[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
FLOOD INSURANCE REFORM:
A COMMUNITY PERSPECTIVE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
HOUSING AND INSURANCE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
MARCH 16, 2017
__________
Printed for the use of the Committee on Financial Services
Serial No. 115-5
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PETER T. KING, New York MAXINE WATERS, California, Ranking
EDWARD R. ROYCE, California Member
FRANK D. LUCAS, Oklahoma CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina NYDIA M. VELAZQUEZ, New York
STEVAN PEARCE, New Mexico BRAD SHERMAN, California
BILL POSEY, Florida GREGORY W. MEEKS, New York
BLAINE LUETKEMEYER, Missouri MICHAEL E. CAPUANO, Massachusetts
BILL HUIZENGA, Michigan WM. LACY CLAY, Missouri
SEAN P. DUFFY, Wisconsin STEPHEN F. LYNCH, Massachusetts
STEVE STIVERS, Ohio DAVID SCOTT, Georgia
RANDY HULTGREN, Illinois AL GREEN, Texas
DENNIS A. ROSS, Florida EMANUEL CLEAVER, Missouri
ROBERT PITTENGER, North Carolina GWEN MOORE, Wisconsin
ANN WAGNER, Missouri KEITH ELLISON, Minnesota
ANDY BARR, Kentucky ED PERLMUTTER, Colorado
KEITH J. ROTHFUS, Pennsylvania JAMES A. HIMES, Connecticut
LUKE MESSER, Indiana BILL FOSTER, Illinois
SCOTT TIPTON, Colorado DANIEL T. KILDEE, Michigan
ROGER WILLIAMS, Texas JOHN K. DELANEY, Maryland
BRUCE POLIQUIN, Maine KYRSTEN SINEMA, Arizona
MIA LOVE, Utah JOYCE BEATTY, Ohio
FRENCH HILL, Arkansas DENNY HECK, Washington
TOM EMMER, Minnesota JUAN VARGAS, California
LEE M. ZELDIN, New York JOSH GOTTHEIMER, New Jersey
DAVID A. TROTT, Michigan VICENTE GONZALEZ, Texas
BARRY LOUDERMILK, Georgia CHARLIE CRIST, Florida
ALEXANDER X. MOONEY, West Virginia RUBEN KIHUEN, Nevada
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana
Kirsten Sutton Mork, Staff Director
Subcommittee on Housing and Insurance
SEAN P. DUFFY, Wisconsin, Chairman
DENNIS A. ROSS, Florida, Vice EMANUEL CLEAVER, Missouri, Ranking
Chairman Member
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
STEVAN PEARCE, New Mexico MICHAEL E. CAPUANO, Massachusetts
BILL POSEY, Florida WM. LACY CLAY, Missouri
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
STEVE STIVERS, Ohio JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
KEITH J. ROTHFUS, Pennsylvania JOHN K. DELANEY, Maryland
LEE M. ZELDIN, New York RUBEN KIHUEN, Nevada
DAVID A. TROTT, Michigan VICENTE GONZALEZ, Texas
THOMAS MacARTHUR, New Jersey
TED BUDD, North Carolina
C O N T E N T S
----------
Page
Hearing held on:
March 16, 2017............................................... 1
Appendix:
March 16, 2017............................................... 37
WITNESSES
Thursday, March 16, 2017
Berginnis, Chad, Executive Director, Association of State
Floodplain Managers............................................ 8
Hecht, Evan, Chief Executive Officer, the Flood Insurance Agency. 9
Luckman, Melissa H., Director, Disaster Relief Clinic, Touro Law
Center......................................................... 5
Terchunian, Aram V., Coastal Geologist and Environmental
Scientist...................................................... 6
APPENDIX
Prepared statements:
Berginnis, Chad.............................................. 38
Hecht, Evan.................................................. 58
Luckman, Melissa H........................................... 73
Terchunian, Aram V........................................... 85
Additional Material Submitted for the Record
Duffy, Hon. Sean:
Written statement of CIAB, IIABA, NAIFA, and PIA............. 93
Written statement of the Consumer Mortgage Coalition......... 100
Written statement of the National Association of Mutual
Insurance Companies........................................ 113
Written statement of the Property Casualty Insurers
Association of America..................................... 116
Cleaver, Hon. Emanuel:
Written statement of the National Association of Federal
Credit Unions.............................................. 124
Green, Hon. Al:
Written statement of the Greater Houston Partnership......... 126
Written statement of the Houston Association of REALTORS.... 127
Written statement of the City of Houston..................... 128
Written statement of the Communications Workers of America,
AFL-CIO.................................................... 129
Written statement of the Harris County Flood Control District 130
Hecht, Evan:
Written responses to questions for the record submitted by
Representative Duffy....................................... 132
FLOOD INSURANCE REFORM:
A COMMUNITY PERSPECTIVE
----------
Thursday, March 16, 2017
U.S. House of Representatives,
Subcommittee on Housing
and Insurance,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 3:21 p.m., in
room 2128, Rayburn House Office Building, Hon. Sean P. Duffy
[chairman of the subcommittee] presiding.
Members present: Representatives Duffy, Ross, Royce,
Pearce, Posey, Luetkemeyer, Stivers, Hultgren, Rothfus, Zeldin,
Trott, MacArthur, Budd; Cleaver, Velazquez, Capuano, Sherman,
Beatty, Delaney, and Gonzalez.
Ex officio present: Representatives Hensarling and Waters.
Also present: Representative Green.
Chairman Duffy. The Subcommittee on Housing and Insurance
will come to order. Today's hearing is entitled, ``Flood
Insurance Reform: A Community Perspective.'' Without objection,
the Chair is authorized to declare a recess of the subcommittee
at any time. Also, without objection, members of the full
Financial Services Committee who are not members of this
subcommittee may participate in today's hearing for the
purposes of making an opening statement and questioning the
witnesses.
The Chair now recognizes himself for 3 minutes for an
opening statement. I want to welcome our members, witnesses,
and audience to the Housing and Insurance Subcommittee's second
hearing in as many weeks on the National Flood Insurance
Program (NFIP). On Thursday, we had a productive discussion
with Roy Wright to get FEMA's perspective on the NFIP. Today,
we will get a community perspective. We are joined by four
great witnesses, each of whom comes with a different set of
experience and expertise.
In what 60 Minutes dubbed, ``The Storm After the Storm,''
more than 140 NFIP policyholders who submitted flood claims due
to damages caused by Superstorm Sandy were told by FEMA that
they could have their claim files reviewed. FEMA's
unprecedented Sandy claims review process was prompted, at
least in part, by a Federal judge's finding of reprehensible
gamesmanship by a professional engineering company that may be
widespread. As a result of the claims review process, and with
legal help from people like Melissa Luckman, nearly 82 percent
of the claims closed by FEMA received additional payment of
nearly $185 million. I look forward to hearing from Ms. Luckman
about the process and ways that Congress can help prevent
situations like this from ever happening again in the future.
I also look forward to hearing from Mr. Terchunian, who has
decades of experience in coastal hazard area management and
coastal property protection on Long Island, which was also hit
especially hard by Superstorm Sandy. I hope that he and Mr.
Berginnis can share their views on floodplain management and
mitigation, which we know from last week's hearing, can save
taxpayers $4 for every $1 of investment.
Finally, we need to look beyond the NFIP monopoly to a
robust private market that can better serve communities through
competitive rates and services. Mr. Hecht's company is the
largest writer of private insurance in the country, and we will
be looking to him to share his views on how to do just that.
I now recognize the gentleman from Missouri, the ranking
member of the subcommittee, Mr. Cleaver, for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman. Late last week, we
held a hearing on FEMA's perspective on the National Flood
Insurance Program, gaining, I think, some important insight
from Mr. Roy Wright. I would encourage the committee to
continue engaging with FEMA as we move forward towards flood
insurance reauthorization. This is especially important as the
President's Fiscal Year 2018 budget contained significant cuts
and changes to FEMA. It is extremely disappointing to see that
the President's budget would eliminate discretionary funding
for FEMA mapping and mitigation activities. If anything, we
should be increasing congressional support for these vital
activities.
Today, we will hear the community's perspective on the
NFIP, giving us a broader understanding of the challenges
facing the program and the areas in need of improvement.
Following Superstorm Sandy, which resulted in $65 billion
in damages, allegations began to surface regarding the
underpayment of policyholder claims, fraud, and altered
engineering reports. As homeowners slowly recover from Sandy,
we must continue to hold those who did wrong accountable for
their actions.
Now, I am extremely encouraged that this committee is
working and is committed to working on NFIP reauthorization,
and as this discussion continues, we must do so with a goal of
ensuring affordability of flood insurance premiums for our
constituents. The program does little good if consumers are
priced out of the market and priced out of homes. I would like
to yield the last minute to the gentleman from California, Mr.
Sherman.
Mr. Sherman. I thank the ranking member. I just want to
join with him in my concern about this idea of cutting the
budget for the mapping program. The idea that mapping is not an
appropriate Federal Government expenditure would come as news
to Thomas Jefferson, who sent Meriwether Lewis and William
Clark to map the Louisiana Purchase. If it was a good
expenditure of Federal funds then, and I think it was, then it
is a good expenditure that benefits all Americans. If your home
isn't on the map, that is also useful information. But more
importantly, the mapping process, the insurance process, is
designed to reduce the future supplemental appropriations when
we have the next disaster, and with global warming, there will
be more weather disasters and flood disasters. So if we can
have an effective Flood Insurance Program that starts with
mapping, we can avoid the huge supplemental appropriations. And
so many Members come and pound the table and say the Federal
Government shouldn't be subsidizing, shouldn't be doing this,
and yet I see them on the Floor when we have a real disaster
and millions of Americans are uninsured, and they are voting
for the supplemental appropriation as we all do, because we all
have a heart. I yield back.
Chairman Duffy. The gentleman yields back. The Chair now
recognizes the gentleman from Florida, Mr. Ross, the vice
chairman of the subcommittee, for 2 minutes.
Mr. Ross. Thank you, Mr. Chairman, and thank you for
calling this important hearing. As we continue our efforts to
reauthorize and reform the National Flood Insurance Program
before September 30, 2017, we have a lot on our plate, and we
are glad that you are here to help us try to solve some of
these issues.
The NFIP provides flood insurance coverage to more than 5
million policyholders across the Nation. At the same time, it
faces serious financial challenges as it is nearing $25 billion
in debt. As a result, the Government Accountability Office
(GAO) has considered the program to be a high-risk since 2006.
Damage from flooding has become more frequent and more severe
over the past 2 decades despite the NFIP floodplain management
efforts. Also, homeowners with NFIP policies have been left
with more questions than answers about how their families can
rebuild and recover from recent catastrophic storms. As this
committee and Congress as a whole moves forward with flood
insurance reforms, we must do so with homeowners in mind across
the country.
Severe storms transcend the typical partisan divisions we
see on Capitol Hill. On this issue, Congress must move beyond
political differences and put forward critical NFIP reforms to
protect taxpayers and improve the program now, and very
definitely for the future.
As a Member of Congress from Florida, I am committed to
ensuring that property owners have uninterrupted access to
affordable flood insurance products which allow them to recover
from devastating storms more quickly. I am also committed to
ensuring that homeowners and communities have opportunities to
mitigate against flood risks prior to a disastrous weather
event. Mitigation is one of the best avenues that we can
pursue.
Thank you again, Mr. Chairman, for calling this important
hearing, and I am excited about this opportunity to receive
testimony from this diverse panel of witnesses. I yield back
the balance of my time.
Chairman Duffy. The gentleman yields back. We now welcome
our witnesses today. For introductions, first we have Ms.
Melissa Luckman. Ms. Luckman is the director of Touro Law
Center's Disaster Relief Clinic, which provides pro bono legal
services to Sandy victims. For over 4 years, Ms. Luckman has
been helping homeowners navigate the NFIP's process, seeing the
program from the perspective of the policyholder. The Law
Center has helped put over $2.3 million back into the Long
Island community as a result of their work.
I now recognize the gentleman from New York, Mr. Zeldin,
for the introduction of Mr. Terchunian.
Mr. Zeldin. Thank you, Mr. Chairman. It is my pleasure to
introduce to the Housing and Insurance Subcommittee today Mr.
Aram Terchunian. He is a resident of New York's First
Congressional District, and has over 30 years of experience in
storm mitigation and costal restoration work. His company,
First Coastal, deals with the NFIP on a daily basis, helping
homeowners navigate the complicated process and red tape they
face when seeking an improvement in their premiums after an
investment has been made to elevate a home or take other steps
to protect a property. He is also the wildlife commissioner of
the Village of West Hampton Dunes, a coastal community where
storm mitigation is top priority. Many homeowners rely on the
National Flood Insurance Program. I thank Aram for being here
today to share his experience and perspective with our
subcommittee on this important topic, and I yield back.
Chairman Duffy. Our next witness is Mr. Chad Berginnis, the
executive director of the Association of State Floodplain
Managers, also from the great State of Wisconsin. With nearly
25 years of experience, he is a nationally recognized expert in
natural hazard management, flood-loss reduction, and land use
planning at the State, local, and private sector level.
Welcome.
I now want to recognize, Mr. Ross, our vice chairman, for
the introduction of Mr. Hecht.
Mr. Ross. Thank you, Mr. Chairman. And it is my pleasure to
introduce to the Housing and Insurance Subcommittee Mr. Evan
Hecht, the founder and CEO of the Flood Insurance Agency, which
is based in Gainesville, Florida. They wrote their first
private flood insurance policy in our State on October 24,
2013. Today, they have over 3,285 active private flood market
policies in Florida. Visiting your company's website, I am very
impressed with the positive response your flood insurance
policies have received. Florida homeowners deserve more choices
when it comes to flood insurance. I am excited for the
subcommittee to receive your testimony and for you to be able
to provide a perspective outlining the unique needs of our
State and the benefits homeowners can receive from an increase
in private flood options. Thank you, Mr. Hecht, for joining us,
and I yield back the balance of my time.
Chairman Duffy. The gentleman yields back. The witnesses
will now be recognized for 5 minutes to give an oral
presentation of their testimony. And without objection, the
witnesses' written statements will be made a part of the
record. Once the witnesses have finished presenting their
testimony, each member of the subcommittee will have 5 minutes
within which to ask the panel questions.
On your table, there are three lights: green means go;
yellow means you have one minute left; and red means your time
is up.
With that, Ms. Luckman, you are now recognized for 5
minutes for your oral presentation.
STATEMENT OF MELISSA H. LUCKMAN, DIRECTOR, DISASTER RELIEF
CLINIC, TOURO LAW CENTER
Ms. Luckman. Good afternoon, Chairman Duffy, Ranking Member
Cleaver, and members of the subcommittee. My name is Melissa
Luckman. I am the director of the Touro Law Center Disaster
Relief Clinic. While we assist homeowners with various
categories of assistance, flood insurance has always been our
primary focus. I want to thank you for the opportunity to
testify about the National Flood Insurance Program, and to
provide suggestions for reform as we quickly approach the
September 2017 expiration of this program. To date, we have
spoken with over 5,000 households, and have represented over
1,400 homeowners with various Sandy issues. We have provided
assistance to homeowners with supplemental insurance claims,
flood insurance appeals, flood insurance litigation, and most
recently, assistance with the FEMA Sandy claims review process.
First and foremost, I would like to state that I do believe
the NFIP should be reauthorized as it provides a valuable
subsidized flood insurance policy to thousands of homeowners in
the United States. However, there must be significant reform to
ensure the program functions in a more efficient manner than it
does today. The greatest lesson learned from my involvement
with flood insurance claims is the simple concept of getting it
right from the start. It is imperative that we shift our focus
from a reactive response to proactive education to ensure a
full and complete recovery to create a more sustainable future,
not only for our country, but also for the National Flood
Insurance Program.
My proposals for reauthorization are as follows: first, I
believe there should be a standardized requirement of education
and certification for all actors connected to an NFIP policy,
which would include WYO staff adjusters, independent adjusters,
engineers, and sales agents. Standardization and continued
educational requirements for all actors engaged would implement
quality control among those participating in the NFIP.
Next, I believe there needs to be additional requirements
of policyholder acknowledgment and inspection at the inception
of an NFIP policy. In the wake of Sandy, policyholders voiced a
host of complaints with regard to their flood insurance
coverage. Those most commonly expressed were that they carried
a structure policy of $250,000 when they didn't have a
mortgage, or a mortgage of under that amount; that they
believed that they had contents coverage, which they actually
did not have; and that they were not aware of the limitations
on basement coverage. Quite often, policyholders who could
barely afford their premiums felt the cost was not worth the
coverage. A simple solution to these issues is a requirement
that all NFIP policies be accompanied by an acknowledgment
which must be executed by the policyholder and the sales agent
at the inception of a policy which speaks to these issues.
I also believe that there is a necessity for a baseline
photographic inspection which should take place at the
inception of an NFIP policy. Similar to the issuance of a
homeowner's insurance policy, there should be the requirement
of a photographic inspection completed for the property for
which flood insurance is being sought to ensure that the
information set forth in the application is correct.
With regard to the claims and appeals process, I have
proposed five reforms in my written statement, but would like
to discuss two here today.
First, I believe a policyholder should be advised in
advance who the adjusting and engineering companies will be who
will be assigned to their claim. Thereafter, the homeowner
should be afforded a reasonable opportunity to research and
investigate that company with the option to veto and request
another company be reassigned.
Second, I believe that the appeals process should be
handled by a neutral arbitrator who is not employed by FEMA.
With regard to mitigation and the increased cost of compliance,
post-Sandy, we saw two items that homeowners struggled with the
most, and that is the cost of accessibility, post elevation,
and additional costs policyholders face when complying with
local building codes. I believe that these are two very
important items that policyholders need for recovery which
could potentially be covered under ICC coverage without the
trigger of substantial damage. The hot topic post-Sandy, of
course, is litigation costs, and who covers those costs. I do
believe that policyholders who act in good faith through the
submission of a claim, throughout the appeals process, and are
forced to pursue litigation, should be compensated with
reimbursement of legal fees.
I have reviewed the recently introduced legislation by
Congresswoman Velazquez, and I believe that Congress should
pass this legislation or adopt many of these ideas into the
final reauthorization bill. That bill, and my proposals here
today, are common-sense reforms which will lead to a stronger
and more cost-effective NFIP.
To summarize my comments here today, getting it right from
the start is the key which will allow a quicker and stronger
recovery, as well as a more resilient future.
[The prepared statement of Ms. Luckman can be found on page
73 of the appendix.]
Chairman Duffy. Thank you, Ms. Luckman. The Chair now
recognizes Mr. Terchunian for 5 minutes.
STATEMENT OF ARAM V. TERCHUNIAN, COASTAL GEOLOGIST AND
ENVIRONMENTAL SCIENTIST
Mr. Terchunian. Good afternoon. My name is Aram Terchunian,
and for 35 years, I have been helping people identify coastal
risk, mitigate coastal risk, and recover and adapt when risk
becomes reality. Thank you to Chairman Duffy, Ranking Member
Cleaver, my Congressman, Lee Zeldin, and the subcommittee for
this opportunity to speak on the topic of flood insurance
reforms. Congressman Zeldin has been a true leader in working
with our communities and the U.S. Army Corps of Engineers to
help to mitigate against future disasters.
The NFIP has helped save lives, properties, and resources
through a classic carrot-and-stick program of incentives and
regulations. However, changing technology, science, and policy
have created new opportunities to improve that system. In a
nutshell, newer buildings that are constructed and maintained
to the NFIP standards and ICC building codes are experiencing
far less flooding damage than older legacy homes that do not
meet present standards. Moreover, those areas protected by
well-designed, built, and maintained flood risk reduction
projects, such as beach and dune restoration, experience
significantly less damage during extreme events.
The goal, in my opinion, is to decrease the number of pre-
FIRM substandard structures and increase flood protection and
resiliency projects. West Hampton Dunes is a small, 2-mile
village on the barrier island of Long Island. In 1992, a
coastal storm pierced the island, creating a one-mile inlet and
destroying almost 300 homes. At the time, West Hampton Dunes
was used as the poster child for how to mismanage a beach.
Today, this humble community is the blueprint for coastal
management and flood insurance modernization. It is a net
economic generator to the local, regional, and national
economy, as well as the NFIP premium pool. The barrier island
was rebuilt through a beach and dune project engineered and
supervised by the U.S. Army Corps of Engineers. The Village
then embarked upon an aggressive program of sand fencing and
beach grass planting that increased the dune. The Village also
implemented zoning measures that allowed property owners to
build as much as 4 feet above the NFIP 100-year flood level
without a zoning variance.
In the 22 years since the project was constructed, there
have been zero houses lost and only minimal flood damage
claims, even after Superstorm Sandy. This is an example of how
integrating flood protection projects with locally implemented
NFIP and zoning regulations, and locally driven beach and dune
enhancements, resulted in a resilient community that is a net
benefit to the NFIP.
Conversely, surrounding communities that did not have an
engineered flood protection project, and were populated by a
substantial number of pre-FIRM buildings, suffered terribly
during Sandy. The human anguish in these areas exceeded even
the substantial flood insurance, infrastructure, and natural
resource losses.
Local communities are incentivized if they can provide
increased flood and erosion protection to their community at
minimal cost. However, many communities do not have the
technical staff to prepare and review the community rating
system applications. Aid to those communities and simplifying
the CRS application process would benefit many policyholders at
a small cost. Rewarding communities that streamline permitting
under local zoning code when complying with NFIP flood mapping
removes a tremendous cost and time impediment for homeowners.
Pre-disaster mitigation planning is not being transformed into
mitigation projects because of a lack of funds. The effect of
recent premium increases is disproportionately impacting
middle- and lower-income families. The payback period to raise
an existing pre-FIRM home into compliance is too long. As a
result, homeowners do not elevate their homes before
experiencing flood damage. Post-disaster programs, such as the
increased cost of compliance coverage, are insufficient to
elevate a typical home on Long Island, where costs run up to
$200,000, and the program maximum is $30,000.
Simply stated, we must convert more pre-FIRM homes to NFIP-
compliant homes faster, and policyholders are the key to the
process. Homeowners will elevate and flood-proof their homes
before the flood if it is in their immediate financial
interest. The financial stick of increased premiums without a
commensurate financial carrot will not work. It is not
reasonable to expect a consumer to invest up to $200,000 for an
annual payback of $4,000 to $5,000. In summary, the NFIP plays
a critical role in protecting the citizens of our Nation. Thank
you very much.
[The prepared statement of Mr. Terchunian can be found on
page 85 of the appendix.]
Chairman Duffy. Thank you. The Chair now recognizes Mr.
Berginnis for 5 minutes.
STATEMENT OF CHAD BERGINNIS, EXECUTIVE DIRECTOR, ASSOCIATION OF
STATE FLOODPLAIN MANAGERS
Mr. Berginnis. Thank you, Chairman Duffy, Ranking Member
Cleaver, and members of the subcommittee for holding this
important hearing and inviting the Association of State
Floodplain Managers (ASFPM) to testify. I am Chad Berginnis,
executive director of ASFPM, whose 17,000 members include many
of the boots-on-the-ground State and local officials who
implement the NFIP.
I will begin by saying that the NFIP is the Nation's most
widely implemented flood risk management program. In fact, I
almost wish it had a different name because it works to reduce
risk in four important ways: making publicly available mapping
to show risk areas; community adoption and enforcement of flood
risk reduction standards; risk reducing mitigation of existing
at-risk structures; and finally, the sale of flood insurance.
The program benefits not only policyholders, but the public
and communities. For example, buildings compliant with NFIP
standards result in nearly $2 billion a year in losses avoided
nationally. The 1.2 million miles of flood mapping in the
country allow not only policyholders, but citizens, emergency
managers, planners, public works officials, and others to know
the flood risks in their areas and to take action to reduce
those risks.
Mitigation programs, increased costs of compliance, and
flood-mitigation assistance are cost-effective, resulting in $5
in benefits for every $1 invested, and have provided $1.3
billion in mitigation funds for reducing risks of thousands of
structures since 1997. These measures not only help individual
property owners, but strengthen neighborhoods and communities,
and reduce blight.
I say all of this to convince you that this nearly 50-year-
old program has very important benefits that serve taxpayers
and policyholders alike. Our written testimony offers 20
specific reform ideas, and for the balance of my testimony, I
want to highlight four of the areas that are most important to
ASFPM.
The first is to deal with the debt, and not only the
current debt, but also to create long-term solutions to ensure
that we effectively deal with catastrophic events in the
future.
The second is to reaffirm the commitment and enhance the
Flood Mapping Program. One of the most critical and important
elements of the 2012 Biggert-Waters Reform Act was the
authorization of the National Flood Mapping Program. It was the
absolute right policy, yet we have not yet finished the job of
mapping the country. Chairman Duffy, many of the flood maps in
your rural district are not modernized. The problem is that the
priorities of the mapping program to date have been to map
existing at-risk areas. As a result, mapping never gets ahead
of development, while these areas are still cornfields, and
instead, sets up a dynamic that makes everybody mad.
When development occurs, the floodplain is put on an area
by FEMA, and everybody down the line from property owners to
REALTORS to local officials are upset because they are now not
only in the floodplain, but have to deal with flood insurance
standards after the fact. We still have 2.3 million miles of
unmapped streams, rivers, and coastlines in the United States,
many residual risk areas that are not mapped, and some mapping
information that is not publicly available. We must do better
and we need your help.
The third is to strengthen the mitigation components of the
NFIP and to use them more often in a pre-disaster setting. This
is particularly true with increased cost of compliance.
Additionally, ICC should be expanded in application and scope,
including raising the maximum ICC amount, and clarifying that
it is available in addition to the maximum claim amount.
Finally, ASFPM believes there are reforms needed related to
private insurance and that they should be focused on ensuring
that other elements of the NFIP are not weakened, and that the
NFIP and private flood are on equal playing field, and that
through competition and cooperation, we grow the overall policy
base. To this end, there are two critical reforms. The first is
a requirement that all private policies sold to meet the
mandatory purchase requirement of the NFIP include an
equivalency fee that is equal to the Federal policy fee on NFIP
policies. Currently, this fee pays for 100 percent of the
floodplain management in the NFIP, and roughly 50 percent of
the mapping budget. If the NFIP ultimately loses policies due
to competition, there will be fewer resources to help
communities and States with floodplain management and mapping.
The second is a requirement that private flood insurance
policies meet mandatory purchase requirement to only be sold in
NFIP-participating communities. Currently, most communities in
the country participate in the NFIP, so while the private
market is in the early stages, let's enlist private industry to
be partners to encourage communities to stay in the program.
Because our members have enrolled nearly all of the 22,000
communities in the NFIP, we uniquely understand their reasons
for joining. The primary reason is accessibility to flood
insurance. ASFPM fears that if private flood insurance is
available with no requirement to join the NFIP, communities
could drop out of the program. Thank you for listening to our
concerns, and we will be happy to answer any questions.
[The prepared statement of Mr. Berginnis can be found on
page 38 of the appendix.]
Chairman Duffy. Thank you. The Chair now recognizes Mr.
Hecht for 5 minutes.
STATEMENT OF EVAN HECHT, CHIEF EXECUTIVE OFFICER, THE FLOOD
INSURANCE AGENCY
Mr. Hecht. Thank you, Chairman Duffy, Ranking Member
Cleaver, and members of the subcommittee. My name is Evan
Hecht, and I am the CEO of the Flood Insurance Agency. Thank
you for this opportunity to testify. The mission statement of
my company is to provide affordable flood insurance to the
maximum number of property owners and business owners in the
United States. We have been an active marketing participant of
the Write-Your-Own National Flood Insurance Program for almost
30 years. For the past 3\1/2\ years, we have underwritten and
distributed private market flood, an alternative to FEMA flood
insurance.
We are one of the largest, if not the largest, writer of
private flood insurance currently in the United States,
providing over $3.5 billion of property coverage to more than
18,500 consumers.
Private flood insurance alternatives to FEMA's NFIP have
now become commonplace. They first became available
simultaneously with the unintended consequences of the Biggert-
Waters Flood Insurance Reform Act in October of 2013. Our
company is just one private market provider, and every day, we
renew a previously written policy every 6 minutes, and we write
a new policy every 10 minutes. The general public's knowledge
of the existence of alternatives to the NFIP is readily
evidenced, considering a unique user visits our website every
52 seconds.
While it is understandable that some might believe the
private market would only want to write FEMA's best risks, and
leave all the poor risks in the NFIP, from our point of view,
almost exactly the opposite is taking place. Nearly all of our
18,500 risks were FEMA-subsidized policies, the policies FEMA
believes are 45 to 50 percent underpriced. Our risk selection
is based on reports from the GAO to Congress summarizing total
premiums received and claims paid from 1978 to 2011, comparing
actuarial results to subsidized results.
The subsidized premium increases over the past 10 years
have far outpaced the actuarial premium increases during the
same time period. I have provided three examples of actual rate
increases. An actuarially rated policy for a property in
California has increased 65 percent over 12 years, while a
subsidized rated policy written in Illinois has increased 153
percent over 11 years, and another subsidized rated policy
written in Louisiana has increased 285 percent over 10 years.
All of our 18,500 private market flood policies are written
with Lexington Insurance Company, a member of AIG, or Lloyd's
of London. Both are surplus lines insurers.
More than 2,000 of our policies are in Pennsylvania.
Pennsylvania Insurance Commissioner Teresa Miller, in her
recent letter to interagency financial regulators states: ``I
would note that even with the increased surplus lines
activities for residential coverage over the past 11 months,
the Pennsylvania Insurance Department has not received a single
complaint concerning a surplus lines carrier.''
The recent flooding in and around Baton Rouge, Louisiana,
is the fourth most costly event in the history of the NFIP, and
was a good test case for the surplus lines private flood
market--381 of our private policies suffered flood damage,
totaling over $30 million. Our average time to settle a claim
was 66 days. To the best of my knowledge, zero complaints have
been filed with the Louisiana Department of Insurance. I have
included, in my written testimony, two of the many testimonials
clients take the time to post on our website, one saving a
client enough money to stay in their home, and the second,
offering to cook us dinner due to a positive claims experience.
I urge Congress to pass the Flood Insurance Market Parity
and Modernization Act that passed the full House of
Representatives with bipartisan support during the last
session. This legislation provides much-needed clarity to
support the growth of a robust private marketplace.
I thank the members of the subcommittee for allowing me to
testify before you today. I wholeheartedly support your mission
and offer you my continued efforts should you request them.
[The prepared statement of Mr. Hecht can be found on page
58 of the appendix.]
Chairman Duffy. Thank you, Mr. Hecht. And thank you to the
whole panel for your testimony. The Chair now recognizes
himself for 5 minutes for questions.
Mr. Hecht, as you mentioned, Mr. Ross has a piece of
legislation which passed in the last Congress--and he has
introduced it in this Congress--making it easier for lenders to
accept private flood insurance. Do you think his bill will go a
long way to helping us create a private market?
Mr. Hecht. I do, Mr. Chairman. The bill does two very
important things: it clarifies that surplus lines insurers
would qualify as acceptable private policies; and the very last
paragraph of that bill talks about recognizing private policies
as continuous coverage so that someone leaving the National
Flood Insurance Program coming into the private marketplace
would have the ability to go back into the National Flood
Insurance Program with no penalty. Both of those would help a
robust private market.
Chairman Duffy. And so beyond Mr. Ross' bill, anything else
you think we could do or should include in legislation that
would help develop a private market? If not, that is okay. This
is the silver bullet.
Mr. Hecht. I think that there are interpretations currently
that FEMA is making that are detrimental to a private market.
FEMA has taken three very specific actions just since we
started writing policies that make it much more difficult.
First, they removed a cancellation provision. Previously, an
NFIP policy could be cancelled and replaced with a private
market policy. Policies can no longer be cancelled for that
reason.
Second, policies that are prepaid, so a FEMA flood policy
when it renews, the Write-Your-Own companies, or the NFIP
direct, issues renewal bills for those policies 65 to 70 days
before the policy renews. Most policies are escrowed by
lenders. When the lender pays the renewal premium, sometimes 60
days in advance, sometimes 45 days in advance, FEMA has taken
the position that once that policy goes into force, the
policyholder is no longer allowed to cancel that policy.
Chairman Duffy. Does the private market work like that?
Mr. Hecht. No.
Chairman Duffy. I want to quickly move on to a couple more
questions. Roy Wright testified last week, and he commented
that compensation for Write-Your-Owns could be decreased. Do
you agree with that?
Mr. Hecht. I absolutely agree with that.
Chairman Duffy. What would a competitive compensation be
for the Write-Your-Owns, do you think?
Mr. Hecht. We pay every one of our 2,000 agents a 10
percent commission.
Chairman Duffy. How much?
Mr. Hecht. Ten percent.
Chairman Duffy. Ten percent. Okay. I want to move on to the
repeated-loss properties. Mr. Terchunian, basically, we have
85,000 properties that account for 24 percent of the losses of
the NFIP, or basically 2 percent of properties that account for
24 percent of the loss. Some have said, well, listen, if you
are paying for a property's value 2 or 3 times, shouldn't you
be taking some action to move them out of the flood program, or
do we have to spend dollars up front to help mitigate these
properties? But what do you think we should do with this small
number of properties that account for such a large portion of
the cost of the NFIP?
Mr. Terchunian. That is the case across-the-board, how do
you deal with this repetitive-loss issue? Clearly, if you have
that small a number of properties, I think you can focus an
extreme effort into sitting down with each one of those
property owners and trying to help them through the process of
getting their homes elevated. I have dealt with a lot of
property owners after the fact who are just thrilled with the
fact that they got their house elevated. They are so much more
comfortable. They are so much happier where they are after the
fact, but you couldn't get them there before the disaster. We
are talking about people who have repeated the same thing over
and over again. I really believe that you need, in the same way
the NFIP does it now, a carrot and a stick. Listen, we will
help you, and this is the path to get it done. If you don't
want to do it, it is going to cost you more money.
Chairman Duffy. Okay. Back to Mr. Hecht. Looking at new
construction, if we stand up a private market, at some point in
the future, whether it is 3 or 4 or 5 years down the road, do
you have an opinion on whether new construction should be
allowed into the NFIP, or new construction should be driven to
the private market? And could the private market take those
newly constructed homes?
Mr. Hecht. I listened to Mr. Wright come up with that
suggestion. I don't agree with the suggestion. I don't know of
a way that you would make it mandatory for the private market
to insure those properties. If they are not eligible to be
insured in the National Flood Insurance Program, how can you
guarantee that they are going to have coverage at all?
Chairman Duffy. Then should they be built?
Mr. Hecht. I think you are talking about something that is
already built.
Chairman Duffy. No. I am talking about new construction.
Mr. Hecht. Right. So you mean you would need to have flood
insurance prior to getting a building permit?
Chairman Duffy. We will circle back. My time is over, and I
want to be respectful. I am now going to recognize the
gentlelady from New York, Ms. Velazquez, for 5 minutes.
Ms. Velazquez. Thank you, Mr. Chairman, and thank you, Mr.
Cleaver, for allowing me to go next.
Ms. Luckman, you and I agree that policyholders should have
advance notice of an adjuster or engineer who is coming to
inspect a flood claim, and be provided with an opportunity to
veto and request reassignment. I have included this idea in my
legislation, H.R. 1423. Can you explain why this reform is
necessary in light of the fraud and underpayment of claims that
took place after Sandy?
Ms. Luckman. What happened after Sandy was we saw the same
bad actors repetitively hitting multiple homes on the same
block, and they really--they weren't punished at all. I think
that homeowners should have advance notice of who is going to
be assigned to their claim with the reasonable opportunity that
they can research that company, and see if they were connected
back to Hurricane Sandy fraud, and see if there is some other
type of fraud. And what we have seen working at the clinic is
that a lot of this information is available online. So I think
it is only fair that a homeowner has a reasonable opportunity
to look into those adjusting and especially engineering
companies. An engineering report can make or break a flood
insurance adjustment when you are talking about a foundation.
So they should absolutely be provided with that right.
Ms. Velazquez. Thank you. Ms. Luckman, following Sandy, a
number of New York policyholders who have been denied coverage,
or suspected their claim has been underpaid, feel they do not
have the financial resources to assert a legal claim against
the Write-Your-Owns. In response, my legislation provides for
the reimbursement of legal fees and litigation expenses for
prevailing policyholders. Do you think the reimbursement of
legal fees and litigation expenses will level the playing field
for policyholders against the Write-Your-Owns, and empower them
to pursue a potential claim?
Ms. Luckman. Yes. Reimbursement of legal fees would be a
huge advantage for homeowners. My clinic is State-funded. We
are permitted to cover all filing and litigation costs for our
homeowners, which can run upwards of $800 to $1,000. Many of
these homeowners who were shortchanged immediately post-storm,
they did not have those funds to go into Federal court and to
pay those fees. So if a homeowner knows that they have acted in
good faith, they have submitted a claim, and they have gone
through the appeals process, and they are still being
improperly underpaid, if they know that they can have legal
costs reimbursed, it will level the playing field. And I think
that, quite honestly, it would put some skin in the game for
the Write-Your-Own carriers, who, right now, they are not any
loss. Unfortunately, the Federal Government covers their legal
costs, and there is no one left helping these homeowners with
their litigation costs.
Ms. Velazquez. Thank you. And my last question, Ms. Luckman
is, following Sandy, a number of policyholders voiced
complaints regarding the coverage they thought they had, versus
the coverage they actually had. In response, my legislation,
H.R. 1423, calls for a disclosure document, an acknowledgment
document or company, the purchase of a standard flood insurance
policy. Based upon your work with Sandy victims, will these
documents provide policyholders with a better understanding of
what is and is not covered under the flood policy?
Ms. Luckman. Yes, absolutely. A separate acknowledgment
that a homeowner and a sales agent would have to execute at the
time that they take out a National Flood Insurance Program
policy would absolutely make them more educated on what their
coverage is on the home. What we saw after Sandy was a lot of
litigation from homeowners against their sales agents. They
were really not aware of whether they had contents coverage,
whether they didn't, what the basement limitations were. Many
homeowners unfortunately were carrying $250,000 of structure
coverage when maybe they didn't necessarily need that coverage
because they didn't have a mortgage, and then we saw a lot of
lawsuit filed against sales agents.
So I think a separate acknowledgment form would protect
everybody. I think it would protect the sales agents selling
the National Flood Insurance products. I think it would protect
the homeowners, so at least that they are on notice, that they
are aware of what their policy says and what their true
coverage is. And I think it results in less litigation, which
would benefit the National Flood Insurance Program.
Ms. Velazquez. Thank you. I yield back.
Chairman Duffy. The gentlelady yields back. The Chair now
recognizes the Vice Chair of the subcommittee, the gentleman
from Florida, Mr. Ross, for 5 minutes.
Mr. Ross. Thank you, Mr. Chairman. Mr. Hecht, I appreciate
your testimony because it seems to me that what your insurance
company is doing is that they are actually assessing the risk
independent of FEMA. Is that pretty accurate?
Mr. Hecht. That is accurate.
Mr. Ross. And in that assessment of risk, you look at the
subsidized risk as opposed to the actuarial adequacy of the
risk, and it appears as though, and according to your
testimony, that the bad risks are really being accepted by the
private market. Is that also correct?
Mr. Hecht. Correct.
Mr. Ross. And in defining your rate--and I am not asking
you to give up anything proprietary--you look at factors, or
would you look at factors other than just elevations and
mapping that FEMA does?
Mr. Hecht. Yes.
Mr. Ross. In fact, you probably get a little bit more
granular, don't you?
Mr. Hecht. Yes.
Mr. Ross. Because your capital is at risk, is it not?
Mr. Hecht. Correct.
Mr. Ross. And you want to make sure that what you do is
right, not only for the consumer, but also for the capital that
you are trying to protect?
Mr. Hecht. Correct.
Mr. Ross. Which is why we call it insurance, because it is
risk management and not relief, which is what I think a lot of
people expect when they pay subsidized policies, is relief
instead of insurance. And getting back to insurance, what
incentives do you offer for mitigation, if any?
Mr. Hecht. We do not have a mitigation offer at this point.
We do have credits for deductibles. We do have credits for--
Mr. Ross. So you can have different various deductibles?
Mr. Hecht. We do. We also give credit for insuring a home
fully to value.
Mr. Ross. You go over the $250,000?
Mr. Hecht. We do.
Mr. Ross. And you do your own claims management, too, don't
you?
Mr. Hecht. We do.
Mr. Ross. So you have over 2,000 agents selling, and you
have your own claims management, and you testified today that
you can, in one case, you resolved all those claims within an
average of 66 days, which is pretty phenomenal, isn't it?
Mr. Hecht. 66 days was satisfactory, yes.
Mr. Ross. But you are in the private market, okay, which is
why we need you. And we talked about the Flood Insurance Market
Parity Act, and I appreciate your comments on that, and I
appreciate the chairman's comments on that. Would it not be
appropriate to get this put into law sooner than the expiration
of the National Flood Insurance Program at the end of
September?
Mr. Hecht. It affects us every day, Congressman. It would
help us if it were passed immediately.
Mr. Ross. And not only would it help your company, but it
would also help the consumers, and it would show this Congress
that the private market not only has the capacity, but the
appetite to enter this flood insurance market that is
affordable and available to all consumers?
Mr. Hecht. I am an advocate of your legislation.
Mr. Ross. Thank you. Let's talk about something else. One
of the things that Roy Wright testified to last week was that
50 percent of those who are receiving policies, who are in
mandated flood insurance zones, let their coverage lapse, and
there seems to be no enforcement. Does anybody on the panel
have a suggestion as to how we maintain continuous coverage so
we don't have a lapse in coverage and an even greater liability
to the National Flood Insurance Program? Ms. Luckman, I will
start with you.
Ms. Luckman. With regard to coverage lapses, I think that
homeowners need to be aware of their renewal timeframe, and I
think that better notice needs to go out to them. I believe
right now they get a 90-day notice.
Mr. Ross. And that is a notice from FEMA, right?
Ms. Luckman. Right. I believe that is a notice that has to
go from Write-Your-Owns (WYOs) or the NFIP--
Mr. Ross. And it should go to additional insureds, should
it not, such as the mortgagee?
Ms. Luckman. Absolutely.
Mr. Ross. And there should be an enforcement of that,
should there not be?
Ms. Luckman. Absolutely.
Mr. Ross. Mr. Terchunian?
Mr. Terchunian. Again, thank you, Mr. Ross. I think your
question is dead on point. We all get mortgage statements, and
associated with that is the homeowner's insurance, and if you
don't have it, the bank gets it for you and bills you. I don't
see why we can't do it the same way with flood insurance.
Mr. Ross. I agree. Almost like an escrow?
Mr. Terchunian. Exactly.
Mr. Ross. At least we know we maintain coverage.
Mr. Terchunian. Exactly.
Mr. Ross. Mr. Berginnis?
Mr. Berginnis. This has been a recognized issue within the
program in every reform at least since 2004. I might suggest
that at least when you look at the buckets of the mandatory
purchase, you certainly have the regulated lenders, but you
also have direct agency lending. And then you also have kind of
this thing that is over here where folks who receive disaster
assistance are supposed to purchase and maintain coverage as
well. And at least in those latter two areas, we really do kind
of question the amount of oversight that is being exercised
right now.
Mr. Ross. So we need greater oversight of the continuous
coverage?
Mr. Berginnis. Yes, sir.
Mr. Ross. I agree with that. Mr. Hecht, any suggestions?
Mr. Hecht. I think the percentage of penetration of
mandatory purchase is understated. There is a robust lender-
placed--
Mr. Ross. Forced-placed?
Mr. Hecht. Forced-placed, flood insurance, and I believe
that is where a lot of those policies are.
Mr. Ross. So would the forced-placed be through the private
market, or would it be through the NFIP?
Mr. Hecht. It could be through the NFIP, through the MPPP
program, but 99 percent of it currently is in the private
market.
Mr. Ross. I appreciate that. My time is up. I yield back.
Chairman Duffy. The gentleman yields back. The Chair now
recognizes the ranking member of the full Financial Services
Committee, the gentlelady from California, Ms. Waters, for 5
minutes.
Ms. Waters. Thank you very much, Mr. Chairman. I really do
believe that we need to have some major changes in the National
Flood Insurance Program, and I am absolutely focused on the
debt and trying to understand why it is that we have a $25
billion debt that we are paying $400 million a year interest on
that debt, a total of $6 billion in principal and interest
since 2006. And if I understand correctly how the program
operates, when FEMA needs money because of the catastrophes
that we have, we have to go to the Treasury and we have to
borrow the money. And so we are paying interest to the
Treasury, and we go back and borrow from the Treasury, and we
have a $25 billion debt, and we have this relationship that
doesn't make good sense to me. I want to know from Mr.
Berginnis, don't you think it is time we forgive this debt, and
if we forgive the debt and we were not paying this interest,
couldn't we put that money into mitigation? What do you think?
Mr. Berginnis. Yes, Congresswoman, absolutely yes. In the
history of the program, I think it is important to recognize
that the program, as designed, was not designed to deal with
the catastrophic loss here. And, in fact, in the 1980s, there
were a couple of times that Congress did forgive the debt in
the program. But then from the late 1980s to 2004, the program
operated as it was designed to. Of course, we had the Florida
hurricanes and Hurricane Katrina, and the debt skyrocketed from
that point. One of the points in our testimony is that had
Congress forgiven the debt at the time, and I believe the debt
was about $18.5 billion then, then there would have been
resources available likely in Sandy and even in 2016 to pay the
claims that we have.
This issue of not dealing with the debt, not only do we
need to address it from the standpoint of the current program
right now, but we need to have a longer-term framework to deal
with catastrophic losses, because even though FEMA has
implemented the financial risk management tools that Congress
has required of it, I am still concerned about these
catastrophic events.
Ms. Waters. Okay. As I understand it, there are several
ways that mitigation is done. Some mitigation is done by FEMA.
Some is done by the Army Corps of Engineers. And I think I
talked to some locals down in Louisiana at one point when I
visited, about them participating in mitigation efforts. How
does this all work? Does the Corps of Engineers work with FEMA
to make some determination about what mitigation can be done
and where?
Mr. Berginnis. It works in a variety of ways. Typically, in
larger mitigation projects for bigger communities, communities
will tend to work with the Corps of Engineers a little bit
more. They can work with them exclusively. But the FEMA
mitigation programs are available across the country to
communities large and small, so we tend to see that smaller
communities will tend to utilize the FEMA mitigation programs.
There are some cases where the mitigation project may implement
several different kinds of methods, and you actually match
funding for multiple programs, and then supplement that with
local resources. So it really can vary widely across the
country, but that is also why we need the different
authorizations for mitigation.
Ms. Waters. Lastly, I want to ask--I think there is
something that I agree with Mr. Duffy on, and this is quite
unusual, but I understand he may be interested in limiting
development in floodplain areas. I think I agree with that.
What do you think?
Mr. Berginnis. One of the original purposes of the program
was to steer development away from high-risk hazard areas, and
it is the one unfulfilled part of the program itself. And so,
to the extent that the program can help make that a reality, we
would definitely agree with that.
Ms. Waters. Thank you. I yield back.
Chairman Duffy. The gentlelady yields back. We agree on
more than just that, Ranking Member.
The Chair now recognizes the gentleman from California, Mr.
Royce, for 5 minutes.
Mr. Royce. Thank you, Mr. Chairman. Mr. Hecht, you
testified that, of course, no private market provider will
choose to write FEMA's severe repetitive loss properties, and
really, that is no surprise, because repeatedly, flood
properties make up 1 percent of those insured by NFIP, but it
represents 25 to 30 percent of all the flood claims, and so
they are not a good risk for private insurers, or for the
American taxpayer. And today, Congressman Blumenauer and I
introduced a bill, H.R. 1558, the Repeatedly Flooded
Communities Preparation Act, and the concept here is to
proactively reduce flood risk, instead of continuing our
current model of rebuilding these properties over and over
again. The way we do it, and let me just give you by way of
example, we have a couple of cities here, Tulsa and Charlotte,
both have had very pronounced success in decreasing flood risk,
because what they did was proactively take on a plan for storm
water management--that is the first thing they did; promoting
voluntary buyouts, sometimes that can be effective; reviewing
new development proposals for flood impacts every time one came
up; and steering development away from risky areas.
So that is part of their plan. Many of their peers, though,
many of the other cities and communities have not kept up with
that kind of approach. So what this bill would require is that
communities with a large amount of repeatedly flooded
properties implement plans to have that city council or those
counties put forward that plan for lowering flood risk, and
then in terms of keeping the records, holds them accountable
for failing to act. That is what the bill does. And I would
just ask for thoughts on this issue, and I also would ask Mr.
Hecht a follow-up question here that I wanted to get to, and
that is, do you think the home-buying public truly grasps flood
risk? Is this registering with them? Do they understand how
subject to hazard their property is when they talk with their
REALTOR? Do they understand how flood risks change over time
when areas nearby are developed, or when a forest fire might
occur? And so, maybe I could ask the panel also on that aspect
about recommendations for how we can change this lack of
education on flood risk? Besides just what we can do at the
county level or city level, how do we improve takeup rates for
flood insurance and strengthen these mitigation efforts?
Mr. Hecht. Let me address both of your questions. My
statement that, of course, we would not want to write severe
repetitive loss properties is a statement that we would not
want to write severe repetitive loss properties at rates that
were competitive with FEMA, because FEMA charges much too
little for the severe representative loss properties. In the
Wharton study last year regarding consumer recognition of flood
risk, consumers actually think their property is going to flood
more than it actually does. They overestimate that, but they
underestimate the amount of damage that an actual flood would
do.
Mr. Royce. Would any other members of the panel like to
jump in on that?
Mr. Berginnis. Congressman Royce, we have taken a look at
the legislation that you and Congressman Blumenauer have
introduced, and actually, we are supportive, and one of the
things that we like about it is that it does have a measure of
accountability. Under current law, which comes from the
Stafford Act, community mitigation plans are required to, at
least, assess how many representative loss properties there
are, but it doesn't really require them to do anything about
it. So I think the innovative element to this legislation is
that it does have some requirements there to actually do some
planning and actually mitigation of those or face some
potential consequences.
In terms of the broader education and awareness of risk,
and I go back to a statement I made in my testimony, we have
to, first of all, map all of these areas in the country.
Oroville Dam, I think, is a great example in California:
200,000 people evacuated, far beyond what the mapped floodplain
showed. Yet how many of those people knew that they were in
basically either a dam failure or dam release inundation zone?
Probably none of them, because that information, while it has
been produced, is not publicly available.
Mr. Royce. Thank you. I thank the panel. Our time has
expired. But transparency is part of this answer. Thank you
very much, Mr. Chairman.
Chairman Duffy. The gentleman yields back. The Chair now
recognizes the ranking member, the gentleman from Missouri, Mr.
Cleaver, for 5 minutes.
Mr. Cleaver. Thank you, Mr. Chairman. Ms. Luckman, thanks
for being here. Ms. Velazquez was talking about how helpful you
had been to her community after Sandy. And she assured me that
if I asked you this question, you were going to answer it in
the fashion in which I wanted.
We are seriously--and I think the chairman of the
subcommittee would agree--dealing with the issue of mapping and
mitigation activities. And so when we learned today that the
President zeroed out in his budget discretionary appropriations
for NFIP's map of the mitigation activities, because we think
that it would be devastating, what do you think we can do to
enhance the program if it is zeroed out?
Ms. Luckman. I think this really goes back to education. I
think if that, unfortunately, is the end result of his budget,
I think we need to look to other sources of education that
would or could appropriately advise a homeowner or a
policyholder of their flood risks.
Something that my statement speaks to is NFIP-certified
agents. So I think that if you have a standardized education
that is required by the NFIP, that information can be given to
homeowners upfront, I think that would at least provide them
with the same information that mapping and risk evaluation
would.
Mr. Cleaver. But it wouldn't--they are still going to have
a serious problem, a homeowner problem. But--
Ms. Luckman. I think the only way to reduce that problem
would be to increase ICC, maybe the scope of increased cost
compliance, maybe allow homeowners to mitigate now. Instead of
waiting until post-disaster, being able to mitigate their
properties pre-disaster, I think, would at least put them in a
safer spot that would raise them out of the flood zone, the
immediate flood zone.
Mr. Cleaver. Mr. Terchunian?
Mr. Terchunian. On that same question, I think FEMA has
come a long way in their mapping program. I am a user of that
program, and my clients use it and call me up and say, I looked
at my property, and we start talking about the level of risk.
That being said, just like in broadband, they need to go
the extra mile. And I think that is an important aspect of
bringing both the education component but the actual mitigation
component to the individual policyholder.
Mr. Cleaver. I think probably there are a number of Federal
agencies that use FEMA, use the mapping. They don't help pay
for it. And now, nobody is going to pay for it if this is
approved. Is this disastrous, Mr. Hecht?
Mr. Hecht. Mr. Cleaver, as part of my written testimony, I
suggested, similar to Senator Warren yesterday and some of the
other panel members, that private policies are assessed a fee,
the same policy fee that the Federal policy has, and that we
remit that money to FEMA to augment the money that you have for
the mapping.
The private market is going to use independent mapping, but
we are also going to have to rely on your mapping because of
the mandatory purchase guidelines. So I am a big supporter of
our participation in your effort.
Mr. Cleaver. In your testimony, Mr. Terchunian, you mention
that the cost of elevating a home in Long Island is between
$100,000 and $150,000. And I think everybody would agree--or
most of us would agree that elevation is the best way to
mitigate against flooding. It is time-consuming and very
costly. Is there any way we can improve homeowner mitigation
efforts?
Mr. Terchunian. Yes, sir, Mr. Cleaver. I believe that we
have to get ahead of the flood curve with these property
owners. After a flood, there are so many different dislocations
that occur: waiting for approval time; getting through the
insurance process; and then having to go to a zoning board.
If we can figure out a way to incentivize the property
owner before a flood occurs, their life will be better, their
policies will be better, and we will be living in a safer
community.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the gentleman from New Mexico, Mr.
Pearce, for 5 minutes.
Mr. Pearce. Thank you, Mr. Chairman.
I appreciate everyone's testimony today.
Now, the National Flood Insurance Program was created in
1968 because we didn't have a private flood line and it was
trying to stop the tremendous losses to the taxpayer.
Mr. Terchunian and Mr. Berginnis, if I were going to kind
of try to summarize your viewpoints, you both would sort of
favor transitioning from a national flood insurance program to
a national mitigation program, is that correct? I hear a really
heavy emphasis.
Mr. Terchunian. I would have to say at least 50/50.
Mr. Pearce. Okay. Mr. Berginnis?
Mr. Berginnis. Yes, definitely increasing the mitigation
component would be helpful.
Mr. Pearce. So, Mr. Berginnis, on page 9 of your testimony,
you talk about the $1.3 billion in mitigation. And getting
about 2,000 houses per year for 5 years, that is--so is that
all that the mitigation did or is the $1.3 billion spread out?
Mr. Berginnis. The 1.3 billion was spread out. I did not
have the data from FEMA to calculate the total amounts.
Mr. Pearce. The 2,000 houses, just kind of accessories,
they are in addition to everything else they did, or is that
the focal point?
Mr. Berginnis. The 2,000 was just for a certain time period
where I had the data for that.
Mr. Pearce. I understand, but I am trying to get an
approximate figure. Mr. Terchunian had said that it could cost
up to $200,000. And if I divide the number of houses, 10,000
into the $1.3 billion, I get $130,000 per house, which falls
into his category, close enough for the discussion.
So when I just do the math in my head, do you have any idea
how many houses out there that we need to mitigate?
Mr. Berginnis. There are a lot of them out there. I think
what you have in terms of--
Mr. Pearce. One million? 100,000?
Mr. Berginnis. In terms of repetitive loss and severe
repetitive loss properties, we are probably talking about
160,000 houses.
Mr. Pearce. 160,000?
Mr. Berginnis. But those are ones that have repetitive loss
claims. That doesn't mean that is all the ones that are
actually at risk. There is a lot of older buildings out there--
Mr. Pearce. I understand, but I am just trying to get a
feel for it.
Mr. Berginnis. So 160,000 could be the--
Mr. Pearce. If we are going to convert this into a 50/50
program, we need to know what it is going to cost us, because--
Mr. Berginnis. Yes.
Mr. Pearce. --you are not claiming that mitigation is going
to stop the debt. In other words, if we were to pay off the
debt completely, we are going to still owe debt in 3 or 4 more
years because we are not going to be able to get everything
done at once.
Mr. Hecht, do you have any policies up in that Long--or
wherever Mr. Terchunian is talking about, the 300 houses. Do
you all insure up in that Long Island area?
Mr. Hecht. We do not write policies on Long Island.
Mr. Pearce. Okay. How about down in the area, Katrina area,
right there in the--
Mr. Hecht. We do not write policies in New Orleans.
Mr. Pearce. Okay.
Mr. Hecht. We do write policies in 36 States and 2,000
communities.
Mr. Pearce. Okay. I understand. Of course, I haven't
investigated it, but what I was getting at is, could there be
an accusation by people who are critical of you that you kind
of cherry pick through? Could you write a plan, just sitting
here today, if we had enough time, could you write a plan that
would insure everybody up and down the spectrum in the flood
map--or in the NFIP program or is that too complex? Is that
very complex?
Mr. Hecht. We would be able to write policies at premiums,
but the premiums would not be competitive with FEMA. That is
why we are not--
Mr. Pearce. Okay. That is kind of what I am getting at.
Right.
Then, Mr. Terchunian, you state on page 2 about the 22
years. I know there have been 10 events in that area. Have any
of them squared up right on that same area where this is a good
analysis? Has the mitigation defeated an event similar to 1992
that is the basis of your testimony on the first pages?
Mr. Terchunian. Yes, I would call Superstorm Sandy an
equivalent of that.
Mr. Pearce. Close enough. Fair enough. That is good enough.
Now, on page 5 in your testimony, you talk about--or page
6, that it is unreasonable to expect a consumer to invest
$200,000 for an annual payback of $4,000 to $5,000. So you then
would want the taxpayer to do it. Would it be reasonable that
the taxpayer, if they subsidize this, would get the first
$200,000 if they sell their home?
Because you are basically transferring value from people
out in New Mexico who live in trailer houses. Fifty percent of
my constituents live in trailer houses, and you want us to
subsidize them, because it is unreasonable to expect them to do
that for a $4,000 to $5,000 return in that area. My taxpayers
are getting no return on it, and I don't know exactly how I
would go back and convince them that is reasonable. The term
``snowflake'' in New Mexico in July comes to my mind.
Thanks. I yield back.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the gentlelady from Ohio, Mrs.
Beatty, for 5 minutes.
Mrs. Beatty. Thank you, Chairman Duffy, Ranking Member
Cleaver, Chairman Hensarling, and Ranking Member Waters.
First, let me just say thank you to all the witnesses here
today. This is a good day for me because I heard my ranking
member and Chairman Duffy agree on something we should do, and
that just has inspired me so much, that I know if I would ask
all of you--
Chairman Duffy. Would the gentlelady yield? I don't know
that I have agreed to anything here.
Mrs. Beatty. I am doing this really for the chairman, not
the subcommittee chairman; the chairman at the end. So I am
going to say some really nice things today. And I think you
will agree with me that, obviously, September is not that far
away, and we certainly--I see you are nodding already--want to
get this reauthorized. It certainly sounds like there are
enough things that if we work together on, I think we could
make this happen.
Would anybody disagree with that?
Okay. And you are all experts. So our experts, Mr.
Chairman, are saying we have a lot of good things on both
sides.
Now, I am from Ohio. I know we have an expert from Ohio.
And so when I think about--in my conversations with Ohioans,
there is a perception amongst some of them that the floodplain
was expanded to subsidize higher-risk policyholders in maybe
States like Florida or Texas. And I think many members of this
committee, including myself, would like to see the private
sector play more of a role in the floodplain insurance
marketplace, because it could be especially beneficial to the
pockets of Ohioans who are required to buy flood insurance.
I think my ranking member, Mr. Cleaver, kind of posed this
question to you, Mr. Hecht, when he was giving his remarks. My
concern is somewhat in the same light. And my question for you
is, if we see private insurers take market shares from the NFIP
and the proposed budget cuts to FEMA materialize, what would
happen to FEMA's budget in mapping and mitigation under this
scenario?
Mr. Hecht. Well, I--
Mrs. Beatty. I am going to go to Ohio first.
Mr. Hecht. Okay.
Mrs. Beatty. I want him to either expand on what you were
saying or agree or elaborate.
Mr. Berginnis. As I have included in my written testimony,
the floodplain management function, again, that is technical
assistance to States, to communities, the FEMA staffing, and
the entire ball of wax is 100 percent paid for through that
Federal policy fee. And so if we go from, let's say, 5.5
million policies that we had in the program to, let's say, 3
million, that is a significant reduction. Half of the mapping
budget comes from that same Federal policy fee, so, again, the
reduction would be significant.
On the mitigation side, one thing I would point out is that
ICC has its own policy surcharge, so it is kind of on a per-
policy basis. So it is not as sensitive to that other than, I
think, the fact, to point out that if we do work to expand
private insurance, that we would strongly recommend that one of
the coverages that needs to be in place for private policies,
especially in the A zones where codes are required, is
something similar to ICC, like ordinance and law coverage, so
that the property owner can access additional funding to
mitigation.
Finally, the Flood Mitigation Assistance program is 100
percent funded through premium dollars. So, again, a
substantial reduction in policies equals a substantial
reduction in FMA funds.
Mrs. Beatty. Thank you so much. I have a little less than a
minute left.
Ms. Luckman, what would be the one thing you would say to
us--since in your written testimony you said you would like to
see it reauthorized. You were very clear on that. What would
you say to us to help us get there on time? Some of your
colleagues have also said they didn't want to see it extended
or short-term ranges. What would you say to us?
Ms. Luckman. I do think it needs to be done in a timely
manner. I think there are a lot of very minor administrative
tweaks that I have spoken about that can be made very quickly.
There is no cost associated with them, and it really does help
the program run more smoothly.
And I also think that when we start looking at the
relationship between the NFIP and the Write-Your-Own carriers,
if we look to maybe implement some additional penalties NFIP
can enforce against the WYOs or just bad actors in general that
have been involved, whether they be adjusters or engineering
firms, I think that it would expedite the process. I think that
there would be safeguards in place for the NFIP and for all
included agents.
Mrs. Beatty. Thank you, Mr. Chairman.
Chairman Duffy. The gentlelady yields back.
The Chair now recognizes the former Chair of this
subcommittee, now the Chair of the Financial Institutions
Subcommittee, Mr. Luetkemeyer, for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
And I thank the panel today. It is a great panel. You all
are very informative, and I appreciate your being here.
Mr. Hecht, quick question for you. We had a great
discussion so far on private sector involvement in flood
insurance. What do you see as the capacity for the private
sector to get involved? How much more--I think Mr. Berginnis a
minute ago said 5.5 million policies in NFIP. How many of those
do you think the private sector could absorb in, say, 5 years
time, if there was ability to be--for instance, Mr. Ross' bill
would pass and there would be able to be purity with the
policies?
Mr. Hecht. That is really a question for the capital
markets, not a question for the distribution system. We
currently--we have written 18,500 policies. The capital markets
that have provided us with capacity, we would be able to maybe
double what we have written so far. At that point, we are going
back to the capital markets and asking which other capital
markets would like to provide capacity.
Mr. Luetkemeyer. Okay. As a private insurance company, you
have reinsurance, I guess?
Mr. Hecht. Now, I am--
Mr. Luetkemeyer. You are the agent?
Mr. Hecht. Yes, I am an administrator. I am a program
administrator and a cover holder, so I am not the insurance
company.
Mr. Luetkemeyer. Okay.
Mr. Hecht. So Lexington Insurance Company, part of AIG,
they have reinsurance. It kicks in at a $1.5 billion level.
Some of our syndicates at Lloyd's of London have reinsurance
that participates as low as $1.5 million, so that is a 1,000
times difference in terms of a factor of 1,000, in terms of--
Mr. Luetkemeyer. The reason for that is they just wanted--
some can absorb the risk and others can't or--
Mr. Hecht. Correct.
Mr. Luetkemeyer. Okay. Mr. Berginnis, you were talking
quite a bit about mapping. And it has been mentioned here
already today that the President looks like he is wanting to
zero out the mapping efforts here.
One of the things--one of the ways that I think and what we
are suggesting here that we can solve the problem is that if we
allow the private sector to local communities, the local--
whether it is city, county, subdivision, wherever it may be, to
be able to map their own area. Today's ability of these
communities to get this mapped is not within their ability to
pay for it because the cost has come down so much. Is that
something that could be done if you had a certain level of
criteria there that would allow the local communities to do
that?
Mr. Berginnis. So States and communities can actually do
some of their own mapping right now under the FEMA program. It
is called the Cooperating Technical Partners.
Mr. Luetkemeyer. Right. Right.
Mr. Berginnis. And sometimes, like at the State level, they
will actually do it in-house, but they can also contract with
the mapping and modeling community that does a great job with
that.
One of the things I would say, though, is that we are
seeing the cost coming down. And one of the things that the
FEMA flood mapping program, I think, that is a credit to them
is to take advantage of those latest technologies as well as
experiment with those cheaper costs.
The Chair of our organization, Ceil Strauss, from the State
of Minnesota, they are a CTP, and they are currently doing some
large-scale mapping in rural Minnesota for as low as $200 a
stream mile. To do a detailed flood study, we are probably
talking about--
Mr. Luetkemeyer. Okay. Very good.
I have one more question I want to get to before my time
runs out here.
I want to go back to Mr. Hecht. You were talking a while
ago about actuarial rates. I know that Mr. Ross is from Florida
and his State went to replacement cost rates based on the value
of the home such that if you had a $50,000 house, you would be
based on the cost to replace the house versus a $250,000 house.
How would that structure work for you in your policies, you
think?
Mr. Hecht. I am really not sure that I understood that
question in terms of--
Mr. Luetkemeyer. Okay. Do you settle claims at actual cash
value or replacement cost?
Mr. Hecht. I'm sorry. Our policy is identical to FEMA's
policy. It is word-for-word. So there are certain structures
that qualify for replacement cost and there are certain
policies that qualify for actual cash value.
Mr. Luetkemeyer. Okay. With regards to the rates, what
about--how would it affect the rates if you went to replacement
cost rates and availability of that sort of coverage to the
insured?
Mr. Hecht. The actual cash value settlement reduces claims
by approximately 22 percent. So the rates would go up
approximately 22 percent, again, on just those properties that
are currently written at actual cash value. About 60 percent of
our policies qualify for replacement cost, the same as the
National Flood Insurance Program.
Mr. Luetkemeyer. Okay.
Mr. Hecht. Commercial properties are at actual cash value.
Non-owner-occupied residential structures are at actual cash
value. Those are the ones that you're talking about.
Mr. Luetkemeyer. Very good. Thank you very much.
My time has expired. Thank you, Mr. Chairman.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the gentleman from Michigan, Mr.
Trott, for 5 minutes.
Mr. Trott. Thank you, Mr. Chairman.
I thank the panel for their interesting testimony. And I
want to ask the entire panel--and start by thanking Mr. Hecht
for your comments because it gives me confidence that the
private sector can fill the void that we are hoping to solve by
making this program sound.
But my concern is that 1.6 percent of the policyholders, so
roughly 85,000 people of the 5.1 million, account for 24
percent of the claims. And so any solution has to deal with
creating an actuarial rate that is going to make the program
solvent. I am interested in your comments on how we can
transition to that without creating sticker shock for the
homeowners and how we can do it without disrupting the real
estate markets by causing the premiums to become unaffordable?
Mr. Hecht. I think anything--the rates for severe
repetitive loss properties have to be coincident with the risk.
If the policyholder is not going to pay for that risk, then it
has to be dealt with in some kind of an entitlement program
mode. The insurance companies are not going to subsidize that
risk. The risk is what the risk is. We are not going to compete
at the rates that FEMA is currently charging for that 1 percent
of the policies.
Mr. Trott. Any other panel members?
Mr. Berginnis. One of the things that we suggested is a
mitigation surge, maybe where one or a couple-year
appropriation to actually take care of those properties,
mitigate those to where the flood insurance would be less
expensive.
Mr. Trott. To that point, though--and, Mr. Terchunian, you
commented about the cost of raising a home, $100,000 to
$200,000, and you had commented, one of you, that there are
160,000 properties potentially in that category. That is $160
billion. Right? $100,000. Let's round down and call it $100,000
instead of $130,000 or $200,000. It is 160,000 properties, that
is $160 billion.
As an aside, since this hearing began, we have added $150
million to our debt, so that is a little footnote. Is the
mitigation really going to be part of any solution? Because
that seems like a large number under any calculation.
Mr. Terchunian. The answer to the question is that we are
paying it now, but we are paying it in post-disaster dollars,
which are much more expensive than mitigation dollars. So, it
is pay me now or pay me later. That is the situation the
taxpayer is in right now.
And the gentleman from New Mexico asked, why should they be
subsidizing people on Long Island? We are doing it, and we need
to stop doing it. And the way to stop doing it is when you
have--is to take--85,000 homes sounds like a lot, but it is
not.
On the south shore of Long Island in Mr. Zeldin's district,
we are going to elevate 4,500 homes in the next couple of
years. Now, that was spurred on by Sandy, but that is a project
that has been decades in the making. We can do this around the
country if we boil it down to bite-sized pieces and take it on
one at a time.
Mr. Trott. Ms. Luckman, any--
Ms. Luckman. Yes, I agree. I think mitigation is key, and I
think it needs to be upon community resiliency. I think if you
took communities one at a time, block by block, and if you
mitigated those homes and elevated them, then we may be
spending more money out-of-pocket right now, but it will
definitely result in less flood claims down the line, less
repetitive loss claims, and it would definitely benefit the
future.
Mr. Trott. Ms. Luckman, at the Law Center, how many people
have you helped with their claims, to navigate that claims
process?
Ms. Luckman. Through the claims process, we had 10 cases
that we took through litigation, and we have just over 100
claims in the Sandy claims review process right now.
Mr. Trott. Okay. In how many of those claims, would you
say, you saw abuse for the homeowners or unfair results in
terms of how they were treated?
Ms. Luckman. All of them. Right now, we have received--
between litigation and the Sandy claims review process, we are
over $3 million that we have been able to put back into
people's pockets. And we still have another 42 cases that need
to go through that neutral level of review in the Sandy claims
review process.
Mr. Trott. Mr. Hecht, so let's fast forward maybe 10 years
from now. Let's assume the private sector is playing a greater
role. I am interested, if we got rid of the noncompete clause,
would that--what impact that would have. And then long term, if
we came up with a model that dealt with the repetitive loss
properties in a fair manner so people could be transitioned and
not lose their homes because of increases, do you see a need
for the NFIP long term?
Mr. Hecht. I do see a need for the NFIP. The general
principle of insurance is the distribution of risk. What the
private market brings to the NFIP right now is a further
distribution of risk. So whatever the percentage is, if the
NFIP ended up with 80 percent of the risk and the private
market ended up with 20 percent of the risk, it is spread so
that the taxpayer is not on the hook for 100 percent. They are
on the hook for 80 percent of a disaster.
Mr. Trott. Thank you.
Chairman Duffy. The gentleman's time has expired.
The Chair now recognizes the gentleman from Pennsylvania,
Mr. Rothfus, for 5 minutes.
Mr. Rothfus. Thank you, Mr. Chairman.
Mr. Hecht, I want to talk a little bit about your
experience. I think $3.5 billion in coverage for 18,000
customers, approximately?
Mr. Hecht. Correct.
Mr. Rothfus. So I guess you are one of the largest private
flood insurers out there.
As you note in your testimony, there is an ongoing debate
about whether private sector flood providers like yours would
be prone to cherry picking as they begin to play a greater role
in the industry. You seem to believe that cherry picking
concerns are misplaced. Can you elaborate on why you disagree
with this commonly held belief?
Mr. Hecht. Yes. Thank you for the question.
The last actuarial rate review that FEMA reported to
Congress was in 2011, in substantiation of the 2009 rates. When
we look at that review, the policies that FEMA says are
actuarial produced $121 of loss for every $100 of premium. It
had a 121 percent loss ratio. Their actuarial policies had a
121 percent loss.
The subsidized policies only had 114 percent loss. The
subsidized policies are a better insurance risk to value for
the private market. That was as of 2009. That is why, in my
testimony, what I did was I substantiated that the rates for
subsidized policies have increased at a much faster pace than
the actuarial policies.
The subsidized policies are the policies that we now
consider rate adequate. FEMA's worst performing category of
risk was elevation rated A zones. For that 32-year period, the
loss ratio was 163 percent. Their preferred risk policies, the
loss ratio for that 32-year period was 133 percent. Yet their
most hazardous classification of velocity, V zones, during that
same 32-year period, the loss ratio was 47 percent.
As a private insurer, I want to write risks that are going
to have a 47 percent loss ratio, not a 163 percent loss ratio.
We are not cherry picking the risks. We think FEMA has it
upside down.
Mr. Rothfus. Interesting.
We have often heard in this committee that the private
sector needs access to more NFIP data in order to expand its
role in the flood insurance market. Could you elaborate on what
types of data would be useful to firms like yours?
Mr. Hecht. We do not have any granular level data now. Most
insurance risks are written at an individual level. It does no
good to know whether your high school class had 32 speeding
tickets if you are going to underwrite an automobile policy.
What is relevant is, does the driver that you are going to
insure have a speeding ticket?
FEMA releasing claims data on a community-level basis does
nothing for us to select risk.
Mr. Rothfus. You noted in your testimony that my home
State's insurance commissioner, Teresa Miller, recently wrote
that, ``Even with the increased surplus lines activity for
residential flood coverage over the past 11 months, the
Pennsylvania Insurance Department has not received a single
complaint concerning a surplus lines carrier.''
Commissioner Miller's assessment suggests that private
sector insurance providers can deliver a high level of service,
maybe even better service than the NFIP. Do you believe that
consumers are well-served by the NFIP in its current form?
Mr. Hecht. I think we can do a better job.
Mr. Rothfus. What are some of the common complaints that
you hear from customers about their experiences with the NFIP?
Mr. Hecht. On our website, we allow consumers to post
testimonials, and one, two, or three consumers take their time
every single day to tell us what we are doing right. And our
rates are lower, our service is better. A live individual picks
up the phone, a live licensed agent counsels them on what
insurance they need. We are there to make changes on their
policy almost instantly when they request a change. Our claims
were settled in 66 days. We simply do a better job right now.
Mr. Rothfus. Thank you, Mr. Chairman. I yield back.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the gentleman from California, Mr.
Sherman, for 5 minutes.
Mr. Sherman. Thank you.
Mr. Berginnis, the President's budget request which was
released this morning would completely eliminate discretionary
appropriations for the NFIP mapping and mitigation activities.
How is that going to impact those activities?
Mr. Berginnis. It would be devastating. And the reason is
that because mapping is the cornerstone of everything else the
NFIP does, the mitigation, the land use, and even the
insurance. And what will end up happening is that the inventory
we have will begin to decay, because flood maps do have to be
updated periodically, and we won't be able to do new flood
mapping.
Mr. Sherman. And then how will that impact our ability to
properly assess the risk to discourage building where it is
particularly dangerous and to properly assess the amount
homeowners and others should pay for their insurance?
Mr. Berginnis. It will degrade that capability
significantly, and that degradation will increase over time as
the maps get older. And that--not unlike the situation we had
in the late 1990s, before the map modernization program where
Congress saw fit to invest more funding in mapping.
Mr. Sherman. In your testimony, you recommended that
private flood policies include a fee equivalent to the Federal
policy fee to help continue to pay for the floodplain mapping
and the floodplain management standards programs. I just want
to clarify with you your proposal.
Do you suggest that the fee apply only to policies written
in special flood hazard areas or to all private flood policies?
Mr. Berginnis. We would think that, at a minimum, it should
be associated with those in the special flood hazard areas, and
kind of the hook to do that would be those needed to meet the
mandatory purchase requirement.
Mr. Sherman. Do you have a suggested dollar amount in mind
that you would recommend as the equivalency fee?
Mr. Berginnis. We call it the equivalency fee because it
would be pegged at the same amount as the Federal policy fee so
that the NFIP and private policies would be on the same playing
field.
Mr. Sherman. And what impact do you think this new
surcharge would have on private insurers' appetite to enter the
flood market? What about the cost to consumers of private flood
policies?
Mr. Berginnis. Certainly, there is going to be a
sensitivity to cost on any insurance product. But I was
actually quite happy to hear my fellow witness, Mr. Hecht, as
the largest writer of private flood, recognize the value of the
mapping and endorse the concept.
Mr. Sherman. And what impact do you estimate the surcharge
would have on emerging technology or innovation in the mapping
field?
Mr. Berginnis. I think it will have a positive impact,
because when you have the resources to invest in mapping, you
can investigate those emerging technologies. When you don't
have the funds, you are essentially just trying to play catchup
and really don't have the resources available.
Mr. Sherman. The President's budget request also proposes
to restructure selected user fees for the NFIP in order to
``ensure that the cost of government services is not subsidized
by taxpayers who do not directly benefit from those programs.''
This sounds like the Trump Administration may be proposing to
have NFIP policyholders pay the full cost of mapping activities
because President Trump assumes that no one else benefits from
those programs.
Can you talk about how FEMA's flood maps provide benefits
for people in communities beyond just the NFIP policyholders?
Mr. Berginnis. Yes, absolutely. Actually, a colleague
forwarded me a case study recently from the Louisiana flooding,
where a person who was not even a policyholder was close to the
Amite River. Their son was a REALTOR, and the son began to
talk to him about the potential need to evacuate and that there
are these FEMA flood maps online.
And after they looked at the flood maps and determined that
the crest was higher than what the map showed, it showed that
all the evacuation areas were pretty much going to be blocked.
And so it would help that individual, non-NFIP related, to
actually evacuate, possibly saving lives and certainly saving
property.
Mr. Sherman. I yield back.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the gentleman from New York, Mr.
Zeldin, for 5 minutes.
Mr. Zeldin. Thank you, Mr. Chairman.
And first off, just on behalf of my constituents and
everyone on Long Island who cares very deeply about this issue,
I want to thank the committee for the countless meetings,
conversations, the emails, all the questions that have been
asked just to understand the practical impacts of the NFIP on
individual lives.
This hearing is called, ``Flood Insurance Reform: A
Community Perspective.'' And this committee has focused a lot,
since I joined it a couple of months back, on getting the
impacts on each individual committee.
There was a lot of focus here today on mitigation. I would
love to be able to take that to the next level. And if you
wouldn't mind, Mr. Terchunian, I will put you on the spot
first.
You mentioned how homeowners on the east end of Long
Island, or a community like yours, West Hampton Dunes, make
investments in mitigation. An important goal is to get clarity
from FEMA as far as what mitigation will lower NFIP premiums
and improve maps.
So taking this conversation to the next level, what is the
most effective policy approach to make sure homeowners or
municipalities who mitigate get a clear return on their
investment? We are expressing our positions with regards to
dollars that should be saved from mitigation. What should
FEMA's response be as far as changing policy?
Mr. Terchunian. I think there are two groups who are
affected by that: the entire community that is in the
floodplain and is paying flood policies; and the individual
policyholders themselves.
The FEMA rating process is reasonably opaque. I find myself
often in conversations with the property owner, the private
insurance agent, and we can't get the FEMA underwriter on the
same telephone call with us to explain why things are being
rated the way they are.
That process needs to change and needs to become utterly
transparent, because there is poor predictability and I don't
know whether it is because the rater is not hearing what is
being said or it is not being communicated properly to them.
But that entire process has too many layers. It needs to be
much more direct so that the policyholder themselves, as Ms.
Luckman said, understands what it is they are buying and what
it is that they may want to buy.
The second aspect of it has to do with the community rating
system (CRS). The community rating system is a great idea. It
says, hey, listen, if you do a better job than NFIP requires,
we are going to benefit everybody in the community. The problem
is the CRS is a difficult program, and there is a lot of
criteria in there that, at least in my opinion, doesn't advance
community resiliency, but you can't get to the next level
without it.
So I think that process, number one, the CRS process needs
to be simplified. I think it is too complex. And number two,
small communities who don't have staff and can't afford to hire
need to be helped through that process, and because CRS is one
of the ways where you reach from the NFIP through the local
community directly to the policyholder.
Local communities send out tax bills once or twice a year.
There is no reason that the people who live in the floodplain
can't get a notice in their tax bill, but it doesn't happen
unless there is the linkage between the NFIP and the local
community.
Mr. Zeldin. And for anyone else on the panel, if you want
to join in, is there anything that hasn't been said during this
hearing of what FEMA should do to improve policy so that
homeowners understand exactly what their investment and
mitigation is going to return as far as a reduction of premium?
Is there anything else as far as the FEMA end of things that we
haven't discussed yet in the hearing?
Mr. Berginnis. I think one element is just increasing the
level of property owner awareness of mitigation. It has been,
in my experience and that of a lot of our members, that people
don't necessarily know what to do. So they either talk to
experts, maybe they talk to their floodplain managers. And so
there really isn't a good mechanism right now to proactively
educate property owners, even if they had the resources to do
it, the fact that, okay, here is the risk and here is what you
need to do to mitigate.
Mr. Zeldin. And if in the days ahead, the weeks ahead, any
additional insight on this mitigation component that wasn't
brought up during this hearing, to be able to supplement your
remarks here and your written testimony, I certainly would
appreciate. I am sure--I can't speak for everyone else, but I
would imagine everyone would appreciate that insight.
So thank you again, Mr. Chairman, for your focus on these
issues impacting my congressional district, the greatest
congressional district of America, New York One.
Chairman Duffy. The gentleman yields back.
From the second greatest congressional district in the
country, the Chair now recognizes the gentleman from Illinois,
Mr. Hultgren, for 5 minutes.
Mr. Hultgren. Thank you, Mr. Chairman.
Thank you all for being here. Again, this is a very
important subject for all of us.
But I want to address the first question to Mr. Hecht, if I
could. As you are aware, companies who write NFIP policies must
sign a noncompete clause, which pushes those companies to the
sidelines in terms of developing and offering private flood
insurance policies.
Two-point question, if I could: One, could you discuss how
this could derail efforts for private sector innovation and
participation in the flood insurance market? And two, would you
support legislation that eliminates the noncompete clause now
required by FEMA?
Mr. Hecht. Let me answer the second one. It is easier. Yes,
I would support the legislation. And the cause and effect,
capacity is what the private market needs to take on a bigger
share of the National Flood Insurance Program. And the Write-
Your-Own companies, if they are precluded from participating in
the private market, then you have taken that capacity out of
the marketplace. There is no reason to take that capacity out
of the marketplace.
I listened to Mr. Wright's testimony to the Senate
yesterday where he described that his reasoning was that these
Write-Your-Own companies had access to proprietary data and
that they could choose just the best risks and leave him with
the worst risks.
Again, the private market is going to write the risks that
they want to write. It is not a matter--we don't necessarily
agree with FEMA on what the right risks are, but that financial
arrangement should be amended.
Mr. Hultgren. Thank you.
Ms. Luckman, I wonder if I could address a couple of
questions to you. 60 Minutes did a story on the Sandy claims
review process in 2015, in which homeowners were interviewed
about falsified engineering reports done on their homes after
Superstorm Sandy. According to the story, engineers found
flooding to be the cause of structural damages, only to learn
later that their reports were changed by the insurance company,
who, by the way, take on none of the loss risk as a Write-Your-
Own company. According to 60 Minutes, insurance companies have
argued the reason the engineering reports were changed was to
allow for a peer review process, which is a standard practice
in the insurance industry.
First question: Is it common for an engineering report to
be changed without the knowledge of the engineer who prepared
the report?
Ms. Luckman. No, I don't believe that is common practice.
And if it was truly peer review, the secondary person reviewing
a report would have also been a licensed engineer.
What we saw, especially in the cases of HiRise Engineering,
is that Mr. Pappalardo, against whom the AG had recently
pressed criminal charges, wasn't even a licensed engineer. He
was just purely making changes to reports, rubber stamping
them, and sending them out the door to deny damage.
Mr. Hultgren. What do you believe accounts for the
inexplicable fraud in the claims process, especially adjusters
and engineering reports? What accounts for that fraud, do you
think?
Ms. Luckman. First and foremost, I think the fear, that we
have heard from many adjusters that we work with, that if they
overpay a claim, that there is that fear of audit; that FEMA
may come back and say, why did you overpay the claim, whether
it be $10, $1,000, or $100,000; and that there needs to be put
safeguards in place that there needs to also be an audit for
underpayment. And I think if there was audit for underpayment,
we wouldn't have seen nearly half of the fraud that we saw in
the review process.
Mr. Hultgren. That maybe answers my last question, but I
will ask it still: What do you think we can do to prevent
something like this from happening again? Do you think that is
the answer?
Ms. Luckman. I definitely think there needs to be an audit
requirement for underpayments. I think the messaging needs to
be clear that there will be an audit for under- and
overpayments. Payments should be proper. If an adjuster is
getting paid to adjust a claim, they need to adjust it
properly. And if they are unable to do that, then they should
not be allowed to participate in the National Flood Insurance
Program.
Mr. Hultgren. Mr. Hecht, if I can go back to you, one last
question with my one last minute. In your testimony, you
mention a FEMA-subsidized rate policy written in Illinois in
2006 for $998 that renewed this year for $2,525, an increase of
153 percent over 10 years. You go on to say that private market
providers may choose to write FEMA-subsidized risk.
Is this policy in Illinois an example of where the private
market could step in and provide better terms than the
government? I could just see private providers take on a
greater role in the market, but I am also a little surprised
you can compete with government-subsidized policies.
Mr. Hecht. Correct. The rate increases that FEMA has taken
on subsidized policies have opened the door for the private
market. We are the largest writer of private flood insurance
currently. We do have competition. There are several other
private market providers. All of them, to the best of my
knowledge, are concentrating on writing FEMA's subsidized
risks. It is not my company that is not cherry picking that
term. The entire private market is doing what we are doing.
Mr. Hultgren. Again, thank you all. This is obviously an
important topic. We will keep learning from you and hopefully
having ongoing communication.
I yield back, Mr. Chairman. Thank you.
Chairman Duffy. The gentleman yields back.
The Chair now recognizes the gentleman from Texas. I would
just note that he is not on the subcommittee, that is why he
goes last, but we welcome him here for his questions. Mr. Green
is recognized for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. And thank you for
allowing me to be an interloper today. I thank the ranking
member as well. They are both friends, and I enjoy working with
them.
Mr. Hecht, you insure properties in some 36 or 37 States; I
am not sure which. I have seen the two numbers, 36 and 37. Do
you insure any properties now or have you ever insured any
properties in Houston, Texas?
Mr. Hecht. Yes.
Mr. Green. If you have insured properties in Houston,
Texas, you are familiar with the Memorial Day flood that caused
over $100 million in damages, approximately, and you are
familiar with the Tax Day flood that caused about $1.9 billion,
depending on who is counting and how you count, in damages.
Now, you probably also are aware of the fact that Congress has
appropriated funds to mitigate and eliminate some of these
damages. The Army Corps of Engineers has on its docket--there
are projects that when completed would mitigate and eliminate a
lot of these damages.
The question I have for you is this: Given that we have
these $100 million floods--there is some debate as to whether
they are 100-year floods, but very little debate about the
cost--and people are victims more than once in certain areas,
and it is prognosticated that if we completed the projects that
have been authorized by Congress, money not appropriated, we
would eliminate and mitigate a lot of this flooding.
Your policyholders who are suffering because the projects
that we have authorized have not had appropriate
appropriations, they have to suffer flooding more than once. Do
you tell them that they should elevate, knowing that if the
flood control district had the money to properly mitigate they
might not have to elevate? Are you following me, Mr. Hecht?
Mr. Hecht. Yes, I am following you.
Mr. Green. How do your property--your persons that you have
insured, how do they respond to this circumstance, which is not
entirely unique? There are other places in the country where
similar circumstances exist. How do they respond to this?
Mr. Hecht. Actually, there are other places in the country
where similar circumstances exist. We paid $30 million for
flood claims in Baton Rouge just a few months ago. That is a
project that had already been approved. That project was
approved 10 years ago and never came to fruition.
Had the mitigation project, the floodplain management
project in Baton Rouge been accomplished, we wouldn't have paid
$30 million. People wouldn't have had to have elevated their
houses, they wouldn't have had to move out of their houses,
they wouldn't have had to rebuild their whole lives. So I am a
big fan of mitigation projects.
Mr. Green. And obviously, the people that you insure, they
mitigate because they raise the level of their properties. That
is a form of mitigation, isn't it, when they elevate their
properties?
Mr. Hecht. Yes.
Mr. Green. They are doing this, in some cases, because we
are not appropriating the moneys that we have authorized. And
in Houston, for example, we need about $311 million. That $311
million hasn't been spent, but after the fact, post-disaster,
we end up spending hundreds of millions of dollars.
There has to be a point wherein we do this thing called
cost-benefit analysis, that we are so fond of talking about
here, and at some point we have to fund these projects and
spend less on what we will call the front end of the process as
opposed to more on what we will call the back end of the
process. Are you in agreement with me, Mr. Hecht?
Mr. Hecht. I am.
Mr. Green. Okay. Does anybody differ with me on the panel?
Everybody agrees.
I am going to move to do something quickly. I have some
documents that I would like to introduce into the record,
without objection, hopefully, Mr. Chairman: A resolution from
the Harris County Commissioners Court signed by all
commissioners supporting reauthorization; a statement from the
Communications Workers of America indicating that they would
support the completion of these flood control projects; a
letter from the City of Houston signed by Mayor Turner
indicating that some 2,700 homes were damaged in the April 18th
floods; a letter from the Flood Control District indicating
that they could use the $311 million to help mitigate and
eliminate; a letter from the Houston Partnership indicating
that about $1.9 billion in damages were done with one of the
floods, the Tax Day flood; and a letter from the Houston
REALTORS Association indicating that the 2016 Tax Day flood
caused 1,362 homes to be damaged that were within the 100-year
floodplain.
Mr. Chairman, I ask that these be added to the record.
Chairman Duffy. Without objection, the documents will be
included in the record.
Mr. Green. Mr. Chairman, if I may say so, just in closing,
I was disappointed to hear that the President was going to cut
$190 million from the discretionary appropriations in NFIP, but
I was also even more disappointed to learn that he is
appropriating $4.5 billion for Executive Orders, one of which
is to deal with a wall that Mexico is supposed to pay for.
I yield back the balance of my time.
Chairman Duffy. The gentleman yields back and is well over
a minute beyond his 5 minutes.
The Chair now recognizes the ranking member, Mr. Cleaver.
Mr. Cleaver. Mr. Chairman, I have a communication from the
National Association of Federal Credit Unions addressed to both
you and me that I would like to have introduced into the
record.
Chairman Duffy. Without objection, the document will be
included in the record.
Chairman Duffy. The gentleman yields back.
I want to thank our panel for their testimony today.
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.
Again, I want to thank you for your time today and your
testimony, for helping this panel get up to speed on your
experience so we can develop the best product possible in a
timely manner.
With that, and without objection, this hearing is now
adjourned.
[Whereupon, at 4:15 p.m., the hearing was adjourned.]
A P P E N D I X
March 16, 2017
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