016

Birnbaum, Birny, Executive Director, Center for Economic Justice.     9
Bradshaw, Steven, Executive Vice President, Standard Mortgage, on 
  behalf of the Mortgage Bankers Association (MBA)...............     6
Kelley, Brady, Executive Director, National Association of 
  Professional Surplus Lines Offices (NAPSLO)....................     8
Miller, Teresa D., Commissioner, Pennsylvania State Insurance 
  Department, on behalf of the National Association of Insurance 
  Commissioners (NAIC)...........................................     4

                                APPENDIX

Prepared statements:
    Birnbaum, Birny..............................................    42
    Bradshaw, Steven.............................................    63
    Kelley, Brady................................................    68
    Miller, Teresa D.............................................   129

              Additional Material Submitted for the Record

Luetkemeyer, Hon. Blaine:
    Letter from PCI, dated June 25, 2015.........................   135
    Letter from the ABA, dated July 7, 2015......................   136
    Letter from the AIA, dated January 13, 2016..................   137
    Letter from the Big ``I'', dated July 13, 2015...............   139
    Letter from Birny Birnbaum, Center for Economic Justice, 
      containing supplemental comments for his testimony at the 
      hearing, dated February 2, 2016............................   140
    Letter from the Council of Insurance Agents and Brokers, 
      dated July 16, 2015........................................   145
    Letter from the Financial Services Roundtable, dated July 27, 
      2015.......................................................   146
    Letter from the MBA, dated June 30, 2015.....................   147
    Letter from NAIC and the Center for Insurance Policy and 
      Research, dated July 29, 2015..............................   149
    Letter from NAMIC, dated July 20, 2015.......................   151
    Letter from NAPSLO...........................................   153
    Letter from the NAR, dated July 20, 2015.....................   154
    Letter from the NMHC and the NAA, dated January 13, 2016.....   155
    Letter from the National Association of Professional 
      Insurance Agents, dated July 7, 2015.......................   157
    Letter from the Reinsurance Association of America, dated 
      June 30, 2015..............................................   158
    Letter from SmarterSafer.org, dated July 21, 2015............   159

 
                    HOW TO CREATE A MORE ROBUST AND
                  PRIVATE FLOOD INSURANCE MARKETPLACE

                              ----------                              


                      Wednesday, January 13, 2016

             U.S. House of Representatives,
                            Subcommittee on Housing
                                     and Insurance,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:19 a.m., in 
room 2128, Rayburn House Office Building, Hon. Blaine 
Luetkemeyer [chairman of the subcommittee] presiding.
    Members present: Representatives Luetkemeyer, Garrett, 
Pearce, Posey, Hurt, Ross, Barr, Rothfus, Williams; Cleaver, 
Velazquez, Green, Beatty, and Kildee.
    Ex officio present: Representatives Hensarling and Waters.
    Also present: Representative Murphy.
    Chairman  Luetkemeyer. Okay. Mr. Cleaver managed to make it 
through our Washington traffic here and has joined us. So let's 
call the subcommittee to order.
    The Subcommittee on Housing and Insurance will come to 
order. Today's hearing is entitled, ``How to Create a More 
Robust and Private Flood Insurance Marketplace.''
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Before we begin today, I would like to thank the witnesses 
for appearing today. I look forward to your testimony.
    And I now recognize myself for 2\1/2\ minutes to give an 
opening statement.
    Flooding has devastated large areas of my home State of 
Missouri as well as the neighboring State of Illinois, 
tragically claiming lives and causing millions of dollars of 
damage. In the past several months, we have seen similar 
situations from South Carolina to southern California. 
Unfortunately, these are not isolated incidents. Flooding 
continues to be the most prevalent natural disaster in the 
United States. As communities in Missouri and across the Nation 
begin to put their lives back together, it is fitting that this 
subcommittee continues to examine flood insurance and the 
current construct of the National Flood Insurance Program 
(NFIP). Yesterday, this subcommittee held a hearing to discuss 
the state of flood insurance in America.
    Last week, I convened a roundtable discussion on flood 
mapping. What has become evident is that total reliance on 
insurance coverage for the NFIP is inadequate. Members agree 
across party lines that policyholders, communities, and 
taxpayers deserve better. One of the first steps toward reform 
is to allow policyholders to access market-based flood 
insurance policies.
    H.R. 2901, the Flood Insurance Market Parity and 
Modernization Act of 2015, introduced by the gentleman from 
Florida, Mr. Ross, and the gentleman from Florida, Mr. Murphy, 
would allow for greater consumer choice and private market 
participation. It does so under the close supervision of the 
State Insurance Commissioners, the foundation of the regulatory 
system we have worked in an overwhelming bipartisan fashion to 
protect. By removing the ambiguity around what qualifies as 
acceptable flood insurance, property owners will be assured of 
greater options and flexibility in their choice of policies. 
Providing private competition to the publicly administered NFIP 
will also promote competition in markets which have previously 
been underserved.
    I owe it to my constituents back in Missouri, and to all 
Americans who have suffered from flood damage, to create a 
program for flood insurance that is stable, accessible, and 
cost-effective.
    Before I yield to the ranking member, I ask unanimous 
consent to insert into the record letters on H.R. 2901 from the 
NAIC, PCI, AIA, NAMIC, NAPSLO, the Big ``I,'' CIAB, the 
National Association of Professional Insurance Agents, the 
Financial Services Roundtable, the SmarterSafer Coalition, the 
Reinsurance Association of America, the National Association of 
REALTORS, MBA, ABA, and the National Multifamily Housing 
Council and the National Apartment Association. As you can see, 
there is wide support across the industry spectrum for this 
alternative to our present system.
    Without objection, it is so ordered.
    The Chair now recognizes the ranking member of the 
subcommittee, the gentleman from Missouri, Mr. Cleaver, for 5 
minutes for an opening statement.
    Mr.  Cleaver. Thank you, Mr. Chairman. Let me, again, thank 
you, as I did yesterday, for the very proactive step you have 
taken toward dealing with the issue of insurance before it 
becomes caught up in a critical year where we are not going to 
have a lot of workdays. And I think it is appropriate for us to 
continue, as you have already begun, hearing issues that relate 
to flood insurance. We discussed yesterday, I think rather 
broadly, the NFIP, and we highlighted areas where there is room 
for improvement and discussed ways in which the NFIP could be 
reauthorized.
    Today is our second hearing on flood insurance, and today 
we will be discussing the role of private insurance in the 
flood insurance market, which is a significant issue and a 
significant concern. And we dealt with it yesterday, but I 
think the key to this whole issue is whether or not the private 
sector is interested in and willing to become intimately 
involved in this program. We have attempted this over the 
years. The program was created in 1968 to provide flood 
coverage to consumers who were unable to get coverage from the 
very limited private market. The NFIP is responsible not only 
for providing flood insurance, but for developing flood maps 
and promoting mitigation activities.
    One of the things that I think we all have come to see is 
that flooding can occur anywhere. I grew up in a flat part of 
Texas, the Dallas area on toward probably until you get to Palo 
Duro Canyon around Amarillo is just flat. And last summer, in 
this flatland, there was all kinds of flooding. And we do know 
that it can and does occur everywhere, and can have a 
devastating impact on our communities. But one of the things we 
have also learned is that when these major events occur, like 
Hurricane Katrina, it pretty much decimates any private 
participation and the government has had to do a lot of 
backstopping, both for Sandy and Katrina.
    And then as we begin to discuss reauthorization of the 
program, I think we have to ensure products remain affordable 
and available. Our conversation must also focus on the 
importance of obtaining accuracy in our mapping, which is a 
really big issue in the rural part of the 5th District, which I 
represent in Missouri. And as mapping and risk technology has 
developed since the creation of the NFIP, the appetite for 
private insurers to re-enter the flood market has grown.
    And so, I look forward to hearing our witnesses today 
discuss ways in which the private role in flood insurance could 
grow.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Chairman  Luetkemeyer. The gentleman yields back. With 
that, the Chair now recognizes the gentleman from Florida, Mr. 
Ross, for 2\1/2\ minutes for an opening statement.
    Mr.  Ross. Thank you, Mr. Chairman. And thank you very much 
for holding this important hearing about an issue to which I am 
dedicated. And that is, providing American homeowners more 
affordable consumer options in the flood insurance marketplace. 
I would also like to thank our distinguished guests for their 
testimony today, and Representative Patrick Murphy for joining 
me in introducing the Flood Insurance Market Parity and 
Modernization Act, which we will be discussing this morning.
    Since joining the House Financial Services Committee, I 
have urged my colleagues to work with me to address the 
shortcomings of the current government flood insurance model 
known as the National Flood Insurance Program. Yesterday, we 
held our first in a series of hearings to examine the problems 
with this Federal program, and to explore solutions that 
benefit homeowners. Floridians and Americans across the country 
would greatly benefit from more choices when it comes to flood 
insurance policies, and private competition in this market will 
lead to greater innovations and more affordable and 
comprehensive policies for consumers.
    Unfortunately, regulatory barriers and the bias of 
regulators favoring NFIP policies have prevented the 
development of a private flood insurance marketplace. This was 
not the intention of the Biggert-Waters Act. Rather, it was an 
unintended consequence. With Florida homeowners in mind, I 
introduced H.R. 2901, the Flood Insurance Market Parity and 
Modernization Act. This bipartisan legislation will remove the 
unnecessary regulatory barriers that are hindering consumers' 
flood insurance options.
    As the primary insurance regulator for my home State of 
Florida, I am proud that our Commissioner of Insurance 
Regulation, Kevin McCarty, has offered his full support of this 
legislation. I urge my colleagues on both sides of the aisle to 
join me in enacting this commonsense, bipartisan legislation 
that will encourage the expansion of a well-regulated, more 
affordable private flood insurance option for homeowners. And I 
yield back.
    Chairman  Luetkemeyer. The gentleman yields back.
    With that, we want to begin our testimony, and we welcome 
all of the panelists today: Ms. Teresa Miller, Commissioner, 
Pennsylvania State Insurance Department, testifying on behalf 
of the National Association of Insurance Commissioners; Mr. 
Steven Bradshaw, Executive Vice President, Standard Mortgage, 
on behalf of the Mortgage Bankers Association; Mr. Brad Kelley, 
Executive Director, National Association of Professional 
Surplus Lines Offices; and Mr. Birny Birnbaum, Executive 
Director, Center for Economic Justice.
    Each of you will be recognized for 5 minutes to give an 
oral presentation of your testimony. And without objection, 
your written statements will be made a part of the record. Just 
a quick primer on the lighting system: green means go; when you 
get to yellow, you have one minute to wrap up; and when it 
turns red, I am the one who has the last word. So we will 
hopefully stop there shortly thereafter.
    With that, I want to recognize the gentleman from 
Pennsylvania, Mr. Rothfus, to introduce our first witness.
    Mr.  Rothfus. Thank you, Mr. Chairman.
    It is my privilege to welcome Pennsylvania's Insurance 
Commissioner, Teresa Miller, to the Financial Services 
Committee today. Commissioner Miller was confirmed to her role 
in June of last year. In that capacity, see oversees the fifth 
largest insurance market in the country, and the fourteenth 
largest in the world in terms of premium volume. This is a 
significant and challenging responsibility in our large and 
diverse State.
    Fortunately, Commissioner Miller brings years of experience 
to her new appointment and to our subcommittee today, having 
previously served in Oregon's insurance division as well as in 
the private sector. She will be speaking to us today not just 
as Pennsylvania's Insurance Commissioner, but also as an active 
NAIC member.
    Commissioner Miller serves on the Federal Advisory 
Committee on Insurance (FIO), providing advice and 
recommendations to the Federal Insurance Office on issues such 
as automobile insurance affordability, and international 
insurance developments. Given Pennsylvania's history of 
flooding, and ongoing concerns about the impact of flood 
insurance policy on its citizens, I expect Commissioner Miller 
to provide welcome insight into the future of the NFIP and 
impactful reforms for the committee to consider. Thank you 
again for coming, Commissioner Miller, and I yield back.
    Chairman  Luetkemeyer. With that, Ms. Miller, you are 
recognized for 5 minutes.

STATEMENT OF TERESA D. MILLER, COMMISSIONER, PENNSYLVANIA STATE 
INSURANCE DEPARTMENT, ON BEHALF OF THE NATIONAL ASSOCIATION OF 
                 INSURANCE COMMISSIONERS (NAIC)

    Ms.  Miller. Good morning. Thank you, Chairman Luetkemeyer, 
and Ranking Member Cleaver. And thank you, Congressman Rothfus, 
for your kind introduction. I appreciate the opportunity to 
testify today to provide State insurance regulators' views on 
issues surrounding the development of a private flood insurance 
market. Facilitating increased private sector involvement in 
the sale of flood insurance will help promote consumer choice 
and spur competition. It will also provide homeowners necessary 
coverage, often at greatly reduced costs. In Pennsylvania, we 
are finding that in many cases, private carriers are willing to 
offer comparable coverage at substantially lower cost than 
NFIP. In one instance, a property owner would have paid a 
$7,500 annual premium with the NFIP, but found private coverage 
for a little over $1,400.
    Another homeowner was quoted a $6,000 annual premium by 
NFIP, but found a private policy for $900. Like other types of 
new coverages, private flood insurance is being developed and 
offered first by the surplus lines insurers. These insurers 
typically insure unique or otherwise difficult to underwrite 
risks that the admitted market is at least initially reluctant 
to insure. As detailed in my written testimony, we have 
significant authorities to ensure consumers in the surplus 
lines market are well-protected. These authorities include 
capital, surplus, and eligibility requirements on surplus lines 
carriers, as well as the ability to hold both the insurer and 
the broker responsible for any misconduct.
    As the private flood insurance market grows and more 
companies offer coverage, including admitted companies, our 
regulation will continue to evolve to meet the size and the 
breadth of the market as well as the needs of consumers. 
However, more can be done to help facilitate the development of 
this market, providing consumers more choices and more 
affordable coverage.
    One of the objectives of the Biggert-Waters Act was to 
create opportunities for the growth of the private market as an 
alternative to the NFIP. Unfortunately, the definition of and 
the regulatory environment surrounding private flood insurance 
is at odds with this objective, making it more difficult for 
insurance regulators to protect consumers and ensure 
availability. The Flood Insurance Market Parity and 
Modernization Act addresses these concerns, which is why I am 
here today to support it.
    Specifically, we find it troubling that Biggert-Waters 
empowered Federal banking and housing regulators and the GSEs 
to apply their own requirements related to the financial 
solvency strength or claims-paying ability of private insurance 
companies from which they will accept private flood insurance. 
This is highly problematic as banking and housing regulators 
have neither the expertise nor the experience to regulate 
insurance companies or markets. Moreover, they have regulatory 
objectives that while laudable, are fundamentally different 
than insurance consumer protection and fostering competitive 
insurance markets.
    They are simply ill-suited to regulate insurance, and it is 
inappropriate for them to have the authority to substitute 
their judgment for those charged under the law with regulating 
insurance products and protecting policyholders. To address 
this, H.R. 2901 includes important language clarifying that 
State insurance regulators have the same authority and 
discretion to regulate private flood insurance as they have to 
regulate other similar insurance products and markets. We very 
much appreciate these clarifications as they are critical for 
NAIC's support for this legislation.
    Another impediment for entrants into the market is the 
vague definition of private flood insurance included in 
Biggert-Waters. In order for a private market to evolve, 
insurers need flexibility to tailor insurance products to meet 
consumer needs. Biggert-Waters does not allow for innovation, 
but rather focuses on ensuring policies don't deviate from its 
rigid criteria. This is despite the fact that private insurers 
may be able to offer additional coverage features or greater 
limits at a more affordable price.
    H.R. 2901 provides a clearer definition of private flood 
insurance by clarifying that State insurance laws solely govern 
over the insurance transaction. It will ensure that State 
insurance regulators have the flexibility to approve private 
flood insurance coverage that is responsive to the needs of 
their States and constituents, while complying with their 
State's regulatory requirements. These clarifications will 
assist in removing the restrictive and confusing language in 
current law to help prompt more insurers to enter the market if 
they are willing.
    In conclusion, State insurance regulators support efforts 
to further develop the private market to help provide consumers 
with access to additional options for flood insurance products 
and coverage at potentially more affordable prices.
    We appreciate very much Congressmen Ross and Murphy's 
leadership on H.R. 2901, and look forward to continuing to work 
together as this bill moves forward. I appreciate very much the 
opportunity to be here on behalf of the NAIC. Thank you.
    [The prepared statement of Commissioner Miller can be found 
on page 129 of the appendix.]
    Chairman  Luetkemeyer. Thank you, Ms. Miller.
    Mr. Bradshaw, you are now recognized for 5 minutes.

    STATEMENT OF STEVEN BRADSHAW, EXECUTIVE VICE PRESIDENT, 
     STANDARD MORTGAGE, ON BEHALF OF THE MORTGAGE BANKERS 
                       ASSOCIATION (MBA)

    Mr.  Bradshaw. Good morning, Chairman Luetkemeyer, Ranking 
Member Cleaver, and members of the subcommittee. My name is 
Steve Bradshaw, and I appreciate the opportunity to testify 
today on behalf of the Mortgage Bankers Association.
    I am currently executive vice president of Standard 
Mortgage Corporation, a lender and servicer headquartered in 
New Orleans, Louisiana. The company was founded in 1925 and 
currently services approximately 28,000 residential mortgage 
loans throughout the southeast.
    This past August marked the 10th anniversary of one of the 
most significant flood events in U.S. history, Hurricane 
Katrina. We experienced the massive devastation firsthand. 
Approximately 3,500 of our servicing customers sustained 
significant flood damage to their homes. And on a more personal 
note, nearly two-thirds of our staff lost their homes.
    As a result of Hurricane Katrina and two other significant 
storms in the fall of 2005, more than one million housing units 
were damaged across five States. There is no doubt that the 
National Flood Insurance Program was the key component to the 
Gulf Coast recovery, just as it has been for other communities 
across the country that have sustained major flooding or are 
flooding today. But there is also no doubt that the NFIP needs 
to be reformed. The program is now $23 billion in debt and is 
simply not sustainable as it is. The Federal Government cannot 
and should not bear the full burden of post-disaster recovery.
    Congress recognized when it passed Biggert-Waters that 
private sector flood insurance must be allowed to develop in 
order to ensure a stable, sustainable, and affordable market. 
Expanding flood insurance options will make it easier for more 
homeowners to obtain flood insurance. And a competitive flood 
insurance market will expand available insurance options, lower 
cost, and increase the number of at-risk properties that are 
insured. In other words, we are expanding the pool.
    For example, many homes that were destroyed in Katrina were 
not located in a special flood hazard area. Homes outside those 
zones are not required to have flood insurance. As a result, 
mortgage servicers like us were liable for the cost when those 
homes were wiped out. The MBA believes that increased private 
sector involvement can also serve to shift some of the burden--
not all of the burden--of post-disaster recovery away from the 
Federal Government and to the private sector. This will limit 
taxpayer exposure to future flood losses.
    In light of this, we support H.R. 2901, the Flood Insurance 
Market Parity and Modernization Act. The bill provides two 
important improvements to the NFIP. First, the bill clarifies 
what constitutes an acceptable private flood insurance policy 
by providing a clear definition of private flood insurance. 
This will make it easier for lenders to accept private policies 
to satisfy the mandatory purchase requirement.
    Second, H.R. 2901 addresses lenders' concerns regarding 
continuous coverage requirements. Under current law, it is 
unclear whether someone previously covered under an NFIP policy 
who moves to a private sector policy would be eligible to 
return to the NFIP policy at their previous rate. We are 
pleased that H.R. 2901 eliminates this disincentive for 
consumers to choose a private policy. It does so by clarifying 
that private flood insurance satisfies the continuous coverage 
requirement.
    In summary, MBA supports H.R. 2901 as a simple way to 
encourage the growth of a competitive private flood insurance 
market. Increased private sector involvement will hopefully 
expand available insurance options for borrowers, lower cost 
for consumers, and reduce taxpayer exposure to flood losses 
over time. We are especially grateful for the leadership shown 
by Representatives Dennis Ross and Patrick Murphy on this 
legislation, and we urge the subcommittee to approve it.
    Thank you, again, for the opportunity to testify today. The 
MBA commends your efforts to expand the private flood insurance 
market, and I look forward to any questions you may have.
    [The prepared statement of Mr. Bradshaw can be found on 
page 63 of the appendix.]
    Chairman  Luetkemeyer. Thank you, Mr. Bradshaw.
    Mr. Kelley, you are recognized for 5 minutes.

    STATEMENT OF BRADY KELLEY, EXECUTIVE DIRECTOR, NATIONAL 
   ASSOCIATION OF PROFESSIONAL SURPLUS LINES OFFICES (NAPSLO)

    Mr.  Kelley. Good morning, Chairman Luetkemeyer, Ranking 
Member Cleaver, Chairman Hensarling, and members of the 
subcommittee. My name is Brady Kelley. I am the executive 
director of the National Association of Professional Surplus 
Lines Offices based in Kansas City, Missouri. Thank you for 
inviting me here today to testify on H.R. 2901.
    Surplus lines is a $40.2 billion market. And NAPSLO members 
broker and underwrite a very high proportion of that. Our 
market, often referred to as the nonadmitted market, exists to 
provide insurance coverage for nonstandard and complex risks, 
and to provide cover for risks that exceed what the standard 
market is either willing or able to underwrite. It is the 
State's approach to regulating that market, which includes 
providing what is freedom from rate and form regulation, that 
allows it to work as this effective supplement. This 
fundamental principle is part and parcel to its effective 
operation and regulation.
    Consider, for example, the impact of catastrophic losses 
that cause standard carriers to either withdraw or 
significantly curtail underwriting in certain regions of the 
country, or in certain lines of business. Exhibit one of our 
testimony tries to illustrate that. Market responses to 
catastrophic events by measuring the rates at which surplus 
lines premium has shifted either up or down over time in 
relation to total U.S. property casualty premium. You see 
events like the Northridge earthquake, 9/11, and hurricanes in 
2005. They were all followed by very clear spikes in surplus 
lines premium, spikes that exceed the growth of the overall 
property casualty market. And then you see the reverse being 
true in years following that where catastrophe losses are lower 
or as the standard market re-adjusts. Without this safety net, 
consumers would be left without coverage for their commercial 
risks and/or their personal assets.
    These same fundamentals apply in the case of private flood 
insurance. Consumers whose flood risks do not fit within the 
terms and limits of the NFIP, or whose risks are declined by 
the standard market, will look to our market, surplus lines, 
for the solution. It is important to point out that this is not 
new. Why might that be? Property exposures may exceed the 
$250,000 limit within the NFIP on a residential property, or 
the half million dollar limit on a commercial property. 
Homeowners may want replacement coverage rather than actual 
cash value for their property. They might want to insure 
additional structures, or list other properties on one policy. 
They might need additional living expense, basement exposure, 
and/or business interruption for a commercial entity.
    These examples, coupled with communities or zones that are 
not eligible for NFIP coverage, mean consumer alternatives are 
absolutely essential. Our written testimony includes some facts 
and figures about the size of the surplus lines flood insurance 
market, and while you will see that they represent a relatively 
small proportion of the overall market, without it, consumers 
who need it would have no alternative.
    This is precisely why we strongly support H.R. 2901. 
Although our market is currently allowed to provide private 
flood insurance, the 2012 law created uncertainty for lenders 
and consumers. Specifically, lenders became uncertain about 
accepting surplus lines policies in light of the law's 
requirements, and because it authorized Federal banking and 
housing regulators to apply their own requirements on private 
insurance companies. No regulations have been developed since 
that time. And it is prolonging this uncertainty. Uncertainty 
is the problem, but H.R. 2901 is the fix. It simply ensures our 
market's continued role in solving unique and complex flood 
risks that exceed or differ from the options available through 
either the NFIP or the standard market.
    In addition, H.R. 2901 maintains the authority and primacy 
of State Insurance Commissioners in regulating private flood 
insurance. Because of their experience, their strong track 
record, and their success in regulating the U.S. business, we 
obviously strongly support that.
    We have also provided written testimony describing how the 
States regulate the surplus lines market. I think Commissioner 
Miller has already done a pretty thorough job of describing 
that. So let me simply reiterate the importance and degree of 
each State's authority over both the insurance company and the 
surplus lines broker in a surplus lines transaction.
    As a result, the 2015 A.M. Best report illustrates an 
exemplary solvency record for our market. It is included as 
another exhibit in the testimony. H.R. 2901 will solve the 
problems and concerns shared by the insurance and banking 
industries by preserving our market's ability to offer options 
to consumers. Without it, consumers who need it will have no 
alternative. Legislators on both sides of the aisle have 
expressed a desire to not just extend, but to also improve the 
NFIP going forward. And I think the witnesses over the last 
couple of days certainly agree with that. We believe H.R. 2901 
is a positive step in that direction because it enables the 
private market to develop, and it allows the NFIP to focus on 
those properties with repetitive losses and their goal of flood 
loss mitigation and prevention.
    We appreciate Congressmen Ross and Murphy for introducing 
the bill. Again, we thank you for the opportunity to be here. 
We look forward to working with you as this bill moves forward. 
Thank you.
    [The prepared statement of Mr. Kelley can be found on page 
68 of the appendix.]
    Chairman  Luetkemeyer. Thank you, Mr. Kelley.
    And Mr. Birnbaum, you are recognized for 5 minutes.

  STATEMENT OF BIRNY BIRNBAUM, EXECUTIVE DIRECTOR, CENTER FOR 
                        ECONOMIC JUSTICE

    Mr.  Birnbaum. Thank you. Chairman Luetkemeyer, Ranking 
Member Cleaver, and members of the subcommittee, my name is 
Birny Birnbaum. Thank you for the invitation to speak to you 
today.
    The availability and affordability of flood insurance is a 
critical issue for individual and community well-being, 
economic development, and a resilient and sustainable future. I 
have worked on these issues for over 20 years as an insurance 
regulator, consulting economist, and consumer advocate. Your 
invitation to testify asked whether the NFIP, as it is 
presently constituted, represents an ideal model for the 
effective protection of residential and commercial property 
owners from damages relating to flooding. The answer to that 
question is a resounding ``no'' for a number of reasons. The 
primary problem of the NFIP is the multiple and conflicting 
goals that Congress has tasked the Program with, and the 
constraints and requirements Congress has placed on the 
Program. The starting point for Congress and the Federal 
Government should be a laser-like focus that Federal 
expenditures related to flood promote more resilient and 
sustainable homes, businesses, communities, and infrastructure 
against the peril of flood.
    With this as the clear goal, any proposal regarding the 
NFIP can be evaluated by asking, ``Does this change promote 
resiliency and sustainability or not?'' The reason why 
resiliency and sustainability must be the overarching goal for 
restructuring the NFIP is that there is no insurance 
mechanism--public, private, or combo--that will be able to 
finance increasingly frequent and severe flooding. And a focus 
on resiliency and sustainability means Federal expenditures as 
investments today to replace disaster relief expenditures 
tomorrow.
    The way forward: There is a great opportunity for greater 
reliance on private insurers and markets to provide flood 
insurance, but H.R. 2901 is not the approach to accomplish 
this. And certainly, it's not the approach to make the NFIP 
more financially sound or achieve greater resiliency and 
sustainability. The best approach for Congress to achieve these 
goals is to require that flood be covered in standard 
residential and commercial property insurance policies, and 
subject to the same State-based regulatory framework that 
exists for homeowners and commercial property insurance today.
    There are four key actions needed by 2017:
    One, get the NFIP out of the business of being a flood 
insurance company by requiring that residential and commercial 
insurance policies sold by private insurers cover the peril of 
flood. That requirement turns flood back to the States where 
all other property insurance products and markets are 
regulated, and back to private insurers, re-insurers, and 
catastrophe models who have the capability and capital to 
provide flood coverage more comprehensively and efficiently 
than the Federal Government.
    Two, transition the NFIP from a direct provider of 
insurance to a mega-catastrophe re-insurer utilizing the 
successful model of the Terrorism Risk Insurance Program.
    Three, address the affordability problem of flood insurance 
with Federal, State, and local assistance outside of the 
insurance system, no-subsidies insurance pricing with an 
overwhelming emphasis on assistance for lost mitigation as the 
tool to create more affordable premiums.
    And four, reauthorize the NFIP during a period of 
transition.
    As we have seen over the last decade, the congressional 
changes to the NFIP have lurched from efforts that longer-term 
reform to responses to current crises, with the responses to 
current crises often contributing to bigger problems down the 
road. H.R. 2901 is a response to a current issue. Federal 
agencies have been slow in promulgating rules regarding private 
flood insurance and surplus lines insurers see an opportunity 
to pick off NFIP policies that are mispriced due to NFIP rating 
practices.
    H.R. 2901 will not address the longer-term problems of the 
NFIP, will not meaningfully promote private market 
participation in the sale of flood insurance, and will create 
bigger problems in the future when a flood event occurs. H.R. 
2901 attempts to encourage private flood by defining private 
flood to include surplus lines insurance for residential 
properties, and by eliminating Federal oversight, removing 
current consumer protection requirements for private flood, 
removing the authority of Federal agencies to implement those 
requirements, and removing the authority of Government-
Sponsored Enterprises (GSEs) to establish standards for the 
claims-paying ability of insurers, which they already do now 
for hazard insurance.
    Surplus lines or nonadmitted carriers can be distinguished 
from admitted insurers in the following ways: Admitted insurers 
are licensed by a State insurance department to sell certain 
types of insurance. These insurers are subject to regulatory 
requirements for the filing and approval of policy forms and 
rates, are subject to the State's consumer protection laws 
regarding unfair trade practices and unfair competition, and 
importantly, participate in the State guaranty fund, which pays 
claims in the event the admitted insurers become insolvent.
    In contrast, surplus lines insurers are not licensed by 
State insurance departments. Rather, the State department 
regulates surplus lines agents who are authorized to place 
coverage with a surplus line insurer on a list of acceptable 
insurers. Surplus lines policy forms and rates are not subject 
to regulatory oversight, and surplus lines insurers do not 
participate in State guaranty funds.
    I understand the theory behind H.R. 2901 is that admitted 
insurers are not willing to write private flood, but surplus 
lines insurers would be if certain requirements, such as 
comparability with the NFIP policy or claims settlement 
requirements, were relaxed.
    The story continues that once surplus lines insurers are 
offering private flood, admitted insurers will be more 
comfortable. I have seen no empirical evidence to remotely 
suggest admitted carriers will do as suggested. I have seen 
surplus lines insurers write business that admitted insurers 
would have written, and I have seen personalized business 
migrate from the admitted market to surplus lines when 
permitted to do so to take advantage of fewer consumer 
protection requirements.
    The actual results of these changes will be for surplus 
lines insurers to cherry-pick NFIP policies that are currently 
overpriced due to the NFIP's broad rating scheme and loadings 
for contingency and reserves. While the surplus lines insurers 
take the profitable low-risk policies, the NFIP will become 
even more financially vulnerable as its premium revenue will 
decline far faster than its risk exposure. H.R. 2901 will not 
only create financial problems for the NFIP in the future, it 
will set the table for more problems--
    Chairman  Luetkemeyer. Mr. Birnbaum, can you wrap this up 
quickly? You are over--
    Mr.  Birnbaum. Yes.
    --when a flood occurs. Since the States don't regulate 
policy forms, these policies can contain exclusions that a 
regulator would never approve, and a policy filed by admitted 
insurers.
    In summary, flood insurance markets, in particular, are not 
competitive. So unleashing unregulated insurers on vulnerable 
consumers without Federal oversight and without meaningful 
State oversight is a recipe for disaster.
    Thank you.
    [The prepared statement of Mr. Birnbaum can be found on 
page 42 of the appendix.]
    Chairman  Luetkemeyer. Thank you, Mr. Birnbaum.
    We will begin our questioning. And I will start off. I 
recognize myself for 5 minutes.
    Ms. Miller, you made a comment a while ago with regards to 
the GSEs being able to regulate insurance versus the private 
market, which would have to be overseen by you. Can you explain 
what you are talking about there a little bit, because I think 
it is a key point of what we are looking at this morning with 
regards to regulatory oversight.
    Ms.  Miller. Absolutely. Thank you, Mr. Chairman. Banking 
and housing regulators have regulatory objectives that are 
simply fundamentally different than insurance consumer 
protection, and promoting competitive insurance markets. So, 
our view is that they are ill-suited to regulate insurance. And 
it is really inappropriate for them to be given the authority 
to substitute their judgment for those of us who are charged 
under the law with regulating insurance. State regulators have 
140 years of regulating and supervising the business of 
insurance, and protecting policyholders and really balancing 
the availability of coverage with solvency. I think, to put it 
very bluntly, banking regulators don't have a mandate of 
consumer protection. And State regulators, that is what we do. 
That is our charge.
    Chairman  Luetkemeyer. So basically, what you are saying is 
the GSEs are usurping your authority to be able to oversee and 
qualify the different policies of the private sector? Is that 
what you were just saying?
    Ms.  Miller. That is correct.
    Chairman  Luetkemeyer. Okay. Thank you.
    Mr. Bradshaw, you talked a little bit about some of the 
folks who were not covered by flood insurance, especially in 
Katrina. And you sort of alluded to the fact that there is 
concern there because flood affects a lot of people beyond the 
floodplain. So would you consider--or are you alluding to the 
fact that you would like to see everybody required to have 
this, or that the lenders have more leeway in requiring people 
to have flood insurance, or did I misunderstand what you just 
said?
    Mr.  Bradshaw. With regards to requiring everybody to have 
flood insurance, the answer to that is no, that is not the 
position of Standard Mortgage. It is certainly not the position 
of the Mortgage Bankers Association. With regards to expanding 
the options for insurance coverage to be available, we, 
Standard Mortgage, are very interested in that.
    During Katrina, there were a number of people who were 
flooded. Due to the nature of FHA insurance, just as an 
example, if someone floods and they are not in a flood zone, so 
there is no flood insurance, and if they then abandon their 
home, then under the FHA program, it is up to Standard Mortgage 
to repair the home in order to file the claim against FHA.
    That puts us in the business of insuring FHA. So we believe 
with a new type of program that could be developed by private 
insurers, that other people may be interested in obtaining 
insurance even when they are outside the zone.
    Chairman  Luetkemeyer. Okay. Thank you.
    Mr. Kelley, Mr. Birnbaum made a statement a minute ago that 
caught my attention that surplus lines don't belong to the 
Guaranty Associations of States. Did I understand that 
statement correctly, Mr. Birnbaum? Did you make that statement?
    Mr.  Birnbaum. Yes.
    Chairman  Luetkemeyer. Okay. That is a very key point from 
the standpoint, I think, that surplus lines are where you look 
to be able to provide flood insurance. Is that the case, Mr. 
Kelley?
    Mr.  Kelley. It is the case. Surplus lines insurers do 
not--they are not backed by guaranty funds. But there is good 
reason for that. If you look at the types of coverages written 
in the surplus lines market, there are oftentimes not coverages 
that would fall under the general limits of the guaranty that 
exists for the standard market. You also have, again, the A.M. 
Best report that shows an incredible solvency record for the 
surplus lines market: 11 years of no financial impairments, 
compared to, I think, 207 impairments in the standard market 
over that same time period.
    If you look at the ratings of surplus lines carriers, they 
are all in the excellent-to-good category compared to ratings 
on the standard side that aren't quite as good. So we tend to 
believe that coverage is typically inadequate for the size and 
limits of commercial policies covered by surplus lines 
carriers. We believe they don't incentivize strong corporate 
financial operations. And guaranty funds, in our opinion, would 
add an unnecessary burden on the surplus lines consumer, given 
the stellar financial strength of the industry.
    Chairman  Luetkemeyer. Okay. Thank you. My time has 
expired.
    I recognize the ranking member, Mr. Cleaver from Missouri, 
for 5 minutes.
    Mr.  Cleaver. Thank you, Mr. Chairman.
    Yesterday, I asked our witnesses if any of them believed 
that we needed to end the NFIP. And there were no hands raised. 
So I am interested in whether this panel sees it the same way. 
Do any of you believe that we need to eliminate the NFIP? Just 
raise your hand if you--
    Mr.  Birnbaum. Yes. I think we need to eliminate the NFIP 
as a direct provider of insurance and transition it to a mega-
reinsurer along the model of the Terrorism Risk Insurance 
program, because the private market is in a much better 
position to deliver the coverage of flood in the standard 
homeowners and commercial property insurance policies than the 
NFIP with a separate flood insurance program.
    Mr.  Cleaver. But wouldn't the rates be higher for the 
consumers than they are right now for the NFIP?
    Mr.  Birnbaum. I would--no. Certainly for some. But for the 
vast majority of consumers, the rates would be less because the 
private market could deliver the coverage of flood far more 
efficiently. Number one, there are fewer administrative costs 
because you eliminate a second insurance policy. Number two, 
you eliminate a lot of claim settlement costs because you no 
longer have an insurance company and the NFIP both trying to 
settle a claim and deciding who is responsible for it. We saw 
problems with that after Hurricane Katrina, which is whether 
the insurers who are responsible for settling the claims were 
trying to say: Well, is it a claim that is wind that we cover, 
or is it a flood coverage that the NFIP will pay for? So there 
are a lot of reasons why the private market could introduce 
efficiencies that the NFIP couldn't.
    So for the vast majority of consumers, the actual coverage 
for flood would be less expensive than from the NFIP. And, of 
course, there still remains the issue that for some consumers, 
it is unaffordable. And that still has to be addressed the same 
way it does for the NFIP.
    Mr.  Cleaver. Mr. Kelley, do you agree? And also, do you 
think that we would actually have consumers who would pay the 
full risk rate in substantial enough numbers to make the 
program work?
    Mr.  Kelley. I don't agree. Sorry. I don't agree that we 
need to eliminate the NFIP entirely. We certainly agree it 
needs to be reformed. I keep going back to this GAO report and 
the note that they made about subsidized properties counting 
for the majority of the repetitive loss properties in the 
market. And I heard it yesterday during the testimony as well. 
One percent of all NFIP policies count for 30 percent of all 
claims paid. So I think we have to face it there. That one 
percent category of property, no one is attracted in insuring 
those properties. And to think that you could come up with an 
actuarially sound rate that covers the risk of that property, I 
can't imagine a consumer having the ability to afford that.
    So we believe there is a need for the NFIP to serve as some 
level of backstop. But we think you can focus it down on that 
category of risk.
    Mr.  Cleaver. So a hybrid?
    Mr.  Kelley. Maybe. I think, again, H.R. 2901 is going to 
shift as much business as possible to the private industry. But 
let's face it. Private industry is not--they are going to have 
trouble insuring that one percent category as well without a 
pretty reasonable rate. So if you focus on that one percent 
category, maybe focusing NFIP on their mission of mitigating 
flood losses, preventing flood losses, that, in our opinion, is 
a better focus of a reformed NFIP.
    Mr.  Cleaver. So, Mr. Bradshaw, do you think if shifting 
exposure to the private sector is going to be just too much for 
them to bear--we have tried this before. So, we are talking 
about shifting more and more exposure to the private sector. Do 
you think that would run away private sector participation, or 
would they be jumping for joy?
    Mr.  Bradshaw. We don't know what the private sector is 
going to do because they are not in that business on a large 
role today. So it is something to us that is worth trying. Of 
course, in Louisiana, we have a high concentration of risk. We 
are very eager to have as many choices in order to expand 
homeownership and to provide an affordable option. And, to me, 
there may be something akin to the relationship we have with 
the FHA and the GSEs and the Thrifts and everybody that is 
serving--
    Mr.  Cleaver. That is bad for my colleagues here. So use 
another--no. Inside. Go ahead.
    Mr.  Bradshaw. There is a--pardon me for going off. We are 
interested in expanding options. We are interested in seeing 
flexibility for the consumer.
    Mr.  Cleaver. Thank you. I will yield back the balance of 
my time, Mr. Chairman.
    Chairman  Luetkemeyer. The gentleman yields back. With 
that, I recognize the gentleman from New Mexico, Mr. Pearce, 
for 5 minutes.
    Mr.  Pearce. Thank you, Mr. Chairman. I appreciate your 
testimony. Ms. Miller, thanks. Your testimony is 
extraordinarily clear and precise, especially in the 
recommendations.
    You recommend that more flexibility is needed under 
Biggert-Waters. Could you describe that flexibility just a 
little bit? Flesh that out a little bit more? What would it 
look like?
    Ms.  Miller. Congressman, I think what we are looking for 
is a clear definition of private flood insurance. That has been 
one of the biggest difficulties with the Biggert-Waters Act is 
that the definition is just not very clear, and it has 
created--
    Mr.  Pearce. If we were to ask you, would you have a 
sentence that would clarify that?
    Ms.  Miller. I think that's what H.R. 2901 does. It 
provides that--
    Mr.  Pearce. And you think that it completely does that?
    Ms.  Miller. Right.
    Mr.  Pearce. Okay. I needed reassurance. For my friend, Mr. 
Ross, sometimes has to be at--brand him to make sure. Okay.
    And, Mr. Kelley, your testimony seems to hint that there is 
not much reason for a private market. But that is pretty much 
in contrast to Ms. Miller's. Do you not find the private 
market--in other words, she gave three examples. And if three 
people can get insurance, then it is almost out there for 
everybody. Do you not find examples of that, or is this 
something specific to her State?
    Mr.  Kelley. No. I don't mean to suggest that. I think 
there are opportunities. What we have tried to specify and what 
we have to go back and reiterate is that the surplus lines 
market is generally not the market of first resort. It is a 
market that exists to supplement what the standard market isn't 
willing to underwrite. They are not approved to write it. They 
don't have the--
    Mr.  Pearce. But you heard her examples. She gave them, and 
then they are in her written testimony. This one, this one, 
this one, went out and they got it, and they got it cheaper.
    Mr.  Kelley. Right.
    Mr.  Pearce. And sitting up here, not knowing a thing about 
insurance, except that I pay for it once in a while, usually my 
wife does, but not knowing much more than that, it is 
confusing. And that is all I am trying to solve. I am not 
trying to pick at you or anything like that. So you don't find 
the private market as viable as she does? That is all I want to 
understand.
    Mr.  Kelley. I am confusing you. I don't mean to suggest 
that. I think her examples are good ones. And there was an 
example given yesterday by a Member here. I think it was a 
property in Florida where part of the property is in the flood 
zone, but the structure itself was way up on the hill. It is 
never going to see water. The fact that our market, surplus 
lines market, can come in and specifically underwrite that 
property, even though it is classified a specific way by the 
NFIP, we can say we know that structure is never going to flood 
and we can--
    Mr.  Pearce. Okay. Yes, so that gives me the impression 
that it is a specialty market for special circumstances.
    And, Ms. Miller, again, is that the case that these three 
examples you gave, they weren't just people going out and 
shopping off the shelf. These were examples where somebody 
specifically went and said: Oh, we will insure that. That is 
pretty easy and that is not like the rest of the flood, or was 
it kind of a broader market? That is all I am trying to assess.
    Ms.  Miller. Congressman, it is a good question. And I 
don't mean to suggest that this is big market even in 
Pennsylvania. We are starting to see increased interest by our 
surplus lines carriers in particular. But the examples I gave 
you are examples my department is aware of. But I am not trying 
to--this is still a very limited market. I am not trying--
    Mr.  Pearce. Okay.
    Ms.  Miller. Frankly, from my perspective, I would like to 
see if we could grow it and make sure that consumers know 
that--
    Mr.  Pearce. Fair enough. I think many of us would like to 
see that same thing.
    Mr. Birnbaum, Ms. Miller adequately points out, and she is 
talking about making sure that there is viability. Mr. Kelley 
has, on page 9 of his report, and I am sure you dissected it as 
well as I did. But on page 9, he has the rating agencies. If 
you took the time to watch the movie, ``The Big Short,'' and if 
you watched the circumstances play out, the financial industry 
had all the rating agencies. And, frankly, they were rigging 
the game. The triple A's weren't triple A at all. And some 
people made a whole lot of money by saying they are going to 
fail, and they did.
    So if we were to look at the soundness of the ratings 
that--the Best ratings I think Mr. Kelley referred to, in your 
experience, would that tell us that those ratings are going to 
be adequate? Are they--is that game cooked, too, and we just 
haven't found it out yet?
    Mr.  Birnbaum. Well, first note, it is not adequate. If you 
look at the way State insurance regulation deals with admitted 
carriers, there is extensive oversight of the financial 
condition of admitted carriers, which is far more extensive 
than over surplus lines carriers, number one. But, number two, 
this whole idea that somehow Biggert-Waters gives the GSEs 
responsibility for financial regulation of insurance companies 
is a real mischaracterization. Saying that they can determine 
the claims-paying ability means that they can require that the 
insurer have a certain credit rating of say an A.M. Best rating 
of B or more, which is precisely what they do now for hazard 
insurance.
    So Biggert-Waters doesn't give regulatory authority to the 
GSEs. It simply says you don't have to take any insurance 
policy that comes your way. You can require an insurance policy 
with an insurer who has demonstrated a claims-paying ability, 
either by a credit rating agency, a rating of B or more or 
something along those lines. So that is why it is important to 
keep that in Biggert-Waters.
    Mr.  Pearce. Okay. Thanks. I appreciate it. I yield back, 
Mr. Chairman.
    Chairman  Luetkemeyer. The gentleman's time has expired. 
With that, we go to the gentlelady from California, the ranking 
member of the full Financial Services Committee, Ms. Waters. 
You are recognized for 5 minutes.
    Ms.  Waters. Thank you very much, Mr. Chairman, for holding 
this hearing. These hearings are very important, because we are 
dealing with a rather complicated issue of how to have a 
National Flood Insurance Program that serves our public well.
    Let me apologize to everybody for Biggert-Waters. I am the 
``Waters'' of Biggert-Waters. And I have been apologizing for 
many months, and helping everybody to understand the unintended 
consequences of Biggert-Waters. And we tried to straighten that 
out with the bill that we passed that helped to reduce the cost 
of the premiums to our consumers, et cetera, et cetera.
    But I want you to know that I am very interested in whether 
or not we can have a private/public operation that will do the 
best job for our constituents. And I have been working with Mr. 
Murphy and Mr. Ross. And I really do commend them for the 
attempts that they have made to try and have this a bipartisan 
issue, this bill that we are discussing today, H.R. 2901.
    But I recognize there are some concerns. And I think that, 
Mr. Birnbaum, you have identified some of the same concerns 
that I have. But I want to know from you, do you think it is 
possible to have more private participation and involvement in 
the ways that Mr. Ross and Mr. Murphy would have it? And do you 
think we can work this out?
    Mr.  Birnbaum. I think yes, absolutely, we can get more 
private market involvement in flood insurance. But with 
respect, I don't think H.R. 2901 is the way to go with that. 
One of the problems with the NFIP is the various and 
conflicting requirements. Make insurance affordable, but not 
only have premiums that are sufficient to pay claims, but pay 
back all of the claims in the past that were far in excess of 
the revenues. When you have those conflicting things, how do 
you address that? So what would happen with H.R. 2901 is that 
the surplus lines insurers would cherry-pick certain policies. 
Right now, the NFIP looks at a special flood hazard area and 
has 30 different levels of risk, with 1 being the highest 
elevation and the lowest risks, and 30 being the lowest 
elevation and the highest risk. They then average the claim 
cost for that, for everyone in that. Surplus lines insurers are 
going to come in and pick off everyone from 1 to 14, leaving 
the NFIP with everyone in 15 to 30, with the result that the 
NFIP is stuck with the worst and most risky claims, but no more 
revenue, per se, to deal with that. So you are going to create 
more financial problems for the NFIP down the road.
    The proposal that we put forth fully gives the private 
market not only the responsibility, but the tools to price the 
product and utilize all of their means, whether that is 
catastrophe modeling, catastrophe reinsurance, all of the 
pricing tools that they can to get flood insurance right.
    Ms.  Waters. Would you just briefly describe your proposal?
    Mr.  Birnbaum. The proposal is that Congress, or the 
States, require that flood be part of the homeowners and 
commercial property insurance policy. Remember, these are 
private insurers that are already providing property insurance. 
So you are just asking them to add the peril of flood. What 
that would mean is you would have the far more efficient 
delivery of the coverage of flood, because you wouldn't have to 
have a second policy. You would have all of the skills and 
tools of the private insurers who, in pricing, access the 
catastrophe modelers to get the pricing right. And you would 
have all of the catastrophe reinsurance and catastrophe bonds 
and all the alternative capital available to support that.
    You would then transition the NFIP to a mega-reinsurer the 
same way the Terrorism Risk Insurance program works. That has 
been a successful model. This would accomplish so many things. 
Not only would it deliver the cost of flood more efficiently, 
but it would expand flood coverage. It would give consumers the 
coverage that they expect at the time of an event instead of 
surprising them with, ``There is a flood, and, oh, I am not 
covered.'' Or more importantly, how many times have we seen 
flood in areas that aren't special flood hazard areas?
    This would mean that everybody is covered, even if they 
happen to be outside a special flood hazard area. This will 
transform Federal expenditures from massive disaster relief to 
investments in loss mitigation and reduce disaster relief 
expenditures down the road. This is really the only long-term 
solution.
    Ms.  Waters. If I may, what you are indicating is mandatory 
insurance for everybody to participate? I agree with you. First 
of all, the debt that Biggert-Waters attempted to address was 
just impossible. We could never pay that down or take care of 
that. So what would you say about constituents who would say, 
``I don't live in a flood zone. I shouldn't be responsible for 
those people who decide they want to live in places where they 
know they are at risk.'' What would you say to a politician 
about that?
    Mr.  Birnbaum. The beauty of having the flood as part of 
the private market, private flood or the homeowners or the 
commercial property, is that insurers would price the coverage 
of flood according to the peril. So for consumers who lived in 
areas that didn't have a high exposure to flood, they would pay 
little or next to nothing for it. For consumers who lived in a 
high-flood-risk area, they would pay a lot more. But the 
private market would reflect these risks a lot more 
responsively than the NFIP because the NFIP is required to go 
through this lengthy process with the flood maps. So imagine if 
that same process were required for wind coverage the way 
homeowner's insurance is sold today. That would be a disaster 
for providing wind coverage.
    So by turning this over to the market, everyone pays their 
fair share instead of the system today, which is a bunch of 
hidden subsidies. Taxpayers are basically--there are some 
taxpayers who live in areas without much flood who end up 
paying for flood because the Federal Government has lent $24 
billion to an NFIP that still isn't financially sound.
    So there are subsidies not only from one set of NFIP 
policyholders to others, but there are subsidies from taxpayers 
to other taxpayers.
    Mr.  Ross [presiding]. Mr. Birnbaum, I am going to need you 
to wrap it up. A little--
    Mr.  Birnbaum. Okay. So by moving this to the private 
market, you would introduce a lot more equity in the price of 
flood insurance. And you would make it a lot more transparent.
    Ms.  Waters. Thank you very much. I appreciate that. And I 
am hopeful that you can work with us as we try and figure out 
what we are going to do to reform the National Flood Insurance 
Program and have some private involvement in it.
    Thank you, Mr. Chairman.
    Mr.  Ross. Thank you. The gentlelady's time has expired.
    Ms.  Waters. I yield back.
    Mr.  Ross. The Chair now recognizes the gentleman from 
Florida, Mr. Posey, for 5 minutes.
    Mr.  Posey. Thank you, Mr. Chairman. And, again, I would 
like to express my appreciation to Chairman Luetkemeyer for 
holding these hearings and for his efforts to help us get ahead 
of this issue a little bit.
    The National Flood Insurance Program is currently $23 
billion in debt. That is about the clearest indication we can 
ever have that it is not working in its present form. And from 
the hearings that we have held so far, I am encouraged that at 
least every Member seems to be able to agree on that.
    At one time, an HO-3 was said to have been the broadest, 
most inclusive form of insurance ever written. HO-3 standard 
homeowners insurance policy not only covered a lot of perils 
such as fire and wind at one time, it had liability coverage in 
it if your kid shot the neighbor with a bow and arrow, and 
theft provisions, and pretty broad. I don't know if that is 
still the case, still is considered to be the broadest. But the 
question I have is a historical one, if any of you could answer 
it, and that is, if flood was ever included in a standard 
property insurance policy before, homeowners or otherwise? Can 
any of you answer that question?
    Ms.  Miller. Not to my knowledge.
    Mr.  Birnbaum. I'm sorry. Could you repeat the question? I 
didn't--
    Mr.  Posey. Yes. Was the peril of flood ever before covered 
by, say, an HO-3 policy in the standard homeowners insurance 
policy, was it ever covered? And, of course, the next question 
is, when did it cease to be covered?
    Mr.  Birnbaum. Okay. Basically, Congress created the NFIP 
in 1968. And that is when private industry came forward and 
said, ``We are not willing to cover flood because the risk is 
concentrated in certain areas, and we can't diversify it, and 
we have a hard time identifying the risk because of the flood 
maps.''
    Mr.  Posey. So, at one time, it was covered?
    Mr.  Birnbaum. Yes.
    Mr.  Posey. Do they cover earthquakes in California? Is 
that a standard covered peril?
    Mr.  Birnbaum. No.
    Mr.  Posey. No. Okay. What do you think would happen if 
there was a small sentence added to legislation which said, 
``If you cover any property which has a mortgage insured by the 
Federal Government, you shall not exclude the peril of flood 
from the coverage,'' what do you think would happen?
    Mr.  Birnbaum. I think what would happen is that private 
insurers would start offering the coverage of peril of flood in 
their homeowners policies. And if they didn't, then State 
residual markets would be providing that. So, for example, in 
Florida, just as, right now, if a company isn't willing to 
write wind coverage, the consumer would go to Florida Citizens. 
So if a company wasn't willing to write flood in the policy, 
then the consumer would go to Florida Citizens. But the ability 
for companies to write flood today is completely different than 
it was 40, 45 years ago. Companies have access to catastrophe 
models. They have access to very distinct and clear and 
detailed itemization of risk. There is access to reinsurance 
and alternative capital that didn't exist 45 years ago. So the 
opportunities are there. There just needs to be a nudge from 
the government to do so. And that nudge would be a requirement 
that they include it.
    Mr.  Posey. I am not opposed to that concept for sure. But 
I must say that Citizens puts Florida taxpayers on the hook 
greater than any other risk ever known to those citizens of 
Florida. Had Citizens had as broad of coverage pre-2004 and 
2005 hurricane seasons as it does now, Florida would probably 
be in as bad a financial state as Detroit. That is definitely 
not a real clear answer to have a government-owned insurance 
company being the largest one in the State with never enough 
reserves when you live on a hurricane-prone peninsula to cover 
innumerable losses. Fortunately, our States cannot just print 
more money and go into debt. They have to actually--they have a 
constitutional requirement to balance their budget. And they 
can't pull the escapades that the Federal Government can. So, 
anyway, I see my time has expired.
    Mr. Chairman, thank you very much.
    Mr.  Ross. Thank you.
    The gentleman's time has expired.
    The Chair now recognizes the gentlewoman from Ohio, Mrs. 
Beatty, for 5 minutes.
    Mrs.  Beatty. Thank you so much, Mr. Chairman, and to our 
ranking member and to our witnesses today. First, let me say 
that I support what Ranking Waters said in relationship to 
wanting to be able to look at a public-private operation. So I 
am going to try to get through two quick questions, one to you, 
Mr. Birnbaum, and one to you, Mr. Bradshaw, as it relates to 
the National Flood Insurance Program and privatization.
    To you, Mr. Birnbaum, we have certainly heard some 
interesting testimony here today. And I have had an opportunity 
to look through your written statement. And one of the concerns 
I have is the area of moving away from the National Flood 
Insurance Program to privatization. I am concerned, I am sure 
my colleagues on both sides of the aisle are concerned or 
should be concerned, and I know FEMA is also concerned when you 
look at the $23 billion in debt. And so I guess my question is 
if we talk about, as you stated, Mr. Birnbaum, that we move 
away from privatization and move away from the way it is now to 
privatization, what happens to the $23 billion in debt? Because 
certainly one would not expect FEMA or the taxpayers to be left 
holding the bag. And when you recommend that the National Flood 
Insurance Program get out of the business of being a flood 
insurance provider and do its transition, I don't think I saw 
anywhere in there where you addressed what happens to the $23 
billion in debt. Did I miss that? Or is there something there 
that you can share with us?
    Mr.  Birnbaum. No. The short answer to your question is 
that the same thing is going to happen, would happen, as is 
going to happen right now, which is taxpayers are on the hook 
for the $23 billion. Right now, there is this belief that 
somehow the NFIP is going to generate funds into the future 
sufficient to pay back that $23 billion. Given that you are 
continuing to allow or require the NFIP to subsidize rates--
and, with H.R. 2901, you are going to put the NFIP in a 
position of being even more financially vulnerable--you are not 
only never going to pay back the $23 billion through the NFIP, 
you are going to create an even larger requirement for the NFIP 
to borrow from Treasury. So the answer to the question is that 
$23 billion is there; cut your losses and move to a system of 
sustainability.
    Mrs.  Beatty. When you say, ``cut your losses,'' that makes 
it go away?
    Mr.  Birnbaum. It doesn't make it go away. But Congress is 
going to have to pay that $23 billion because there is no way 
that the NFIP is going to be able to repay back over time, even 
under the current requirements, let alone under the 
requirements of H.R. 2901.
    Mrs.  Beatty. So I guess what I am hearing--and certainly 
you are the expert--is that if Congress is going to have to pay 
it for it to be privatized, and Congress is going to have to 
pay it to leave it the way it is, where is the in-between of 
public and private in sharing in that cost?
    Mr.  Birnbaum. By moving to flood as part of the standard 
homeowners and commercial property insurance, what happens then 
is that the Federal Government stops being on the hook for 
flood insurance losses. It means that the private market is 
responsible for accepting the exposures, pricing them 
appropriately, and paying the claims. The bleeding stops. And 
that is what is necessary at this point in time. So you 
accomplish several things by putting it with the private market 
along the proposal we have made. You not only stop the 
hemorrhaging of Federal money, number one. But, number two, you 
get better pricing, you get more comprehensive coverage, and 
you get better opportunities for loss mitigation. You get 
private insurers now incentivized to get involved in loss 
mitigation for flood in a way that they currently have no 
interest in doing right now.
    Mrs.  Beatty. For the sake of time, I am going to move on 
quickly to you, Mr. Bradshaw. Can you tell me the value of the 
flood plain maps as it benefits lower- and middle-income 
Americans and first-time home buyers?
    Mr.  Bradshaw. Certainly the value of the flood plain maps 
are significantly improved today as compared to when I started 
in the business in 1971, when we received this big box roll of 
maps and our objective was or our assignment was to locate all 
of the properties on the map. So the digitization of the maps 
helped to improve significantly, we believe, the underwriting 
of the flood insurance risk.
    All that being said, there are several places with the 
mapping that are incorrect and that the private market will be 
able to identify those from using different approaches. And 
then the hope is that provides more choices, that provides more 
opportunities for our consumers to afford the flood insurance, 
particularly the lower income and the new home buyer.
    Mrs.  Beatty. Okay.
    Thank you.
    Mr.  Ross. Thank you.
    The gentlelady's time has expired.
    I now recognize myself for 5 minutes.
    Ms. Miller, you spoke in your testimony about some of the 
obstacles of Biggert-Waters that are preventing you from being 
able to authorize private flood insurance in the State of 
Pennsylvania. Are you seeing an influx of interest from the 
private market to want to write to flood insurance in 
Pennsylvania?
    Ms.  Miller. Mr. Chairman, we are not seeing an influx of 
interest. It is still a very limited market. We are seeing some 
increased interest. We are seeing more surplus lines policies. 
But it is still a very limited market.
    Mr.  Ross. And if H.R. 2901 were to pass, do you think that 
would change things and allow for the presentation of more 
private capital to come in and take the risk in Pennsylvania?
    Ms.  Miller. That is my hope. That is why I am here 
supporting it because I would like to see the private market 
grow. And I would like to see consumers have more options.
    Mr.  Ross. And if the private market does grow and they are 
assessing the risk based on their models and based on what they 
believe is appropriate in risk-based analysis, do you feel that 
there may also be an opportunity then that these private 
carriers may not only offer flood but also want to include it 
in an all-perils since they have--managing the risk?
    Ms.  Miller. I think that is right.
    Mr.  Ross. And would that not lead to an opportunity where 
we may have even more people, assuming other Insurance 
Commissioners across the country feel as you do, to include 
more people to want to participate in flood insurance because 
the private carrier can offer it to them at a lower price?
    Ms.  Miller. That is the hope.
    Mr.  Ross. And would that not lead to an opportunity, as 
Mr. Birnbaum says, where you would see more and more policies 
include in their all-perils flood? But to keep it the way it is 
now where we bifurcate NFIP against an all-perils policy is not 
going to help the situation. Would you agree?
    Ms.  Miller. Yes.
    Mr.  Ross. I have enjoyed listening to Mr. Birnbaum. I 
agree with him. And I think you will too that--when he states 
in his testimony, ``consumer protections provided by the States 
are far greater than those that exist for NFIP insurance,'' 
would you agree?
    Ms.  Miller. Yes.
    Mr.  Ross. And have you had any problems, well, let me put 
it this way, do you feel comfortable continuing to allow 
surplus lines carriers to write flood insurance in the State of 
Pennsylvania?
    Ms.  Miller. Absolutely.
    Mr.  Ross. Thank you.
    Mr. Kelly, surplus lines, they just don't just write flood 
insurance, do they?
    Mr.  Kelley. They just don't write flood insurance. I 
appreciate that question. We have heard here that surplus lines 
are not regulated. We have heard that they are not licensed. 
That is--
    Mr.  Ross. Correct. And if you would discuss those.
    Mr.  Kelley. --simply incorrect. Every surplus lines 
insurer is licensed in a State. It may not be licensed in every 
State. But in order to be eligible to write surplus lines 
insurance, as Commissioner Miller described, you have to be 
licensed in your State of domicile. So the regulation of that 
insurer from a financial solvency, from a market conduct 
perspective, none of that varies between the standard market 
and the surplus lines market.
    Mr.  Ross. And surplus lines are currently writing flood 
insurance policies now?
    Mr.  Kelley. Absolutely. And here is why, not just because 
of the Biggert-Waters Act, but because for decades, you have 
had consumers whose problems weren't solved by the limits of 
the NFIP or who didn't have a standard market option.
    Mr.  Ross. So under the law, surplus lines carriers can 
write policies? And is the number of policies growing over time 
in flood insurance? I doubt it is significantly. But is it 
growing?
    Mr.  Kelley. It is not significant. You have seen the stats 
in my testimony. And I will just recap them here. We have about 
six States, some of the biggest States, that capture flood 
insurance data. And those 6 States, which represent about 50 
percent of our surplus lines market, wrote $134.1 million in 
flood premium in 2014.
    Mr.  Ross. And then because my time is limited, would H.R. 
2901 assist and facilitate in the increase of policies 
available and being purchased by consumers for flood?
    Mr.  Kelley. Yes, it would.
    Mr.  Ross. Thank you.
    We talked about mitigation yesterday. And I think the 
overall goal of a flood insurance policy, as in any insurance 
policy, is to have the minimization of risk with the benefit of 
an affordable policy because if you don't focus on that, then 
what you are providing is nothing but relief. And relief is not 
where we want to go because that creates FEMA and then that 
creates greater problems without any control. So what benefit 
is there in making sure that we allow for incentives to 
mitigate the risk? And what benefit is being provided or 
incentives being provided right now by NFIP for that 
mitigation? Would anybody like to take a stab at that?
    Mr.  Birnbaum. Sure. So the key incentive for loss 
mitigation is proper pricing of the insurance product.
    Mr.  Ross. Correct, Mr. Birnbaum. And I apologize because 
you are on something I want to talk about, and I only have a 
couple of seconds. Would not the consumers benefit greater for 
having more assessment of risk done in a granular fashion if 
the private carriers were involved to make sure that they are 
protecting their investment on that risk to the benefit of the 
consumers so that we would have a more affordable market with 
less risk of loss to the consumer?
    Mr.  Birnbaum. The answer to that is, yes, if it were 
comprehensively done by the private market. If you do just 
selective with the cherry-picking of H.R. 2901, then you have 
some consumers who get that and the majority of consumers 
don't.
    Mr.  Ross. My time is running out.
    Clearly, then, I would suggest that H.R. 2901 offers that 
transition to create the NFIP to be the market of last resort, 
which I think is what the panelists would like to see in the 
overall equation.
    Thank you. My time has expired.
    I now recognize Mr. Rothfus from Pennsylvania for 5 
minutes.
    Mr.  Rothfus. Thank you.
    Ms. Miller, I am going to talk a little bit about the 
surplus lines insurers. You mentioned in your testimony that 
there is a growing appetite in the surplus lines market to 
provide private flood insurance coverage and that Pennsylvania 
has had some success with surplus lines carriers offering flood 
insurance. Taking a national perspective, do you feel 
comfortable with surplus lines carriers writing private flood 
policies?
    Ms.  Miller. Congressman, I do.
    And, in fact, in Pennsylvania, one of the things we are 
trying to do as a department right now is figure out how we can 
do a better job of letting consumers know that this option 
exists. That is now comfortable I am with surplus lines 
policies.
    Mr.  Rothfus. Can you talk a little bit about the 
regulation of the surplus lines insurers? How do State 
insurance regulators monitor the financial health of surplus 
lines insurers?
    Ms.  Miller. Absolutely. As Mr. Kelley indicated, surplus 
lines carriers are licensed in the State of their domicile. So 
in that State, they are meeting the capital and surplus 
requirements that the admitted carriers are meeting. And so 
even though we talked about earlier the fact that the guaranty 
fund doesn't apply to surplus lines, there is financial 
monitoring of surplus lines carriers. And even in 
nondomiciliary States, there are capital and surplus 
requirements on surplus lines carriers, as well as carriers who 
are not domiciled in the United States. So I am comfortable we 
have a lot of financial regulation protection. But also we 
have, in a State like Pennsylvania, if we have a surplus lines 
carrier that is not domiciled in Pennsylvania, we still have 
authority over the placement of that insurance with the surplus 
lines broker and the opportunity to go after that broker if 
there is misconduct. But we also have I think--
    Mr.  Rothfus. What kind of misconduct are you talking 
about?
    Ms.  Miller. For example, in Pennsylvania, we have a 
requirement that they notify policyholders that, for example, 
the guaranty fund doesn't apply if they misrepresent the policy 
somehow. Or if they place the policy with a non-admitted or a 
non-eligible surplus lines carrier, we can go after that 
broker.
    Mr.  Rothfus. These are basic consumer protection items 
that you are talking about?
    Ms.  Miller. Exactly. We also enforce the requirements 
related to the eligibility of surplus lines carriers to operate 
and sell policies in our State. So if we have concerns about 
the financial soundness of a surplus lines carrier, if they are 
not paying claims timely or if they are willfully violating our 
laws, we can declare them ineligible to sell policies in our 
State. Additionally, in Pennsylvania, we have what is called 
the Unfair Insurance Practices Act. I think States have similar 
laws that are probably titled a little bit differently. And 
these, again, are consumer protection statutes. They make sure 
that claims are paid appropriately and that the insurer and the 
broker are not misrepresenting policies and what is covered. 
And this Act applies to surplus lines carriers just like it 
applies to admitted carriers.
    Mr.  Rothfus. Great.
    Mr. Birnbaum, you expressed concerns in your written 
testimony about the level of regulation and policyholder 
protection for surplus lines that are not admitted insurers. In 
fact, on page 21 of your testimony, you state that Ross-Murphy 
``sets the table for more problems for consumers who have 
purchased the surplus lines policies when and if that occurs.'' 
I would point out that Commissioner Miller, from my home State, 
reports at least 5 surplus lines carriers have sold flood 
insurance in Pennsylvania, writing around 1,000 policies, and 
that the State closely monitors surplus lines business. What 
evidence do you have to show that State Insurance Commissioners 
or State regulators have not protected consumers, particularly 
with policies sold through non-admitted carriers via surplus 
lines?
    Mr.  Birnbaum. Sure. So with admitted carriers--
    Mr.  Rothfus. What evidence? I am looking for what evidence 
that you have where you can show me where this has been an 
issue.
    Mr.  Birnbaum. The evidence is that regulators don't have 
authority to approve forms or rates. Commissioner Miller in the 
last few weeks has issued a bulletin on price optimization, 
telling insurers that they can't use a consumer's willingness 
to pay to determine the price that they charge the consumer. 
She has no authority to do the same thing for surplus line 
insurers. And it is the same thing with rate issues and other 
policy form issues. A surplus lines insurer could include a 
provision in the policy--
    Mr.  Rothfus. You are saying, ``could, could, could.'' I am 
looking for specific examples where it has actually happened. 
What evidence? That is what I am looking for from you.
    Mr.  Birnbaum. The evidence--I will give you evidence from 
the force-placed insurance market. The largest writers of 
private flood insurance today are force-placed flood insurers. 
And the largest of those are admitted carriers. So private 
flood insurance can be written by an admitted carrier. But 
there have been issues where those private flood insurers, when 
they were using surplus lines, were charging exorbitant rates 
that were far in excess of the reasonable cost of providing 
insurance. So that has been reined in, in part because the 
Federal Housing Finance Authority and some State regulators 
have said: You need to move that force-placed flood from 
surplus lines to the admitted market.
    Mr.  Rothfus. But State regulators would have the authority 
to go after them. Would State regulators have the authority 
under existing--
    Mr.  Birnbaum. They have authority basically for financial 
condition. But they don't have the same authority as they do 
over admitted carriers for things like policy forms and rates. 
If there is such great consumer protection in the surplus 
lines, why doesn't Pennsylvania or every other State allow all 
personal auto and all homeowners to be written in the surplus 
lines market? Why do they require that to be written in the 
admitted market? Because there are more consumer protections in 
those markets.
    Mr.  Rothfus. Ms. Miller, would you care to respond to 
that?
    Ms.  Miller. Sure. So surplus lines, the way it works is 
surplus lines are for unique risks. That is why we have 
admitted carriers that write the rest of personal lines 
policies because we have laws in all the States about diligent 
search requirements. And if you can buy a policy through the 
admitted market, then that is what you do. Really, surplus 
lines are for those unique risks that aren't being written by 
the admitted market.
    Mr.  Rothfus. I yield back, Mr. Chairman.
    Mr.  Ross. The gentleman's time has expired.
    The Chair recognizes the gentleman from Kentucky, Mr. Barr, 
for 5 minutes.
    Mr.  Barr. I thank Mr. Ross for his leadership on trying to 
tackle this complex issue.
    Mr. Murphy, I thank you as well for your efforts in trying 
to deal with what is clearly a very complicated issue and a 
huge potential liability for the taxpayers and an affordability 
issue, frankly, for a lot of my constituents in rural central 
and eastern Kentucky. I appreciate what H.R. 2901 is trying to 
do in terms of clarifying that State insurance regulators have 
the authority to regulate private flood insurance, clarifying 
the definition of private flood insurance. But I want to have 
Ms. Miller, Mr. Bradshaw--Mr. Kelley actually address a point 
that Mr. Birnbaum is making, which I think is a pretty 
interesting and good point. And that is that there is this 
impediment to private insurance offering flood coverage based 
on just the simple fact that they have to compete with the 
subsidized rates of the NFIP. Even if H.R. 2901 does move us in 
the right direction in these areas, what do we do about this 
fundamental problem, about the competition with subsidized 
rates?
    Ms.  Miller. I think that is a challenge. And I think in 
terms of the future of NFIP, at the NAIC, we will be embarking 
this year--I know the reauthorization is coming up next year. 
And it sounds like there is a lot of interest in talking about 
ways we can modify that program. We have not had conversations 
at NAIC yet about potential recommendations for changes to that 
program. But it was just announced that I am Chair of the 
Property and Casualty NAIC Committee. And I can tell you that 
this is on our agenda for this year. We are going to be looking 
at this and putting together kind of our recommendations for 
ways that perhaps NFIP could be modified going forward. From my 
perspective today, I am here because I just want to see 
consumers have more options. And I believe H.R. 2901 will 
provide for more private market options for folks. And I think 
that will be a good thing for consumers.
    Mr.  Barr. Mr. Bradshaw?
    Mr.  Bradshaw. With regards to the affordability of the 
program, however this comes out, is that we are very interested 
in making sure that the consumers can afford the product. We 
believe that competition will bear that true. We have a unique 
position in Louisiana where we have such a high concentration 
of flood risk, very much of it is required. Many of our 
customers are required to have flood insurance. So the impact 
by NFIP and a huge change in the premium not only affects our 
consumers but the property values, which we have a high level 
of interest in because at the end of the day, we are the guys 
who are protecting the investors. So we are very interested in 
that. We would see it that it is somewhat like the relationship 
with FHA in the general market of lenders and of guarantors in 
the mortgage business is that FHA has a role. Looking back to 
the late 1980s of the oil bust, FHA was the only program in 
town. So the NFIP does serve a significant and a long-term 
benefit.
    Mr.  Barr. Thank you.
    And as we move to Mr. Kelley, Mr. Kelley, if you could 
answer just two specific questions as we--in response to Mr. 
Birnbaum's testimony. In your view, as an advocate of H.R. 
2901, what is preferable about Ross-Murphy to the TRIA model 
that Mr. Birnbaum is advocating? What is preferable to the 
surplus lines solution to the TRIA model that Mr. Birnbaum is 
advocating? And, secondly, could you respond to Mr. Birnbaum's 
contention that H.R. 2901 would give surplus lines insurers the 
ability to cherry-pick NFIP policies that are overpriced and 
low risk, making the NFIP more financially vulnerable? I am 
really interested to hear your thoughts on that.
    Mr.  Kelley. Thank you for that question. With respect to 
the TRIA model concept, H.R. 2901 does a very different job of 
pushing this coverage to the private market. TRIA mandated that 
the private market offer terrorism coverage. This is giving the 
private market the opportunity to get in and figure it out, 
invest in underwriting processes, and get the experience to 
develop products. Many standard companies, I think over time, 
will probably add flood to the standard homeowners policy like 
we have talked about here. It is just going to take time. I 
think it will happen. It is just going to take time. And much 
of that experience will transpire out of what the surplus lines 
market is able to do.
    What was the second question?
    Mr.  Barr. The issue of cherry-picking.
    Mr.  Kelley. The issue of cherry-picking, the issues you 
are trying to balance here are affordability, availability, and 
financial stability of flood insurance. Terms like ``cherry-
picking'' and ``adverse selection'' obviously have very 
negative bias when referring to private companies and their 
business decisions based on sound financial models, actuarial 
data, capacity, risk appetite, and experience. The private 
market's financial stability is in all of our, especially the 
consumer's, best interest. Making decisions about the types of 
risk to write, regions to write in, capacity to allocate to 
those regions, those are essential elements to maintaining a 
solvent, viable marketplace. So regardless of which risk you 
transfer from the public to private balance sheet, it starts to 
transfer some of them and reduces the long-term exposure to the 
subsidized Federal Government.
    Mr.  Barr. Thank you.
    I yield back.
    Chairman  Luetkemeyer. The gentleman's time has expired.
    With that, we will go to the gentleman from Texas, Mr. 
Williams.
    Mr.  Williams. Thank you, Mr. Chairman.
    And I thank all of the witnesses for your participation 
today.
    Mr. Birnbaum, you heard I am from Texas. In your testimony, 
you specifically state that private insurers can offer flood 
insurance and can do so more efficiently and effectively than 
the NFIP. I am going to agree with you 100 percent on that. And 
I believe the Federal Government has gotten way over its head 
on this issue like it does with a lot of things.
    But you also state that H.R. 2901, of which I am a 
cosponsor and proud to be one, will not address the longer term 
problems with the NFIP, will not promote private market 
participation in the sale of flood insurance, will create 
bigger problems in the future when flood events occur, and will 
eliminate State regulatory oversight. So three questions. 
Number one, how can H.R. 2901 totally eliminate State 
regulatory oversight?
    Mr.  Birnbaum. Okay. H.R. 2901 removes from Biggert-Waters 
the limitation that private flood insurance can be written by 
surplus lines for commercial policies. It opens the door to 
surplus lines for residential flood insurance. By doing so, it 
means that private flood insurance basically moves out of the 
admitted market where there are far more consumer protections 
than in the surplus lines market. So, that is the basis for 
that assertion.
    Mr.  Williams. Number two, what is your assessment of the 
State regulatory system in light of your statement on page 19, 
meaning do you have a lack of faith in the State regulatory 
process?
    Mr.  Birnbaum. No. I am a strong supporter of State-based 
regulation. It hasn't been an unqualified success over the 
years. But I am a strong supporter of it. And I demonstrate 
that strong support by saying that flood, by being part of the 
standard homeowners and commercial property insurance, then 
becomes the responsibility of State insurance regulators. What 
H.R. 2901 does is it creates this, continues this Rube Goldberg 
apparatus of constricting the NFIP, giving them all sorts of 
requirements and constraints, giving the private, the State-
based regulators certain responsibilities. But the overall 
thing makes no sense. If you want to get to a sustainable 
future, then you utilize the private market but give them the 
full responsibility overseen by State-based regulation. Don't 
include this NFIP that is required to provide sort of 
subsidized insurance, which gives the private sector then the 
opportunity to say: Well, we are only going to take this most 
profitable business; we are going to leave the more risky and 
the less profitable business to the Federal Government.
    So you are privatizing profit and socializing the risk. 
That is exactly the thing that is outraging people all over the 
country. It is the type of crony capitalism that basically 
says: Look, we are going to give one group of people the 
government advantage, instead of trying to create a level 
playing field for everyone.
    Mr.  Williams. How would the State regulation of flood 
insurance differ from the State regulatory process for 
homeowners insurance or other insurance lines?
    Mr.  Birnbaum. Right now, for surplus lines, what 
Commissioner Miller and others have said is they regulate the 
financial condition of the surplus lines insurer, and they have 
some ability to regulate sort of marketplace misconduct.
    But they don't have the ability to ensure that policy forms 
are not misleading or deceptive. They don't have the ability to 
ensure that rates are not unfairly discriminatory. And, more 
important, they don't have the ability to make sure that the 
NFIP meets its goals. So you have Federal requirements for 
flood insurance, and you are essentially delegating part of the 
responsibility for insuring that to the State-based regulators.
    And while I am a big supporter of State-based regulation, 
there have been some notable failures. If we look at private 
mortgage insurers, we saw that in the financial collapse, 
private mortgage insurers failed. Those were under the purview 
of State-based insurance regulators. So we are not talking 
about a pristine record here.
    But I have faith in State-based insurance regulation if you 
give them the comprehensive tools to do it, not the piecemeal 
approach of H.R. 2901.
    Mr.  Williams. I am a private-sector guy. I am in the 
retail business. And I can tell you, in the counties I 
represent in Texas, we have had a lot of flood problems, and 
the way to get it right is turn it over to the private sector. 
Let the private sector compete. Let the consumer drive the 
industry, not the Federal Government. And I think you will see 
prices will be right, and service will be better.
    And I am happy to be on H.R. 2901.
    Mr. Chairman, I yield back my time.
    Chairman  Luetkemeyer. The gentleman yields back.
    With that, the gentlelady from New York, Ms. Velazquez, is 
recognized for 5 minutes.
    Ms.  Velazquez. Thank you, Mr. Chairman.
    I am sorry I wasn't here to listen to your testimony, but I 
was in a markup in the Small Business Committee. We just 
finished. But I want to thank you all for being here.
    And I have just one question, to Mr. Bradshaw.
    My district in New York City, which encompasses communities 
on New York City's Lower East Side and Red Hook, was especially 
hard hit by Superstorm Sandy.
    In a January 2014 report published by the GAO, some 
stakeholders noted that the rate increases associated with 
private-sector flood insurance could lower a home's market 
value. Some stakeholders also expressed concern that whole 
communities with a high risk of flooding, like those in my 
district, could become economically unviable if the increase in 
premium rates makes flood insurance unaffordable for too many 
residents.
    Mr. Bradshaw, how do we ensure premium rates on flood 
insurance do not rise to such a level that it causes 
homeownership rates to decline, particularly in vulnerable 
communities?
    Mr.  Bradshaw. Certainly, we have had some similar 
experiences with Hurricane Katrina, and our part of the country 
and the Gulf Coast is very much at risk, just as you, and, 
certainly, taking nothing away from the flooding that has taken 
place on the Mississippi River in Missouri right now, as well. 
People are in harm's way.
    We look to committees such as this to make sure that those 
folks who need help in order to maintain their property values, 
in order to continue to make a living, to continue to have 
access to homeownership--and that, from that perspective, there 
seems to me to be a parallel between what FHA does in the home 
mortgage business and what NFIP does for the flood business.
    In our part of the country, Port Fourchon is one example, 
which carries 25 to 35 percent of the petrochemical business 
from the Gulf up to the mainland. There are reasons that has to 
be there. People have to work there. So that very well may 
require some subsidization of premiums for people in that area. 
It is very important.
    I am not sure that I know how to do that. I know that what 
we have right now has created $23 billion in debt and that if 
we fail to plan for the next event, if there is an event, then 
we will merely re-experience what we have today.
    So we are very eager to help protect the consumer. We are 
very eager to be very interested and verbal to help protect the 
consumer. Because without them, our business goes away.
    Ms.  Velazquez. Thank you.
    Chairman  Luetkemeyer. The gentlelady yields back.
    I now recognize the gentleman from Texas, Mr. Green.
    Mr.  Green. Thank you very much, Mr. Chairman.
    And I thank the witnesses.
    And, of course, I always thank the ranking member for her 
leadership on these issues.
    I lived through Katrina. And it is inappropriate to say I 
lived through it because I wasn't actually there--
    [Phone rings.]
    Mr.  Green. Excuse me. This may be the President calling.
    I wasn't actually there.
    It is not the President. Okay. So, I won't take the call.
    I wasn't actually there. But I arrived shortly thereafter, 
and I saw the tragedy that was left behind. I went to Sri Lanka 
after the tsunami. I was in the Philippines after Haiyan. And I 
know what this looks like, the aftermath, and it is not a 
pleasant sight, to say the very least. And I am being quite 
euphemistic.
    Here is the question that I have for you, dear friends: Are 
you indicating that, if we had this system in place pursuant to 
H.R. 2901, that we would not have expended the billions of 
dollars that we had to expend after Katrina, that this would 
eliminate the necessity for the Federal Government to step in? 
This is an important question for me and my constituents.
    Yes, sir, if you would?
    Mr.  Birnbaum. So the answer to that is H.R. 2901 would not 
have prevented any of the problems that you just described, 
because H.R. 2901 would continue to leave the NFIP with those 
policies in high-risk areas, it would continue to have the NFIP 
charging inadequate rates, it would continue to have subsidies 
for people who don't need them.
    So you would still have the same problem you would today. 
And, as a matter of fact, it would be worse, because the NFIP, 
instead of broadly averaging its rates and getting revenue for 
policies in lower-risk areas, it wouldn't even have had that 
revenue. So the situation would be worse today if H.R. 2901 had 
been in place.
    If our proposal of having the private sector provide the 
flood insurance, then the $23 billion would not be there today 
if our system had been in place.
    Mr.  Green. On the question of the billions that we 
currently find ourselves indebted to, I suppose the Treasury, 
would we still have that $23 billion debt if we had H.R. 2901 
in place?
    Mr.  Birnbaum. Well, yes. The $23 billion is not going to 
go away under the existing situation. And it is certainly not 
going to go away under H.R. 2901. It is going to get worse 
under H.R. 2901.
    Because the private sector is going to take the most 
profitable of the policies--remember, I told you earlier that 
the NFIP puts things into 30 risk categories, with 1 being the 
lowest risk, and 30 being the highest, and then averages that. 
The private sector is going to come in and take 1 through 14, 
leaving the NFIP with 15 through 30, the most risk. So the NFIP 
is going to have almost the same risk but much less revenue. So 
the situation is going to get worse for the NFIP. It is going 
to let the private sector cherry-pick the most profitable 
policies that are out there.
    What is needed is to give the private sector the 
responsibility to handle the entire problem, which is price all 
of the policies. There is always going to be an issue with 
affordability, right? There is just no way around it. But you 
can't have affordability addressed through the insurance 
pricing system. When you underprice insurance, you create 
incentives for people to invest badly. You invest in areas 
where it is not sustainable. It is critical to have risk-based 
pricing.
    It is also critical to have financial assistance delivered 
in the form of loss mitigation. Instead of giving people a 
grant to pay for the insurance, give them money to mitigate 
their homes so that they are less exposed to flood. Reduce the 
cost of flood insurance by reducing the exposure. That is where 
the target of Federal expenditure should be. The delivery of 
the insurance should be in the private sector.
    Mr.  Green. Thank you.
    I will yield back the balance of my time.
    Chairman  Luetkemeyer. The gentleman yields back.
    With that, I recognize the gentleman from Florida, Mr. 
Murphy, for 5 minutes.
    Mr.  Murphy. Thank you, Mr. Chairman, and thank you, 
Ranking Member Cleaver, for today's hearing.
    And Ranking Member Waters, thank you for your leadership on 
this.
    And, Mr. Ross, who has now left, I thank him as well for 
his cooperation, working in a bipartisan manner to make some 
progress here.
    And I very much appreciate the input of all the panelists 
today, the witnesses, for this important discussion, hearing 
all your comments, all your thoughts.
    The bottom line is, how can we provide more affordable 
flood insurance options for people all across the country? This 
legislation that we are discussing, the Flood Insurance Market 
Parity and Modernization Act, which I have sponsored with my 
good friend and fellow Floridian, Mr. Ross, aims to do just 
that.
    This Act would provide more choice, greater competition, 
and less cost in the flood insurance market. It would 
accelerate the development of more flood insurance options by 
allowing policies accepted by the State to satisfy mandatory 
coverage requirements under the NFIP.
    Now, when Congress passed the National Flood Insurance Act, 
its intention was that insurance companies would provide flood 
insurance coverage for the American people. And when the 
legislation that was recently updated under the Biggert-Waters 
Flood Insurance Reform Act of 2012, that intention was, in 
fact, reaffirmed.
    However, due to the, I would say, lack of legal clarity on 
the particulars of the insurance policies allowed into the 
program, most lenders have not accepted private flood insurance 
to meet mandatory coverage requirements.
    This bill would solve this problem by providing a simple 
and clear definition of private flood insurance accepted for 
the mandatory coverage under the program, consistent with the 
successful regulation of other forms of insurance in the 
marketplace--that which is issued by an insurance company 
licensed, admitted, or otherwise approved to engage in the 
business of insurance in the State in which the property is 
located.
    I believe there will always be a need for the NFIP, but 
there is more than enough flood risk out there that can be 
written right now by the private insurers that are willing to 
do so, whose capability will only continue to advance with the 
growth of new technology and modeling.
    Ensuring access to private flood insurance choices will 
help reduce the risks to which taxpayers are exposed under the 
Federal program. And especially because flood insurance 
coverage is mandatory in many areas, customers need more 
competition and options in the flood market to make it more 
affordable.
    So I ask that my colleagues on both sides of the aisle 
support this legislation to give our people, our constituents 
more choice, greater competition, and ultimately less costs 
when it comes to flood insurance.
    I came to Congress, as did most of us here, to work with 
everyone, no matter what the party affiliation, and to solve 
problems. I think this legislation is one example of an area we 
can actually make some progress in this last year of this 
Administration, and I urge my colleagues to do so.
    In my remaining time, a question for Mr. Kelley: One topic 
of discussion that we had in this conversation, writing this 
legislation dealt with surplus lines and their role in this. 
Approximately how many surplus lines, if you know off the top 
of your head, flood insurance policies, in Florida have been 
accepted for the purposes of NFIP mandatory purchase?
    Mr.  Kelley. I have the Florida data here somewhere. I have 
it combined with six States, actually.
    In 2014, $134.1 million worth of flood insurance premium 
written in those six big States: Florida, California, Texas, 
New York. $32.9 million of that, 24 percent of that, covers 
residential property. And of that category, only about 29 
percent represents primary coverage, the balance being excess 
coverage on a personal residence.
    So it is still a relatively small share of the overall 
surplus lines market. It is less than 1 percent of the $40 
billion market nationwide.
    Mr.  Murphy. Okay.
    Mr. Birnbaum, in your opinion, how does this differ from 
homeowners insurance? Both seem to be intended for the same 
thing, where that is protecting the loan in an event of a 
disaster. How do you see the difference?
    Mr.  Birnbaum. I don't. That is why our proposal is to 
require that the homeowners insurance policy cover the peril of 
flood. That would deliver that coverage far more efficiently 
than through the requirement of a second policy. It would mean 
that everybody gets the coverage that they expect and pay their 
fair share for that coverage than under the current system.
    And private flood is already being provided by the admitted 
market to a greater extent than the surplus lines market. As I 
mentioned earlier, force-placed flood--there is more force-
placed flood written by admitted carriers than the surplus 
lines numbers that Mr. Kelley described.
    So it is not as if it is unfeasible for admitted carriers 
to write flood. It is feasible. The question is, what is the 
best way to nudge the private market into this? And, in my 
view, the best way is to require the coverage of flood in those 
homeowners and commercial property policies, because that 
accomplishes a variety of things, including problems with the 
NFIP as well as fairness issues and promoting loss mitigation.
    The problem with H.R. 2901 is it addresses a very narrow 
issue but can create problems in other areas of the flood 
program.
    Mr.  Murphy. Thank you.
    Chairman  Luetkemeyer. The gentleman's time has expired.
    We are going to go for a second round. I think everybody 
has maybe just one or two questions, so it shouldn't be too 
long. We do have votes coming up here shortly.
    So, with that, we will go to the gentleman from Kentucky, 
Mr. Barr. You are recognized for 5 minutes.
    Mr.  Barr. Thank you, Mr. Chairman.
    Just to follow up on an issue, there is a pretty good 
consensus here that we need to incentivize more private 
participation in flood insurance, obviously. But beyond the 
Ross-Murphy approach to bring in more surplus lines, companies 
that write NFIP policies currently have to sign this noncompete 
clause, which pushes these companies to the sidelines in terms 
of developing and offering private flood insurance policies.
    For any of the witnesses who are interested in this, would 
you support language in H.R. 2901 or other legislation that 
would eliminate this noncompete clause that is currently 
required by FEMA?
    Mr.  Birnbaum. The answer to the question is, you can't 
eliminate the noncompete clause without doing anything else. 
Because if you eliminate the noncompete clause, then you have a 
situation where the company is selling policies for FEMA and 
also selling its own flood policies.
    So what the company will do is it will make its evaluation 
of what the riskiest policies are and give those to FEMA, and 
keep the most profitable ones or the least risky ones. So what 
you have is essentially adverse selection. So there is a reason 
why there is a noncompete clause.
    That is an example of, well, we will try to address one 
narrow issue without looking at the broader problem. You really 
need a comprehensive approach. And the comprehensive approach 
is the private market provides flood as part of the residential 
and commercial property insurance, subject to the standard 
State-based regulation; the NFIP transforms to a catastrophic 
reinsurer role.
    And that enables all of the players to participate--private 
markets, the State-based regulators, alternative capital. And 
it puts the Federal Government in a role of focusing on loss 
mitigation, which is the long-term solution to addressing flood 
problems.
    Mr.  Barr. I would love Mr. Kelley to respond. But it seems 
like, in advocating the TRIA model, you are avoiding this 
adverse selection, cherry-picking issue, but you still have a 
Federal backstop in either model. And I am just wondering which 
is the better model?
    Mr. Kelley, do you want to weigh in on that?
    Mr.  Kelley. Just to respond to the write-your-own 
prohibition, I agree with your point, Congressman. I think that 
is one barrier that we are seeing to the standard market 
stepping in. If they are already involved in the write-your-own 
program, they can't offer their own standalone program.
    We haven't taken an association position on that. That has 
not been an issue we have really focused on. But it clearly is 
a barrier that I think would get more standard carriers 
involved if it weren't there.
    Mr.  Barr. Ms. Miller, do you have any thoughts?
    Ms.  Miller. Congressman, we also are in the same position. 
The NAIC hasn't taken a look at this issue. I think it is one 
of the issues that, as we look at the NFIP and potential 
recommendations we would make to modify that program, this 
would be one of the things we would look at.
    But I do think it is a very interesting issue to look at. I 
think, from our perspective, H.R. 2901 would be a great first 
step. And if we could do that quickly, then I think having the 
conversation about changes to NFIP would make a lot of sense, 
as well.
    Mr.  Barr. Let me just follow up with one final question. 
Mr. Birnbaum is making the argument that the Ross-Murphy bill 
would actually exacerbate the financial solvency problems of 
the NFIP.
    I think we all agree that we don't want to get the NFIP in 
more financial distress than it already is. So, as advocates of 
the Ross-Murphy approach, do any of you all--Ms. Miller, Mr. 
Bradshaw, Mr. Kelley--want to address that issue?
    Ms.  Miller. I would be happy to.
    I think the issue of cherry-picking is certainly a concern 
and something that we would recommend monitoring going forward.
    But, right now, as I have said a few times, this market is 
very small. There is just too little data, I think, at this 
point, to know how the market is going to react going forward. 
So, from our perspective, if this bill were enacted sooner 
rather than later, I think it would give us a chance to get 
more data and really observe how this market is going to 
perform going forward.
    And I think that does a couple of things. I think, one, it 
gives us--and all of us who are going to be looking at the 
NFIP, it will give us more information to inform potential 
changes to that program. But, also, from a State regulators 
perspective, I think if we had more data, it will help us as we 
look forward and think about ways we might need to change our 
regulation to address this evolving market.
    But I think, from our perspective, I certainly wouldn't 
want concerns about cherry-picking to get in the way of us 
providing more options for consumers in this market.
    Mr.  Barr. Mr. Kelley?
    Mr.  Kelley. And I think back to that 1-percent category of 
properties. We have to admit, no one is lining up to write 
those right away. And the thought of actually adding those 
types of coverages, add a flood peril to that general 
homeowners policy, that is going to price them out of their 
home, in our opinion.
    So if we can focus on at least shifting some of the burden 
out of the Program, you at least reduce the overall risk. That 
leaves you with, then, the category of the highest-risk 
properties that perhaps a residual market is there to figure 
out. And it, in our mind, would allow the NFIP then to focus on 
what do you do about mitigating that risk, what do you do about 
preventing flood damage in those areas.
    Mr.  Birnbaum. I just need to jump in quickly and say it is 
absolutely crystal clear that this bill would allow surplus 
lines and encourage surplus lines insurers to cherry-pick. It 
is as obvious as the nose on your face. The only policies that 
the surplus lines writers would do are the ones that they view 
as profitable.
    The NFIP has a variety of policies, ranging from less 
profitable to more profitable, and what will happen is they 
will be left with the less profitable policies, the highest-
risk policies, and less revenue to do it.
    There is no question this bill will lead to greater 
financial problems for the NFIP. And I am really surprised that 
the other panelists are not acknowledging that.
    Mr.  Barr. I yield back.
    Chairman  Luetkemeyer. The gentleman's time has expired.
    With that, we will go to the ranking member, the gentleman 
from Missouri, Mr. Cleaver, for some follow-ups.
    Mr.  Cleaver. Thank you, Mr. Chairman. And, again, before 
we close out, I want to thank you for the vision of trying to 
get this done much earlier than we normally try to get critical 
legislation through.
    I just have one question. My son is in school outside of 
Los Angeles, and I go out and I see all of these houses built 
on cliffs. That's like saying, ``I dare you to rain and wash my 
house down the cliff.'' And because I am on this subcommittee, 
I am always angry, driving through there, and saying little 
words as I drive.
    But those are usually wealthy people. The chairman and I 
and Ms. Waters, we were in the Ninth Ward just a few months 
ago, and Ranking Member Waters and I were there just a few 
weeks after Katrina. I had a son in college down there at the 
time. And it was just decimated. And the actor from Missouri, 
Brad Pitt, raised a lot of money, and they rebuilt the Ninth 
Ward. Most of the houses are now on stilts. But the people are 
still there. And these are not rich people; these are poor 
people. That ward was and still remains a low-income ward, 
although the people go to work every day.
    So would any of you believe that it is practical to expect 
that poor residents, low-income residents, could actually pay 
the full risk rate for private insurance? Or do they get left 
out?
    Mr.  Birnbaum. The answer to that is they can't pay the 
full risk rate if there is no loss mitigation. If they are in a 
high-risk area and they are paying the full risk rate, then, 
no, they are not going to be able to afford it. But they 
wouldn't be able to afford a surplus lines policy either.
    But the question is then, where do you want to spend your 
Federal dollars? Do you spend your Federal dollars to subsidize 
that policy, or do you spend your Federal dollars on loss 
mitigation that reduces the exposure for that homeowner and 
thereby reduces the premium?
    If you just simply subsidize the rate, then you set the 
table for future claims, repetitive claims. If you spend the 
Federal dollars instead as an investment in loss mitigation, 
then you reduce that exposure, reduce the claims down the road, 
you reduce the disaster relief.
    So the model has to be: Let's spend Federal dollars on loss 
mitigation as a way to make the insurance more affordable 
instead of subsidizing the rates. That is not a long-term 
solution. Subsidy is not a long-term solution. Loss mitigation 
investments are.
    Mr.  Cleaver. Yes, that would be a FEMA issue and not 
necessarily one that we would have to deal with, the mitigation 
issue.
    Mr.  Birnbaum. They go together, Congressman. You can't 
tell the NFIP to offer subsidized rates and then say, invest in 
loss mitigation.
    Mr.  Cleaver. They do in the real world. But this isn't the 
real world. I would like for it to be, but that is just not the 
way it is. I understand exactly what you are saying, and I 
agree with what you are saying, if we were in the real world.
    Mr.  Birnbaum. You have the power to create that real 
world.
    Mr.  Cleaver. Thank you.
    Mr. Bradshaw?
    Mr.  Bradshaw. Just very quickly, as you know, Congressman, 
there has been a huge investment in the levee system in New 
Orleans, which we appreciate significantly. There was a huge 
modernization of the levee system in New Orleans. So when you 
live behind a dam, you have to be always conscious and always 
vigilant if the dam starts leaking.
    So the National Flood Insurance Program is a very important 
program in order to help those folks who do need help to 
maintain affordable housing. We are very much in favor of that.
    Mr.  Cleaver. Thank you.
    Thank you, Mr. Chairman.
    Chairman  Luetkemeyer. The gentleman yields back.
    With that, I have just a couple of follow-ups.
    Mr. Kelley, during the course of the discussion, you 
indicated that we have 1 percent of the policyholders who 
create 30 percent of the loss. Mr. Birnbaum has been talking 
about those guys and how do you adequately rate those folks, 
how do you fund them, how do you not fund them. His suggestion 
is you, through mitigation, take that 1 percent and reduce it 
down as much as you can, I guess.
    So my question is, do you believe--because today we are 
talking about how we can shift from what we have now to a more 
private market solution. Do you believe that if you take that 1 
percent out, the other 99 percent of the policies can 
actuarially be structured so that those 99 percent can afford 
the coverage and take care of that other 70 percent of the 
risk?
    Mr.  Kelley. I wish I could answer that question. I am not 
the actuary in the room. I think there is a large percent of it 
that you can. What percentage, I can't quote you.
    Chairman  Luetkemeyer. Because it would seem to me that 
would be a key point. Because if you have 1 percent causing 30 
percent of the problems, that is the group that is causing your 
headaches. That is where your risk is. So if you can take the 
other 70 percent of the risk and divide it among the 99 percent 
of the policyholders, you would appear to me to be able to find 
a way to fund this that would be affordable.
    So my next question would be, as someone who represents the 
industry and sees opportunity, how long do you think it would 
take for the market to transition from where we are to where 
they would be willing to take this 99 percent of the 
policyholder risk on?
    Mr.  Kelley. Let me start by saying it is going to take 
that transition to figure out how much of the 99 percent can 
transition. But that is going to take some time--
    Chairman  Luetkemeyer. We have a transition period, but how 
long do you think it would take?
    Number one, is there a willingness within your companies 
and the capacity to take this on in a 2-year, 5-year, 10-year, 
20-year window? What would you anticipate being something that 
would be reasonable for the companies to be able to do their 
due diligence, get their mapping correct, get their modeling 
correct so that they could see where they could come in, make 
it a part of the homeowners policy, as Mr. Birnbaum suggested, 
which I, quite frankly, like? How long do you think it would 
take?
    Because one of the concerns that we have as a committee is, 
if we are going to try to go from here to there, we need to 
have an idea time-wise. And the testimony today is very 
important to us to be able to do that. And I am not going to 
hold you to it, but it certainly gives us a guideline to begin 
discussions.
    Mr.  Kelley. I would say that there is capacity already 
there. As the Commissioner already testified, most of what we 
are seeing transition out of NFIP is to surplus lines carriers 
now. So there is capital there. There is a lot of capital in 
surplus lines.
    But, long term, our model--we wouldn't expect that business 
would stay in surplus lines for a very long time. Many types of 
coverages evolve out of surplus lines into the standard market. 
That is how the model works. That is how the market should 
work.
    Chairman  Luetkemeyer. What you are saying is eventually it 
would go into Mr. Birnbaum's model of being a part of the 
homeowners policy itself?
    Mr.  Kelley. I think you are. Eventually, as the standard 
market does their own investment in technology and modeling and 
expertise with the risk, I think you will see many of them 
start to add that peril to their standard homeowners policies. 
It is that time between now and then that our market acts as 
the residual market.
    Chairman  Luetkemeyer. Okay. Thank you.
    Let me yield to the gentleman from New Jersey, Mr. Garrett, 
for 5 minutes.
    Mr. Garrett. Thank you. And I won't use the whole time.
    I thank the panel. We have been following some of your 
testimony back in the office. So just to play off of your 
points, I guess I will throw it out to Mr. Kelley, and I know 
it is in some sense putting you on the spot as trying to be the 
actuary in the room. And what do they say about actuaries? 
Those are the people who found being a CPA was just too 
exciting? Something like that.
    So, in any event, the question that you posited is what? If 
you did it what a 1 percent, 99 percent, what would the 
situation look like, and your answer was that you couldn't 
exactly say for sure. But I am guessing that if you did it that 
way, that for the 99 percent--and anybody else can chime in on 
this--it would be a more favorable rating structure for them 
than it is right now, right?
    So, in New Jersey, if I am in, I am not, but if I am in 
that 99 percent right now after the last go-around with the 
maps and what have you, I am seeing my rates go so high that I 
am having to sell my place, is what--not me, but the people 
back in Jersey are finding that. If you went to this 1 to 99 
situation, theoretically my premiums might be more reasonable. 
Do you want to--
    Mr.  Birnbaum. Yes, I don't think so.
    Mr.  Garrett. Mr. Birnbaum, too.
    Mr.  Birnbaum. I don't think that--
    Mr.  Garrett. Is that true or not?
    Mr.  Birnbaum. Here are the facts. There are 5.2 million 
NIFP policies, and there is well over a million that are 
subsidized. And the exact number isn't known because there are 
a bunch of policies that not only are Pre-FIRM subsidized but 
also grandfathered--
    Mr.  Garrett. Right.
    Mr.  Birnbaum. --subsidized.
    Mr.  Garrett. Good point.
    Mr.  Birnbaum. So you are talking about 20 to who-knows-
what percent of the policies are subsidized. So to suggest that 
if we take out the 1 percent somehow that all of a sudden it 
has become affordable for the 20 or the 30 percent where it is 
currently subsidized, that is just not going to happen.
    So you cannot create affordability strictly through the 
insurance pricing mechanism.
    Mr.  Garrett. So--
    Mr.  Birnbaum. There is always going to be a situation 
where some consumers can't afford a risk-based price. And you 
need some assistance from outside the system. We don't--for 
example--
    Mr.  Garrett. That gets to the second point of the 
question. Because I get that, but then perhaps some of those 
people are living in areas that maybe are just not a risky or 
an overly risky place to be. And that has to be taken into 
consideration as well.
    Does anyone think that there would be a difference if you 
go to that direction, either 100 percent or 1 to 99 percent, as 
far as the mitigation? And I heard some of the talk before as 
the necessity for mitigation, would there be a change in the 
mitigation processes on the private sector versus the public 
way that we do it right now?
    Mr.  Birnbaum. Oh, absolutely, Congressman. If--
    Mr.  Garrett. For the better?
    Mr.  Birnbaum. Yes. If the private sector were responsible 
for flood insurance as part of the homeowners policy, they 
would have an incentive for loss mitigation that they simply 
don't have right now.
    Mr.  Garrett. Okay.
    Mr.  Birnbaum. So you would see things like partnerships 
for loss mitigation. You might see multiyear homeowners 
policies where the loss mitigation is financed with a loan that 
is paid for from the discounts.
    Mr.  Garrett. Okay.
    Mr.  Birnbaum. There are opportunities for innovation that 
simply aren't going to occur by saying, let's hope the private 
sector gets involved if the surplus lines puts its toes in the 
water.
    Mr.  Garrett. With that, I am going to yield back. I see I 
am over time.
    Chairman  Luetkemeyer. Mr. Bradshaw would like to respond.
    Mr.  Garrett. Oh, sure.
    Chairman  Luetkemeyer. Go ahead.
    Mr.  Bradshaw. Just a really quick response. Of course we 
now experience 5 percent named storm deductibles in hazard 
insurance in our particular marketplace. And so we continue to 
have that risk. And as a lender then we accept part of that 
risk. And that is typically what we are seeing unless you buy 
down to a 2 percent named storm.
    Now, that is not flood insurance, but that is the hazard 
insurance. And there is not much loss mitigation on hurricanes.
    Mr.  Garrett. I thank the Chair.
    Chairman  Luetkemeyer. Just as a follow-up comment to Mr. 
Birnbaum's point, I think if you wind up with the private 
insurers trying to figure out what to do with the 1 percent and 
say you can incentivize that group for mitigation by saying if 
you do these things, we will drop your premium, and therefore 
you can have an impact in that way, I believe, as well.
    So, it is a fantastic and a fascinating conversation we 
have had this morning. And I certainly want to thank all of the 
witnesses. You have answered a lot of the questions that we 
have had. You have given us a lot of food for thought. You have 
kind of broadened our scope of what we are trying to find here 
and trying to look to do.
    Trying to see once how we restructure the program, what we 
can do, what the private sector is willing to do, how different 
innovations can be a part of this. Regulatory-wise how this can 
be overseen to make sure that the consumers are protected yet 
there is adequate provisions in policies that--to provide 
coverages that are real and meaningful. So, I thank all of you.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And with that, the hearing is adjourned.
    [Whereupon, at 11:26 a.m., the hearing was adjourned.]

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