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38–391 PDF 2007

H.R. 920, THE MULTIPLE PERIL

INSURANCE ACT OF 2007

HEARING

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND COMMUNITY OPPORTUNITY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

JULY 17, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–50

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON HOUSING AND COMMUNITY OPPORTUNITY

MAXINE WATERS, California, Chairwoman

NYDIA M. VELA ́ ZQUEZ, New York 

JULIA CARSON, Indiana 

STEPHEN F. LYNCH, Massachusetts 

EMANUEL CLEAVER, Missouri 

AL GREEN, Texas 

WM. LACY CLAY, Missouri 

CAROLYN B. MALONEY, New York 

GWEN MOORE, Wisconsin, 

ALBIO SIRES, New Jersey 

KEITH ELLISON, Minnesota 

CHARLES A. WILSON, Ohio 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

BARNEY FRANK, Massachusetts 

JUDY BIGGERT, Illinois 

STEVAN PEARCE, New Mexico 

PETER T. KING, New York 

PAUL E. GILLMOR, Ohio 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

GEOFF DAVIS, Kentucky 

JOHN CAMPBELL, California 

THADDEUS G. McCOTTER, Michigan 

(V)

C O N T E N T S 

Page 

Hearing held on: 

July 17, 2007 ..................................................................................................... 1

Appendix: 

July 17, 2007 ..................................................................................................... 57

WITNESSES 

TUESDAY, JULY 17, 2007

Baker, W. Anderson III, CPCU, ARM, President, Gillis, Ellis & Baker, Inc. .... 37

Baker, Hon. Richard H., a Representative in Congress from the State of 

Louisiana .............................................................................................................. 10

Conrad, David R., Senior Water Resources Specialist, National Wildlife Federation ................................................................................................................... 41

Hartwig, Robert P., Ph.D., CPCU, President and Chief Economist, Insurance 

Information Institute ........................................................................................... 39

Jindal, Hon. Bobby, a Representative in Congress from the State of Louisiana ..................................................................................................................... 13

Majewski, Ted A., Senior Vice President, Harleysville Insurance Group, on 

behalf of the Property Casualty Insurers (PCI), the American Insurance 

Association (AIA), and the National Association of Mutual Insurance Companies (NAMIC) ................................................................................................... 34

Maurstad, David I., Federal Insurance Administrator, and Assistant Administrator, Mitigation Directorate, Federal Emergency Management Agency ...... 15

Melancon, Hon. Charlie, a Representative in Congress from the State of 

Louisiana .............................................................................................................. 8

Pogue, Pamela Mayer, Immediate Past Chair, Association of State Floodplain 

Managers, Inc. ...................................................................................................... 30

Praeger, Sandy, Commissioner, State of Kansas Insurance Department, and 

President-elect, National Association of Insurance Commissioners ................ 32

Small, Cheryl A., Policy Advisor, National Flood Determination Association ... 36

Swagel, Hon. Phillip, Assistant Secretary for Economic Policy, U.S. Department of the Treasury ........................................................................................... 17

Taylor, Hon. Gene, a Representative in Congress from the State of Mississippi .................................................................................................................. 6

APPENDIX 

Prepared statements: 

Baker, W. Anderson III .................................................................................... 58

Conrad, David R. .............................................................................................. 65

Hartwig, Robert P., Ph.D., CPCU ................................................................... 68

Jindal, Hon. Bobby ........................................................................................... 79

Majewski, Ted A. .............................................................................................. 82

Maurstad, David I. ........................................................................................... 86

Pogue, Pamela Mayer ....................................................................................... 89

Praeger, Sandy .................................................................................................. 95

Small, Cheryl A. ............................................................................................... 107

Swagel, Hon. Phillip ......................................................................................... 113

Taylor, Hon. Gene ............................................................................................. 115

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Taylor, Hon. Gene: 

Letter from Allstate .......................................................................................... 125

Page

VI

Taylor, Hon. Gene—Continued

Letter from Governor Haley Barbour ............................................................. 129

Letter from Senator Trent Lott ....................................................................... 131

Letter from Nationwide Insurance .................................................................. 132

Baker, Hon. Richard: 

Copies of charts referred to in testimony ....................................................... 134

Pearce, Hon. Stevan: 

Statement of the Consumer Federation of America ...................................... 136

Letter from the American Insurance Association, the National Association 

of Mutual Insurance Companies, the Property Casualty Insurers Association of America, and The Financial Services Roundtable ..................... 146

(1)

H.R. 920, THE MULTIPLE PERIL 

INSURANCE ACT OF 2007

Tuesday, July 17, 2007

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 2 p.m., in room 

2128, Rayburn House Office Building, Hon. Maxine Waters [chairwoman of the subcommittee] presiding. 

Members present: Waters, Cleaver, Green; Biggert, Pearce, and 

Miller of California. 

Also present: Representatives Watt, Kanjorski, Hinojosa, Baker, 

Melancon, Taylor, and Jindal. 

Chairwoman WATERS. Good afternoon. This hearing of the Subcommittee on Housing and Community Opportunity will come to 

order. 

Good afternoon, ladies and gentlemen. I would like to thank the 

ranking member, Ms. Judy Biggert, and members of the Subcommittee on Housing and Community Opportunity for joining me 

for today’s hearing on the Multiple Peril Insurance Act of 2007, 

H.R. 920. 

I would like to start by noting that without objection, Mr. Paul 

Kanjorski, the chairman of the Subcommittee on Capital Markets, 

Insurance, and Government Sponsored Enterprises; Mr. Mel Watt, 

chairman of the Subcommittee on Oversight and Investigations; 

and Mr. Ruben Hinojosa will be considered members of the subcommittee for the duration of this hearing. Also without objection, 

all members’ opening statements will be made a part of the record. 

I am looking forward to hearing from today’s witnesses about 

H.R. 920, the Multiple Peril Insurance Act of 2007, introduced by 

Rep. Gene Taylor and co-sponsored by a number of Members, including me. As you know, last month, the Subcommittee on Housing and Community Opportunity held a hearing on H.R. 1682, the 

Flood Insurance and Reform Modernization Act of 2007, because of 

issues related to flood insurance reform and modernization, as well 

as funding, and the National Flood Insurance Program. 

Given the ongoing debate concerning wind and flood risk, I believe it is prudent for the subcommittee to address the policy implications of H.R. 920 related to the National Flood Insurance Program. H.R. 920, the Multiple Peril Insurance Act, would create a 

new program in the National Flood Insurance Program to enable 

the purchase of wind and flood risk in one policy. The bill requires 

2

premiums for the new optional coverage to be risk-based and actuarially sound, so that the program would be required to collect 

enough premiums to pay claims. 

Multiple peril policies would be available where local governments agree to adopt and enforce building codes and standards designed to minimize wind damage in addition to the existing flood 

program requirements for floodplain management. Any community 

participating in the flood insurance program could opt-in to the 

multiple peril option, but the greatest demand for the optional coverage product will be in coastal areas that face both flood and wind 

risk from hurricanes and tropical storms. 

Because insurance companies are withdrawing from coastal 

areas, State-sponsored insurers of last resort have been forced to 

take on much more disaster risk. The Multiple Peril Insurance Act 

would allow homeowners to buy insurance and know that their 

damage from both wind and water will be covered. This is primarily a concern after a hurricane, where the worst destruction is 

typically caused by a combination of wind and flooding. Homeowners would not have to hire lawyers, engineers, and adjustors to 

determine what damage was caused by wind, and what was caused 

by flooding. 

The bill would set residential policy limits at $500,000 for the 

structure, and $150,000 for contents and loss of use. Non-residential properties could be covered up to $1 million for structures and 

750,000 for contents and business interruption. Once the new optional coverage program is enacted, a private insurance market 

should develop to offer coverage above the limits. This would allow 

insurance companies to design policies that would have the equivalent of a $500,000 deductible for residential properties or a $1 million for non-residential properties. 

Again, I look forward to hearing the witnesses’ testimony on H.R. 

920, and now I would like to recognize the ranking member, Ms. 

Biggert, for her opening statement. 

Mrs. BIGGERT. Thank you, Chairwoman Waters, and thank you 

for holding today’s hearing on H.R. 920, the Multiple Peril Insurance Act of 2007. 

I had the pleasure of spending time with Mr. Taylor at a field 

hearing in Mississippi earlier this year, and I appreciate his hospitality as well as his commitment to his community and the issue 

of insurance availability. I’d also like to thank both Congressman 

Baker and Congressman Jindal for their longstanding interest in 

natural disaster issues, and I look forward to their testimony 

today. 

In February, I did visit the Gulf Coast and saw the devastation 

that Hurricanes Katrina and Rita caused in both Louisiana and 

Mississippi. It has been almost 2 years since the hurricanes hit 

land, and entire neighborhoods still await rebuilding, in part because many homeowners face difficulties in securing insurance. 

Today we will hear from witnesses to help us determine if wind 

should be added to the National Flood Insurance Program, and I 

will admit that at this time, I do not support this idea, which is 

envisioned in Mr. Taylor’s legislation. But at the same time, I do 

think that we need to more closely examine the insurance availVerDate 0ct 09 2002 15:57 Nov 19, 2007 Jkt 038391 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\38391.TXT HFIN PsN: TERRIE
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ability problems that exist in some areas of the country like the 

Gulf Coast. 

First, I am interested in hearing from today’s witnesses about 

the ways that State regulatory systems influence insurance availability. Why are there availability problems in some States, but not 

others? Are insurers allowed to price for the true risk a particular 

property faces? In Illinois, free market pricing benefits consumers, 

ensuring that they will have choices, since insurers are encouraged 

to compete for their business. I’m also interested in discussing 

ways we might lessen the regulatory burden to spur the creation 

of a private market multiple peril policy at an affordable rate for 

consumers. 

Second, I’m concerned that expanding the Flood Insurance Program to include wind could compromise efforts to enact much-needed reform of it and FIP, which is the Nation’s largest single-line 

property insurance provider. To help reform the Flood Insurance 

Program, I introduced H.R. 1682, the Flood Insurance Reform and 

Modernization Act, with Chairman Frank. I look forward to marking-up this legislation at the end of this month. 

To put it simply, the NFIP is under water. To pay 2005 hurricane claims, the Program was forced to borrow from the Treasury 

a substantial amount of money, over $17 billion, that it will likely 

not be able to repay. I’ll admit that I’m a bit of a skeptic. It seems 

to me that before expanding a sinking Federal program, we should 

reform it. We need to reform the NFIP by updating the Nation’s 

flood maps, improving private/public sector coordination, and removing subsidies from properties that repeatedly flood. 

In January, the Government Accountability Office placed the 

Flood Insurance Program on its high-risk series list which recommends increased congressional oversight for troubled programs. 

So before expanding the NFIP to include wind, we should keep our 

commitment to reform the NFIP and to move H.R. 1682. 

Third, H.R. 920 requires that wind coverage be offered at actuarial rates. I support actuarial insurance pricing, but I’m concerned 

that it is a concept that does not work in practice. Approximately 

one quarter of NFIP policies currently in place are subsidized. The 

Congressional Budget Office believes that even unsubsidized properties may not be charged at actuarial rates because outdated flood 

maps do not in many cases accurately identify risk. I’m concerned 

that wind coverage would be no different, further exposing taxpayers to large financial risks should an underfunded wind program face another Katrina. 

After such large events like the 2005 Gulf Coast hurricanes, the 

market must reevaluate its exposure and the regulatory environment in the wake of tremendous disasters, natural and otherwise. 

We often seek a silver bullet to make things run more smoothly 

next time or prevent the past from repeating itself; however, we 

must be careful not to move too quickly. After Enron and other accounting scandals, the committee worked diligently to enact reform 

legislation. While Sarbanes-Oxley represents an important step forward in safeguarding our Nation’s financial markets, in the years 

since its enactment, we have learned that acting too quickly can 

lead to problems down the road. 

4

Instead of endorsing one legislative approach over another, at 

this point we should study and review ways to increase insurance 

availability and encourage the private sector to offer this coverage 

over the long term. 

I look forward to continuing to work on reforming flood insurance 

programs and setting ways to encourage a more robust market for 

catastrophic insurance. 

I yield back. 

Chairwoman WATERS. Thank you very much, Ranking Member 

Biggert. I would now like to recognize Mr. Cleaver for 5 minutes. 

Mr. CLEAVER. Thank you, Madam Chairwoman, and I take this 

opportunity to express appreciation to you and Ms. Biggert for 

leading the delegation down to the Gulf region earlier this year, 

and we had an opportunity to visit with our colleague, Congressman Gene Taylor, who was kind enough to spend a considerable 

amount of time with us, showing us around. 

This is a very important hearing. I think most of the hearings 

we have are important, but to me this is extremely significant because of the discussions that people are still having about what 

happened in the Gulf Coast region and, in many instances, the failures of the Federal Government. And I think we have an opportunity now to be proactive. 

I have a little different perspective with regard to the term ‘‘acts 

of God,’’ only because in the context that we are dealing with, it 

is something negative, and we are experiencing one of the ‘‘acts of 

God’’ right now. It’s just called an avalanche of oxygen. 

That’s theological. We don’t have to get into it. We can exchange 

papers on the subject, but the final point I want to make here is 

that—and this may be somewhat provocative—in addition to flood 

and wind coverage, at some point, perhaps not today, but at some 

point, I think it is going to be important for us to explore other perils like earthquakes and tornadoes. 

Tornadoes, for example, are readily seen in my native State of 

Texas, and of course in Missouri, which I represent today, and all 

over the Midwest. And so I think at some point that needs to be 

dealt with. I am very proud to be a co-sponsor with my colleague, 

Gene Taylor, on the all peril insurance bill, H.R. 920. I look forward to hearing your comments and being directed in another way 

that would be better than the direction we’re traveling. 

Thank you, Madam Chairwoman. 

Chairwoman WATERS. You’re welcome. And now, I would recognize the gentleman from North Carolina, Mr. Mel Watt, who is also 

the chairman of the Subcommittee on Oversight and Investigations. 

Mr. WATT. I thank the gentlelady for yielding me time, but I just 

came to listen, having developed an intense interest in this because 

of the oversight hearings that we are having regarding the failure 

of the insurance payment process in the aftermath of Hurricane 

Katrina. I’m disappointed that more of the members are not here 

to get actively engaged in this because it’s an issue that we really, 

really must deal with and deal with more aggressively than we 

have. 

And like Representative Cleaver, one of the concerns I have is 

whether the proposal goes far enough in defining the range of perVerDate 0ct 09 2002 15:57 Nov 19, 2007 Jkt 038391 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\38391.TXT HFIN PsN: TERRIE
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ils that should be included under a policy that is written by the 

Federal Government as opposed to private insurers. 

The difference, it seems to me, between the market being able to 

take care of insurance, as Ms. Biggert has indicated is a desirable 

and worthy objective for the market to be able to do, is that when 

you have catastrophic acts of God that can’t be really anticipated 

or reserved for, those are the circumstances in which the risk 

should be spread throughout the Nation because that’s what the 

whole idea of the Nation coming to the aid of people who have had 

catastrophic losses is all about. 

So while private insurers can model and anticipate and reserve 

for and calculate on statistically the likelihood of fires in Chicago, 

or in Illinois, where the gentlelady is from, I don’t think I remember Chicago having a flood of the magnitude of Katrina, or Illinois 

having a flood of the magnitude of Katrina. So you get into these 

situations where, if the private market has part of the coverage, 

and the Federal Government has part of the coverage, you are always going to have these finger-pointing episodes with people 

pointing the finger at each other and saying, you’re responsible for 

that. 

And so there needs to be some threshold, I think, above which 

a Federal catastrophic policy, call it a multi-peril policy, kicks in 

because we recognize that as being beyond what can be reasonably 

anticipated by the private market and reasonably insured against 

by the private market. So this is a very difficult issue, and it’s not 

that I have any opposition to the private sector doing this, but I 

think the gentlelady will find that even the private sector is in full 

accord with trying to get out of these guessing games when you 

have a 100-year or 1,000-year flood. 

The private market simply can’t model and insure against that, 

and the masses of the American people ought to be put at risk 

under those circumstances so that we can spread that risk appropriately across the entire Nation. 

Chairwoman WATERS. Would the gentleman yield? 

Mr. WATT. I’m happy to yield to the gentlelady. 

Mrs. BIGGERT. Since the gentleman mentioned fire, I might just 

remind him that the whole City of Chicago burned down. 

Mr. WATT. And I’m not suggesting that fire is one of the perils 

that ought to be insured against. I guess there are occasions on 

which fires have been caused by acts of God where you have lightning striking somewhere, and it sets off a fire. But at least the insurance companies know the likelihood that a fire is going to break 

out, and it may be a theological debate, as Reverend Cleaver indicated. Few of us know the likelihood that an act of God is going 

to consume us, and I think that’s kind of the threshold that the 

American people ought to be prepared to accept when they accept 

the fact that an act of God has intervened and you can’t really anticipate that. 

I’m over my time. I appreciate the gentlelady yielding the time. 

I didn’t really intend to take anywhere near that amount of time, 

but I appreciate the gentlelady having to yield. 

Chairwoman WATERS. Thank you very much, Mr. Watt. 

At this time, I’d like to introduce our first panel of witnesses, including several of our distinguished colleagues in the House. ServVerDate 0ct 09 2002 15:57 Nov 19, 2007 Jkt 038391 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\38391.TXT HFIN PsN: TERRIE
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ing on this committee: Hon. Richard Baker, the author of the bill; 

the Hon. Gene Taylor; and also, representing Louisiana, Hon. 

Charlie Melancon and Hon. Bobby Jindal. 

Thank you all for coming. I don’t know when we’ve had such a 

distinguished panel before my subcommittee. So with that, we will 

start with our first witness, Mr. Taylor. 

STATEMENT OF THE HONORABLE GENE TAYLOR, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MISSISSIPPI 

Mr. TAYLOR. Thank you, Madam Chairwoman. 

Madam Chairwoman, just as a quick reminder, on the day I was 

elected to Congress, coincidentally, the San Francisco earthquake 

occurred, and I remember some of the earlier votes that I cast were 

for the supplementals to help the people in that area. The people—

people back home—said, ‘‘Why are you doing that?’’ And I distinctly 

remember saying that there will come a time when we’re going to 

need the help of the people from California, and I want to thank 

you for being the face of that help. You have been of tremendous 

assistance, and I’m personally indebted to you. And when this is 

all said and done, the people of Mississippi, the people of our country, are going to be indebted to you as well. 

I want to thank all of you for being here and for your trips to 

Mississippi. Most of you have come to Mississippi only in the aftermath of the storms, but if you had been to the south coast of Mississippi prior to Hurricane Katrina, if you’d gone to my neighborhood, you would have seen a house like this one. 

That’s my buddy, Jody Bienvenutti. He lived about a hundred 

yards from me. He had a house that was about 180 years old, been 

through no telling how many hurricanes. He is in the supplemental 

health insurance business, so he had a lot of faith in the insurance 

industry. He bought a lot of insurance—about $586,000 worth of insurance on that house. 

That’s what it looked like the day before Katrina. This is what 

it looked like 2 days later when he could make his way back from 

Mobile to see what he had left. If he would have gone a little bit 

further down the block, you’d have seen the home of Corky and 

Molly Hadden. And Corky is a financial planner, MBA, built a hurricane-proof home. Look at it. It’s up on stilts. It has a very shallow 

roof to minimize the wind exposure. It has shutters. He built a hurricane-proof home. He’s a financial planner, a very smart guy financially. 

So he insured that home for $650,000. He was also out of town, 

smartly, on the day of the storm; he got out like the local authorities told him to. When he got back, this is what he found. Jody had 

$580,000 worth of insurance; Corky had $650,000; and 23 months 

after that storm, neither one of them has gotten a penny from their 

insurance company. To give you an idea of the magnitude of the 

storm, I really could have started in Slidell, Louisiana, about 30 

miles to the west of where my house was, and I could have gone 

to Bayou la Batre, Alabama, which is probably 80 miles to the east 

of me. 

So I’ll go a little bit further to the east to the town of Long 

Beach, Mississippi, which looking at is a fairly typical south MisVerDate 0ct 09 2002 15:57 Nov 19, 2007 Jkt 038391 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\38391.TXT HFIN PsN: TERRIE
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sissippi home owned by the Kissingers. They had $149,000 worth 

of insurance. This is what it looked like the day before the storm. 

This is what it looked like when they could make their way back 

to it. They had $149,000 worth of insurance. They were luckier 

than most. They were paid $21,000 on a $149,000 policy. 

Now, if you go about another 15 miles to the east of Biloxi, Mississippi, and if you’d been there the day before the storm, you 

would have seen the Strawns’ home and get a fairly typical south 

Mississippi home. They had $134,000 worth of insurance. They 

came home to that, and their insurance company paid them nothing. 

You could go east another 20 miles to Ocean Springs, Mississippi, to the home of the Openchofski family, again, another fairly typical south Mississippi home. This is what it looked like the 

day before Katrina. This is what it looked like the day after. They 

had a $143,000 policy, and they got paid nothing. 

The point I’m trying to make is whether it is Slidell, Louisiana; 

Bay St. Louis, Mississippi; Ocean Springs, Pascagoula, Mississippi; 

or Bayou la Batre, Alabama, a natural event occurred where people 

built what they thought were safe houses, where they bought what 

they thought was an insurance policy that would be their good 

neighbor, or they’d be in good hands. They paid their premiums. 

And in the weeks after the storm, one by one they had an adjustor come to their house and say, we see no evidence of wind damage. We’re not going to pay you a dime. Sometimes they stretched 

that out for days, sometimes for weeks, and sometimes for months. 

And the insurance will come to you and they’ll say, but we settled 

all these claims. We settled 98 percent of them. 

The day they walked on my property, 2 weeks to the day of the 

storm and said—despite all the evidence to the contrary and despite that I walked them hundreds of yards from where my house 

was, showed them where my tin roof was—tin doesn’t float; where 

the holes were where it ripped through the bolts that attached it 

to the roof—and they just, with bold face said, ‘‘We see no evidence 

of wind damage.’’ 

So I know what happened. And so whether they told you 2 weeks 

after the storm, 2 months after the storm, or 2 years after the 

storm, the fact of the matter is that people who played by the rules 

and expected their insurance company to play by those same rules 

got screwed by their insurance companies. It is the only way to describe it, as individuals. 

But it gets worse, you see, because when the insurance companies don’t pay claims that they should, because we are a generous 

nation, our taxpayers do. 

Almost every homeowner’s policy had cost-of-living expenses. If 

you lose your place, while you are out, we are going to pay for your 

apartment. We’re going to pay for this. Well, if they deny your 

claim, you don’t get the cost-of-living. So in south Mississippi alone, 

at its peak, we had 42,000 government-furnished FEMA trailers for 

people whose homes were either completely destroyed or substantially destroyed, where our Nation paid to put that $16,000 trailer 

on their property, paid another $16,000 just to deliver it to their 

property, where our Nation wrote them a FEMA check for their adVerDate 0ct 09 2002 15:57 Nov 19, 2007 Jkt 038391 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\38391.TXT HFIN PsN: TERRIE
8

ditional cost-of-living expenses because the insurance company 

didn’t pay. 

Madam Chairwoman, it gets worse than that because not only 

did we get stuck with that expense, but under the Federal writeyour-own policy, we allowed the insurance companies to determine 

whether the claim was for wind or for water. And so you’re sending 

a 25-year-old claims adjustor out there who’s thinking about his 

Christmas bonus, who’s thinking about his next promotion. And 

you’re putting him in the horrible position of saying, do I ask my 

company to pay and say the wind did it, or do I ask the taxpayers 

to pay and say the water did it all? 

Whenever given the chance, they blamed it on the water. They 

stuck the taxpayer with the bill and right now in the State of Louisiana, there is a multi-billion-dollar civil action suit for people who 

are trying to recover the money that the taxpayers were wrongfully 

billed. 

So, for a lot of reasons, I want to commend you for what you’re 

doing, for looking into this. I’d like to submit for the record letters 

from Senator Lott and Governor Barbour, who are both in support 

of something along this line of addressing the problem. 

And again, thank you for your personal interest and your willingness to have what is now, I think, the fifth hearing on insurance 

reform since the Democrats took over. 

[The prepared statement of Representative Taylor can be found 

on page 115 of the appendix.] 

Chairwoman WATERS. Thank you very much. And without objection, such is the order. 

Mr. Melancon? 

STATEMENT OF THE HONORABLE CHARLIE MELANCON, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF LOUISIANA 

Mr. MELANCON. Thank you, Madam Chairwoman. 

I appreciate you holding this hearing today and I appreciate 

Gene for working so hard and putting together a bill. No bills are 

perfect, but at least maybe we can get this thing and move it along 

to where we start remedying the problems, which may have started 

in Mississippi, Louisiana, Alabama, and Texas, but are obviously 

spreading and spreading quickly along all coastal areas of this 

country that are subject to storms, including the island of Manhattan. 

In August of 2005, America watched as Katrina destroyed over 

200,000 homes in southeast Louisiana, and then saw even more destruction just a few weeks later as Hurricane Rita ripped apart 

southwest Louisiana and took almost another 25,000 homes. After 

the Gulf Coast suffered through two of the worst natural disasters 

in the country, our people were forced through the indignity of another battle—that of fighting their insurance companies, as homeowners’ insurance policies covered damage caused by wind, but not 

damage from flooding or storm surge. 

Because it can be difficult to prove whether wind or water from 

a hurricane caused a home’s damage, many Katrina and Rita victims found that their insurance companies denied or low-balled 

their claims, leaving some of them to rely solely on payouts from 

9

the National Flood Insurance Program, which in turn had to make 

outrageously high payments at taxpayers’ expense. 

Thousands of homeowners took their insurance companies to 

court before they got the insurance payouts they were owed from 

years of faithfully paying their homeowners’ premiums. Today, almost 2 years after the storm, some are still waiting for a check so 

they can rebuild their homes; family and friends and others that 

I know included. 

At the same time, insurance companies have been hastily pulling 

out of coastal areas like south Louisiana, canceling policies and refusing to write new ones. More and more people in south Louisiana 

are being forced to turn to Louisiana’s State-sponsored insurer of 

last resort for their homeowners’ insurance, paying premiums that 

are way above market rates. 

While Louisiana’s strong consumer protection laws protected 

many homeowners who have had insurance policies for at least 3 

years from being dropped by their insurance companies, they are 

by no means the lucky ones. Even those who did not file claims 

after the 2005 hurricane are now being hit with skyrocketing premium increases, often as much as 2 or 3 times what they had paid 

before the storm. 

The district I represent in Louisiana is almost entirely in the 

hard-to-insure part of the State, and every day I get calls, e-mails 

and letters from constituents begging that the Congress do something about the insurance crisis in south Louisiana. I’ve brought 

some of those, and we can enter those into the record. 

One is a guy named Roy Barrios of South Lafourche who wrote 

me saying that Allstate recently canceled his homeowners’ insurance policy and he now will have to pay 3 times as much for coverage from Louisiana’s insurance of last resort. He was only 2 

months shy of being covered by Louisiana’s consumer protection 

laws that would have kept his policy from being canceled, although 

he noted that Allstate is still happy to renew his profitable automobile insurance policy. 

Similarly, Todd Ramirez of Thibodaux, Louisiana, told me his annual premium increased in one year from $1,188 to $4,165, almost 

300 percent. 

Jeanette Tanguis of Houma, Louisiana, said her premium increased $200 per month. In a letter to me she wrote: ‘‘Having spent 

most of my life living in Terrebonne Parish, it never occurred to me 

that I would be forced to move from the place I love and have 

called home for most of my life. Unfortunately, my family and I are 

being forced to make this sad decision.’’ 

These are only a few of the many stories I hear from people who 

are being forced to leave their homes and their communities. 

We in Congress must act quickly to solve this insurance crisis so 

that middle-class families, the backbone of our economy, can continue to afford to live in coastal communities. 

All-peril insurance, like the proposal Mr. Taylor has, would go a 

long way in addressing some of the insurance problems highlighted 

by Katrina and Rita. By bundling wind and water coverage into 

one plan, multi-peril insurance would cover home damage by hurricanes, regardless of whether winds or flooding caused the damage. 

10

Not only will this provide homeowners with peace of mind, it will 

indirectly save them money because they will be able to avoid costly and time-consuming legal battles like those waged after Katrina 

and Rita, when many homeowners had to hire lawyers and engineers to do independent assessments. A multi-peril insurance policy will create more efficiency in adjusting claims, and homeowners 

will receive their payments much faster than under the two-policy 

system. 

Finally, a multi-peril homeowners’ insurance program will rein 

in insurance premium costs because rates would be required to be 

actuarially sound. Also, a multi-peril NFIP can make premiums in 

coastal communities manageable by spreading risk among a much 

larger pool of policyholders. With over 50 percent of Americans living within 50 miles of the coast, a national multi-peril insurance 

program would have plenty of prospective customers. It is time to 

recognize that market failure exists. 

The Federal Government recognized this reality when it created 

crop insurance, which now supports a healthy, domestic agriculture 

industry that can feed American families. The inability of private 

insurance markets to handle catastrophic losses became evident 

after Katrina and Rita and the sharp decline in the availability of 

affordable homeowners insurance is crushing our rebuilding effort 

along the coast. 

I thank Mr. Taylor, and Ms. Waters, I thank you for your efforts. 

Chairwoman WATERS. Thank you very much. 

Now, we’ll hear from Representative Baker. 

STATEMENT OF THE HONORABLE RICHARD H. BAKER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF LOUISIANA 

Mr. BAKER. Thank you, Madam Chairwoman, Ranking Member 

Biggert, and members of the subcommittee. 

I appreciate the opportunity to be here, and I want to acknowledge the work of my colleagues as being helpful to bringing about 

a remedy. At least they have come together with a proposal and 

got it on the table. I, however, have slightly different suggestions 

to make to the committee, that I hope will be taken under consideration, and I’ll jump right to it. 

Similar to the effect of H.R. 920, but without the taxpayer liability component, Congress can authorize the issuance of a national, 

multi-peril insurance policy. The Congress can determine what 

goes into that insurance box. We can include Mr. Cleaver’s tornadoes; we can include western wildfires. We can describe the risk 

that would be covered by such a proposal and ensure that there 

would be no limits. One of the difficulties with the flood insurance 

program is a person’s second home, a vacation home on the beach 

that’s eliminated, or greatly pays a higher premium rate. 

We don’t necessarily like it, but we have to constrain the commercial liability for which we expose ourselves to the marketplace, 

and that is driven because ultimately, taxpayers back up the National Flood Insurance Program, and all too often, the claims in recent days, are far larger than the premium flow, which leaves us 

in a $17 billion hole today. And may the Lord have mercy on us 

11

going through this next season that we don’t have more because 

that deficit will only grow larger. 

Why would a company then write such a policy? It would necessitate preemption of State law with regard to pricing. I have noted 

with great interest, everyone is insisting on actuarial rates, not 

NFIP actuarial. NFIP actuarial only looks to historical loss data. 

It doesn’t use the sophisticated risk modeling capabilities that any 

insurance company still in business today has to use to protect 

itself against future losses, so that if we had real actuarial, as I 

understand is the interest, the difference between a market-priced 

policy and NFIP-like price policy would be negligible because we’d 

both be pricing to the risk. 

Currently, it is the local rate control at the State level which precludes many from entering markets. It’s an arbitrary ceiling 

against the company’s product. And so I suggest that one way to 

go is to authorize the creation of such a product. I had hoped to 

have a document to lay before the committee today. We are engaged in working on it now, but it is not finished. I had indicated 

to Mr. Taylor that I would try to get it to him before the hearing, 

but it’s not ready for prime-time and I will not bring it to the committee until I know it’s a defensible product. 

However, there is another alternative. As we did in terrorism 

risk insurance, many commercial writers would not enter into the 

New York market without the absolute assurance that they know 

the finite amount of loss they would engage in. 

The same is true in the post-Katrina world below the interstate. 

People don’t want to write because they don’t know how much 

money they’re actually going to be engaged in losing. 

If we were to create a Federal backstop with limits—and I’m 

quick to add ‘‘with limits’’—there is an enhancement that would 

come for people entering into the market. Couple that with the 

ability to build up the internal reserves. Today, the IRS does not 

look favorably upon people building up pots of money because they 

think you’re attempting to tax evade, as well as other regulators 

don’t allow financial entities to build up what they believe to be artificial reserves. And if we were to allow the reservings to build 

specifically for the purpose of paying all perils loss, while 

ratcheting down the Federal backstop, the two could cross. So at 

some point, the private market would have in its sock drawer 

somewhere sufficient money to have a likelihood of paying all 

claims made against such a multi-peril policy. That should also, 

however, be coupled with freedom to price the product according to 

the risk the company agrees to take, and that is a voluntary decision. 

If you really want to fix the problem, and this is not maybe quite 

so serious; it’s my remedy but I don’t expect you to take it. It would 

likely be very controversial, and that is in the insurance world, 

generally, to allow people to sell insurance product for the price 

they can sell it for. Allow them to take the risk they choose to take 

as long as the State advocacy for the consumer stays in place to 

ensure that obligations made are obligations kept. 

Now, that is a very dangerous precedent, and I have 6 years of 

hearings, 21 to be exact, with 150 witnesses and volumes of letters 

in my file to prove how wrong I am. But it is absolutely the right 

12

thing to do in the marketplace to make this system work in a responsible manner. 

Why is this important? When you look at the average rate of return in financial sectors, securities firms—they almost beat Fannie 

Mae and Freddie Mac. They have averaged, over the last 5 years, 

a 19 percent rate of return on equity. Commercial banks have averaged 14 percent. The property and casualty insurance sector has 

barely made a 5 percent rate of return. Now, there’s a reason why 

people don’t get into the business of taking this risk. They’re not 

just worried about an unprofitable year. They’re worried about insolvency. 

And so we need to address the issues of why the underlying elements of the commercial insurance marketplace is not working the 

way the rest of the financial marketplace is apparently working. 

The end result of a flood insurance program, which I support, is 

that it has distorted the marketplace. We have created a program 

that takes one product, subsidizes it in a taxpayer way, and therefore has created this wind versus water litigation flood that we’re 

all in the midst of. 

I agree with Mr. Taylor that something has to be done, but I 

think a remedy other than creating additional taxpayer liability is 

what makes the most sense. 

I will move ahead because I’m already out of time. 

There is a chart, Madam Chairwoman, that I think we have distributed. Anyway, it’s just simply two pages. The first one is all 

storms of record that have come across the Gulf or Atlantic Coast. 

The more important and relevant chart for my discussion is the one 

that’s entitled ‘‘1990 to 2006.’’ Those are the storms of record of the 

last 16 years. 

When one takes a look at the frequency of storms landing on the 

coastal United States—and you couple that with this piece of information—I called this morning to the Louisiana Insurance office in 

Baton Rouge and asked for this morning’s average quote for an insurance policy in Orleans Parish for a $200,000 new construction 

brick home. The premium today, average, this is not a single company, is $2,100 per year; 80 miles north in Baton Rouge, same 

house, same set of facts, that premium is $1,200, so there is a 

$1,000 difference by driving 80 miles. 

What you really don’t often think about, though, is if you had a 

$200,000 obligation sitting on this chart, and it was your money, 

would you take $2,100 a year on the chance that you might have 

to pay out $194,000 at some point in the future? That’s $200,000 

less the 5 percent deductible. In other words, we’re asking the insurance industry to take $2,100 premium flow in today’s market 

place, assume $190,000 responsibility, and bet that one of these 

lines isn’t going to cross your back yard. That’s the problem we 

face. 

And, Madam Chairwoman, I appreciate your time and courtesy. 

I really want to work with the committee in going forward and 

hope these ideas will have some relevance in your discussion. 

Chairwoman WATERS. Thank you very much, Mr. Baker. 

Mr. Gene Taylor? 

13

STATEMENT OF THE HONORABLE BOBBY JINDAL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF LOUISIANA 

Mr. JINDAL. Thank you, Madam Chairwoman, Ranking Member 

Biggert, and members of the subcommittee, for allowing me to testify. Thank you, more importantly, for having this hearing. 

I also want to thank Gene for allowing me to work with him on 

this legislation, The Multiple Peril Insurance Act. As you’ve heard, 

and I think it’s important to remember what this legislation will 

do. 

Chairwoman WATERS. Excuse me, did I call you Gene Taylor? I 

have Gene Taylor in my head. 

Mr. BAKER. Don’t let that bother you. He’s been called a lot 

worse than that. 

Mr. JINDAL. That is true. 

[Laughter] 

Chairwoman WATERS. Thank you very much, Bobby Jindal. Excuse me. 

Mr. JINDAL. That’s all right, Madam Chairwoman. Thank you. 

Unfortunately, I’ve been called a lot worse by my colleagues in the 

delegation. 

[Laughter] 

Mr. JINDAL. I think it’s important to remind ourselves what the 

bill would actually do. It actually enables individuals to purchase 

insurance covering losses resulting from flood and wind storms 

without requiring those policyholders to distinguish flood damage 

from wind damage. I’ve heard members suggest we consider expanding the scope. Certainly, in the future, other legislation will be 

open to doing that, but for these purposes, this has been a huge 

concern, especially when you have a hurricane like Katrina, or like 

Rita, where the worst destruction is caused by a combination of 

wind and flooding. 

Under this legislation, homeowners wouldn’t have to hire lawyers, engineers, and adjustors to determine in retrospect what 

damage was caused by wind, what damage was caused by flooding. 

It has been nearly 2 years since those hurricanes devastated the 

Gulf Coast of the United States, including large land areas in my 

home State of Louisiana. Many property owners in Louisiana and 

along the Gulf Coast continue to battle their insurance companies 

for unpaid wind damage claims that they claim should have been 

paid by their insurance companies, while others are discovering 

discrepancies in the way wind versus flood damages were paid out 

by their insurance companies. 

For example, take the case of Michael Holman, a resident of the 

mid-City section of New Orleans. He should have been able to repair his home. He had both flood and homeowners insurance. His 

home suffered damage from hurricane winds that caused it to lean 

substantially in one direction. His home also took on 3 feet of 

water. He was an actual eyewitness to the destruction of his home. 

He can substantiate his claim that the hurricane event caused his 

home to shift. Despite that, his insurance company has refused to 

pay out damage claims to his home. Today, he is suing his company for not covering the wind damage that has made his home a 

complete loss. 

14

Consider the case of Chris Karpells, a prospective buyer of a 

townhouse in Slidell, Louisiana, who would be collecting insurance 

money as part of the real estate transaction. He discovered the insurance company had two ways of pricing the damage repair cost, 

depending, of course, on whether the damage was caused by wind 

or flooding. 

If the company attributed the damage to wind or rain, the price of replacing drywall, for instance, was estimated at $.76 per square 

foot. If the damage was due to flooding, the estimate quadrupled 

to $3.31 per square foot. The homeowner noted other increases in 

his insurance adjustment and noted that they are frontloading all 

the money on the flood policy. 

More than half of our country’s population lives along the coast 

in hundreds of counties or parishes. In areas such as these, many 

residents are required to purchase at least two insurance policies: 

required flood insurance; in addition to a regular homeowner insurance policy that offers wind coverage. 

We all know the limits, especially those of us living along the 

coastal areas. We all know about the exclusions as well, including, 

under the current law, any damages caused by wind or a wind 

storm. Under our current system, a single company can determine 

and apportion damages caused by the wind policy that it insures 

along those caused by flooding, which is insured by the NFIP and 

paid for by the Federal Treasury. 

In the aftermath of an event like Hurricanes Katrina or Rita, it 

sometimes is difficult to determine whether the source of damage 

was the wind that toppled the roof and allowed a property to flood, 

or if the damage was caused by rising flood waters caused by failed 

levies. That’s especially important considering that U.S. taxpayers 

are responsible for paying flood claims. 

While we appreciate the fact that after Hurricanes Katrina and 

Rita, the NFIP approved expedited claims processing for approximately 240,000 anticipated claims, thus appropriately ensuring 

homeowners weren’t prevented from rebuilding by red tape, that 

current process allows insurers to apportion damage that may inadvertently open the door to allow insurance companies to blame 

flood water when wind was the source of property damage. 

The proposed legislation could eliminate this problem by covering 

wind and flood damage under one program. Look, certainly many 

questions have been raised. Many questions should be answered 

about how exactly H.R. 920 should be implemented, what modifications can and ought to be made to make their proposed program 

even more effective. However, I believe this legislation is a positive 

solution, a positive step toward solving the problem of a lack of affordable and available insurance in Louisiana. 

Many of our constituents are still struggling with insurance companies over settlements and payments nearly 2 years after the 

storms. These are normally problems typically resolved within 3 

months after a natural disaster strikes. 

Since the 2005 hurricanes, many homeowners’ policies in the 

greater New Orleans area have seen their premiums go up more 

than 50 percent. Insurance costs have gone up an average of 12 

percent statewide. Obtaining insurance is difficult because only a 

handful of companies are writing property insurance in the State; 

15

10 of the top 25 property insurers don’t do business currently in 

the State. Many of those companies that are remaining are working to eliminate or reduce hurricane coverage from their portfolio. 

In summary, Louisianans are paying more for less insurance, if 

they can get it, which is hampering my State’s recovery from the 

storms. This legislation is a good proposal that will ensure the 

availability of property insurance which can allow recovery in this 

region to continue. 

Madam Chairwoman, I also want to thank you for your attention 

to the ideas of a Federal backstop and your general interest in the 

recovery of the Gulf Coast. We have noted your many trips down, 

your attention to the Road Home Program, and many of the challenges we face in Louisiana. 

Thank you very much. 

[The prepared statement of Representative Jindal can be found 

on page 79 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

And I’d like to say that all of the members of this committee, on 

both sides of the aisle, are very concerned about the recovery of all 

of the Gulf Coast, and we know how much time and energy all of 

you have put into trying to make that recovery happen. So we are 

going to do everything that we can, including dealing with this 

issue of wind versus water. 

And I’d like to invite all of you, if you would like, to stay and 

sit with us and ask questions. Without objection, it is so ordered. 

Thank you very much for having been here today. 

I’d like to bring our second panel to the table. Our first witness 

will be Mr. David Maurstad, Assistant Administrator for Mitigation, Federal Emergency Management Agency. And the second witness will be Mr. Phillip Swagel, Assistant Secretary for Economic 

Policy, U.S. Department of the Treasury. 

Thank you gentlemen for being here with us today. I will call on 

our first witness, Mr. Maurstad. 

STATEMENT OF DAVID I. MAURSTAD, FEDERAL INSURANCE 

ADMINISTRATOR, AND ASSISTANT ADMINISTRATOR, MITIGATION DIRECTORATE, FEDERAL EMERGENCY MANAGEMENT 

AGENCY 

Mr. MAURSTAD. Good afternoon, Chairwoman Waters, Ranking 

Member Biggert, and members of the subcommittee. 

I am David Maurstad, Federal Insurance Administrator and Assistant Administrator for FEMA’s Mitigation Directorate. I appreciate the opportunity to appear to discuss H.R. 920 and the bill’s 

proposal to add wind coverage to the National Flood Insurance Program, a program helping more than 20,300 communities nationwide reduce their vulnerability to flooding, recover faster after 

floods, and protect their personal and community investments with 

a financial safety net. 

The NFIP’s floodplain management and building code guidance, its mitigation base, saves an average of $1.2 billion annually in 

prevented damages, while structures built to the program’s standards experience 80 percent less damage than structures not built 

to such standards. And we’re committed to making the NFIP even 

better, a commitment requiring that we stay focused on the proVerDate 0ct 09 2002 15:57 Nov 19, 2007 Jkt 038391 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\38391.TXT HFIN PsN: TERRIE
16

gram’s objectives, helping communities understand and address 

their flood risks, and making sure that more citizens are protected 

with the financial backstop that flood insurance provides. 

H.R. 920 does not foster these objectives, so FEMA opposes the 

bill for several reasons. First, the private marketplace already offers windstorm coverage. Traditionally, the Federal Government 

has provided insurance only when the marketplace cannot or will 

not offer coverage that the public must have. Private property and 

casualty companies provide wind insurance throughout the 50 

States, and some States have wind pools to augment their market 

conditions. 

For the most part, the property and casualty industry is healthy, 

and although fiscal troubles may occasionally arise, the solution 

lies in making certain that rates are adjusted to reflect the true 

risk from wind damage and to build the reserves needed to pay 

claims after a disaster. As long as the industry and wind pools adequately address wind insurance matters, they and not the Federal 

Government should remain the market of last resort. 

Second, a multi-peril NFIP would be costly to the government 

and to taxpayers. Adding wind coverage to the Nation’s largest, 

single peril insurance entity could make the NFIP one of the 

world’s largest underwriters. Such a high-risk program would need 

reinsurance to protect the Treasury, and FEMA would have to reconfigure the NFIP’s financial structure, a costly undertaking for 

a program already billions of dollars in debt. 

Also, the Act is concerned about the hurricane-related winds 

threatening parts of only a few States, while flooding occurs nationwide. If wind insurance were added to the NFIP, policyholders and 

taxpayers in all States would end up subsidizing the insurance 

costs of hurricane-prone States. 

Third, a multi-peril NFIP would derail State efforts to foster and 

sustain private markets that address wind risk. As insurance is a 

State-regulated industry, States address wind risk in a variety of 

ways. 

Florida, for instance, has tightened their regulations and expanded their State wind pools. Louisiana recently passed proposals 

to disband their insurance rating commission, allowing insurers to 

set hurricane deductibles based on risk, rather than requiring one 

deductible for all the State’s policyholders. South Carolina is calling for market-based solutions to insuring coastal homes against 

windstorm damage, and they are thinking about imposing damage 

costs on builders who construct in high-risk areas. 

A multi-peril NFIP would displace such efforts, forcing all high 

wind risk insurance burdens onto the Federal Government. Clearly, the private industry, the States and communities are in the best 

position to address wind risk and related insurance matters. The 

NFIP is the result of an integrated approach aimed at a long-term 

systemic problem. Before the program was created in 1968, several 

academic and government studies recognized that the private insurance industry was unwilling to provide affordable flood insurance. 

The definitive study was the Johnson Administration’s report, 

‘‘Insurance and Other Programs for Financial Assistance to Flood 

Victims,’’ which concluded that a Federal flood insurance program 

17

is feasible and will promote the public interest. Furthermore, the 

natural hazard insurance arena has been thoroughly analyzed over 

the past 2 decades with reports clearly recognizing the commercial 

availability of wind insurance and remaining silent on the matter 

of government involvement. 

Finally, the vulnerability of wind-prone communities will not be 

reduced by adding wind insurance to the NFIP. Communities must 

understand the risks that threaten them. They must take the initiative to manage and reduce their risks and their efforts must 

revolve around a comprehensive mitigation strategy. 

I look forward to working with the subcommittee, our insurance 

companies and other stakeholders, to improve the National Flood 

Insurance Program, and I look forward to answering any questions 

that the subcommittee may have. 

Thank you. 

[The prepared statement of Mr. Maurstad can be found on page 

86 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

Mr. Phillip Swagel. 

STATEMENT OF THE HONORABLE PHILLIP SWAGEL, ASSISTANT SECRETARY FOR ECONOMIC POLICY, DEPARTMENT OF 

THE TREASURY 

Mr. SWAGEL. Thank you, Madam Chairwoman. 

Good afternoon, Chairwoman Waters, Ranking Member Biggert, 

and members of the subcommittee. I will very briefly summarize 

my statement and have provided the full written statement to be 

included in the record. 

The Administration supports leaving wind coverage to the welldeveloped, private market for such insurance and does not support 

creating a Federal program for wind losses. The private sector is 

effective at providing insurance for damage from wind events. Private market coverage can be expensive in areas facing substantial 

risk of wind events. This is a reflection of the risk, not a defect of 

the market. 

Federal involvement in wind insurance will displace private coverage, lead to costly inefficiencies, and retard innovation. A Federal 

program will face pressures to set aside risk-based pricing. By subsidizing insurance, a Federal program would undermine incentives 

to mitigate risk and encourage development in high-risk areas, potentially increasing future liabilities. 

A Federal role in bearing risk would have taxpayers nationwide 

subsidizing insurance rates for the benefit of a smaller population. 

Federal Government interference in the wind insurance market 

will displace markets, promote riskier behavior, be unfair to taxpayers, and be economically costly. For these reasons, the Administration opposes H.R. 920. The Administration looks forward to 

working with the committee as it considers other reforms of the 

National Flood Insurance Program. 

I appreciate very much the opportunity to appear before the subcommittee and will be happy to answer any questions. 

[The prepared statement of Assistant Secretary Swagel can be 

found on page 113 of the appendix.] 

Chairwoman WATERS. Thank you very much. 

18

We have a vote on the Floor, so I’m going to have to ask all of 

you to remain with us until we return, so that we may ask questions. A am sorry to do that to you, but there’s no other way to do 

it. 

Thank you very much. I appreciate your patience. 

[Recess] 

Chairwoman WATERS. I’d like to thank you very much for your 

patience. I expect other members will be joining us, and I will just 

move now to questions that I have of this panel. 

There is a motion suggested in the testimony received from both 

government witnesses that the private sector will be foreclosed 

from operating in the market if the National Flood Insurance Program is expanded to provide the coverage envisioned by the bill. It 

was also suggested that the States and the private sector are best 

positioned to address the availability and price of insurance in 

high-risk areas. 

On what evidence do you base this conclusion? Are the private 

insurers retreating from providing insurance in high-risk areas, or 

is this just someone’s imagination? 

Mr. Maurstad? 

Mr. MAURSTAD. Ma’am, I think that in the past, especially if you 

look at flood insurance as an example, when the program was 

started the affordability and availability of flood insurance, the 

lack of it, was already well-documented. And once the Federal program started, most of the industry then left the market. I think 

that it is safe to reason that if the National Flood Insurance Program were extended to include wind—as I believe one of the earlier 

witnesses indicated—that it would mostly be in the high-risk areas 

along the coastlines, and so that would just force further abandonment, I believe, by the insurance companies, because there is a government program. So the government program would end up insuring the riskiest of the risky and would then place the Federal 

Treasury at far greater jeopardy. 

Chairwoman WATERS. Okay, so you have testified that you oppose H.R. 920, Mr. Maurstad. Can you think of any way that the 

NFIP can develop actuarially sound premiums? I heard what you 

just said about if the coverage is confined to high-risk areas, the 

private insurers would be assuming unusual risk, and they 

wouldn’t have much to offset that with. So I guess what I want to 

know is, can the NFIP do it? 

Mr. MAURSTAD. Well, I think that certainly an actuarially rated 

program can be developed as long as one understands what actuarial rating is. It would be, in this case, if you would base it on 

the number of policies and the amount of premium that would be 

generated, the pool would be relatively small, as was indicated earlier. And as a result, the actuarial rates would be very high. They 

may be even higher than what are being characterized as 

unaffordable State wind pool rates that also have, although they’re 

high, and people have indicated they are not affordable, also clearly 

are not adequate because most of the wind pools are in financial 

difficulties. 

So the actuarial rates would be very high. I’m not sure—in fact, 

I’m fairly certain they would not be very affordable, which would 

put pressure on Congress to discount those, similar to what was 

19

done in the Flood Insurance Program with the Pre-Firm properties 

in the program there. But certainly an actuarially-rated program 

could be developed. But one also needs to understand that actuarial rates are generating premium this year and for a series of 

years to take care of the losses over that entire period of time. 

And so, in this Federal program, if you had a catastrophic loss 

in the early years, where you have not generated the premium, you 

have not capitalized the program, there is not a reserve available; 

then the Federal Treasury would be looked at to take care of that 

catastrophic event in the early years of any actuarially rated program. 

Chairwoman WATERS. Thank you very much. I will now recognize Ms. Biggert for questioning for 5 minutes. 

Mrs. BIGGERT. Thank you, Madam Chairwoman. 

But both the Government Accountability Office and the DHS Inspector General testified for this committee that FEMA does not 

currently collect adequate information on write-your-own companies’ wind claims to ensure that the NFIP only pays for flood damage and no wind damage. 

Does FEMA collect this information? 

Mr. MAURSTAD. No, we do not. What we do is, at the time of the 

loss, we go out and we look at and determine the liability for the 

National Flood Insurance Program and then work to pay that loss 

as quickly and as fairly as possible. So we go out; we determine 

what was damaged—what property was damaged by flood—and 

pay the loss accordingly. The write-your-own companies that administer the program on behalf of the Federal Government have 

the obligation to do that according to our policies, according to statute, and to follow the guidelines that we set out so that the policyholder is treated fairly and the Federal Treasury is protected. 

Mrs. BIGGERT. Well, I understand that after Katrina, many 

homeowners complained about a lack of coordination between the 

NFIP and insurance companies in adjusting claims. How is FEMA 

reviewing its policies to ensure that in the future there is adequate 

cooperation between the NFIP and wind insurers, or should there 

be? 

Mr. MAURSTAD. Well, I think that in some States, for example in 

Mississippi with the State wind pool, we had the single-adjuster 

program that worked on behalf of both the State wind pool and the 

National Flood Insurance Program to adjust the losses with the 

policyholders and to provide that customer service that you are 

talking about. 

If a write-your-own company both writes the homeowner policy 

and also administers the write-your-own standard flood insurance 

policy for the government, they also, under the arrangement that 

we have with the write-your-own companies, have the obligation to 

assign a single adjuster to that particular claimant to handle both 

of the claims. 

But we have a very good working relationship. It’s a very strong 

public/private partnership with the nearly 90 write-your-own companies that are a part of the program, and we certainly are always 

looking at ways to better coordinate the claims-handling process 

with the industry. 

20

Mrs. BIGGERT. Well, when the Flood Insurance Program was created in the late 1960’s, coverage was generally unavailable in the 

private market from coast to coast. How does this differ with the 

state of wind coverage today? 

Mr. MAURSTAD. It is my understanding that there are certainly 

affordability—primarily affordability—issues. And in certain parts 

of certain States, there are availability issues for wind coverage 

and wind insurance. States have addressed those issues, where it 

has affected their market, by creating the wind pools, which we believe is the best way to deal with the circumstances within that 

particular jurisdiction. 

But in vast parts of the country, I would say in 40 of the 50 

States, there is certainly available and affordable wind coverage 

being provided. 

Mrs. BIGGERT. Do you think that this bill, H.R. 920, would discourage private insurers from continuing to offer wind insurance? 

Mr. MAURSTAD. I believe that it would. I think, as indicated before, it would be similar to when the flood program started, most 

of the private insurance sector—fairly shortly after the program 

started, those private insurers that were involved in the flood program abandoned the flood program completely and let the Federal 

Government deal with the risk. I think that it only is common 

sense that if the Federal Government is going to provide this type 

of coverage in the riskiest of the risky areas, that the insurance industry will avoid those areas and go to other areas where they can 

price their product more fairly. 

Mrs. BIGGERT. Thank you. 

Then, Mr. Swagel, what could State regulators and officials do to 

allow for more competitive, market-based pricing for insurance, and 

attract more insurers to their States? 

Mr. SWAGEL. As Mr. Maurstad just said, in most States, wind 

coverage is generally available. The problems have typically been 

in States that have taken actions that have had unintended consequences of displacing the private coverage. Florida is one example. The symptom is the unavailability, and the problem is typically the unintended consequences of State regulators. 

Mrs. BIGGERT. I might just note that I’m from Illinois, and we 

certainly, you know, have a lot of market competition because we 

don’t have the regulation that so many States have. Does that 

help? 

Mr. SWAGEL. That’s right. You know, this is a case in which 

there’s a lot of private sector capacity. There’s capital both in the 

United States and worldwide that after a hurricane or a natural 

catastrophe does tend to withdraw, but then comes back in, and 

sometimes well-intended actions can interfere with that process. 

Mrs. BIGGERT. Thank you. 

Thank you, Madam Chairwoman. I yield back. 

Chairwoman WATERS. Thank you very much. 

Mr. Cleaver? 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

Mr. Maurstad, FEMA has a herculean responsibility. It’s one of 

the most difficult jobs, probably, in the Federal Government, and 

that’s why I’ve always tried to restrain my criticism, even after I 

was very disappointed in what happened in the Gulf region. 

21

My concern, however, at this point is that when I look at your 

opening statement, it appears as if FEMA is assessing economic 

trends. I won’t criticize the failures in the Gulf region, but I have 

to tell you, I am really concerned about FEMA’s expertise in assessing economic trends. You say that a Federal program would 

undermine economic incentives to mitigate risk because the program would like the historic rates from actuarial values. 

Did FEMA bring on some economists to help it reach this position? 

This morning—this would have been an appropriate response 

from Dr. Friedman from Harvard. We had a committee hearing 

today dealing with monetary policies and the state of the economy, 

with Dr. Meltzer from Carnegie Mellon and John Kenneth Galbraith from the University of Texas. And so, I guess before I can 

go any further, I need to understand FEMA’s expertise in exercising economic trends. 

Mr. MAURSTAD. Thank you, Mr. Cleaver. 

Certainly, we have actuaries on our staff who assess the trends, 

economic and otherwise, of the insurance industry. We also have 

many staff members who together have nearly 40 years of experience in administering and operating the National Flood Insurance 

Program, which, of course, this legislation is based upon. And so, 

I would say that we do have the expertise to provide the information that we did in our testimony. 

Mr. CLEAVER. Well, do you have data available that would demonstrate or show that incentives were undermined as a result of 

the National Flood Insurance Program? 

Mr. MAURSTAD. I think that we can certainly provide you with 

information and data on mitigation activities and the extent that 

mitigation activities are pursued when required, versus when 

they’re just voluntarily taken. I mean, part of that point that was 

attempted to be made there was that without incentives to mitigate 

one’s property, most folks are not going to make that economic decision. 

We will have a discussion with you and try to provide you with 

the data you are looking for to back up that statement. 

Mr. CLEAVER. But you do have it? 

Mr. MAURSTAD. I believe we either have it or will provide it for 

you. Again, I am not sure what the actuary who helped develop the 

testimony—and provided that advice as we were crafting our testimony—used as his basis. I will find that out and provide that to 

you. 

Mr. CLEAVER. Okay, that was exactly where I was going, that if 

we don’t have the data, then the statement would be at least baseless. Right? I mean, if the statement was developed without this 

data, then the statement is baseless. 

Mr. MAURSTAD. Sure. 

Mr. SWAGEL. Thank you, Mr. Cleaver. I apologize for jumping in, 

and thank you for— 

Mr. CLEAVER. You are going to help FEMA out? 

Mr. SWAGEL. I was going to mention just the sense of the second 

half of your question about the incentives undermined by the 

NFIP—and obviously, I’m not blaming Mr. Maurstad here. You 

know, it is well-known that a portion of the properties covered by 

22

the Flood Insurance Program are done so at subsidized rates. This 

is intentional. Essentially, part of the properties were grandfathered in and a disproportionate part of the expenses of the program, the benefits they pay, relate to those properties. In a sense, 

it’s a set of properties that have recurring losses, so they suffer 

damage and are built again and suffer damage again. That’s the 

sort of incentives that the testimony has in mind. 

Mr. CLEAVER. This is very interesting. I mean, who wrote the 

statement for FEMA, then? 

Mr. MAURSTAD. We wrote the statement, sir. Because he helped 

to answer the question, I don’t think— 

Again, you’re asking me to criticize my statement, which I am 

unwilling to do. 

Mr. CLEAVER. I wouldn’t do it either. Believe me, if I were over 

there, I would defend the statement, even if it was wrong. 

Mr. MAURSTAD. Thank you, sir. 

Mr. CLEAVER. And it is wrong, but I mean— 

Because I don’t understand. Describe the NFIP actuarial sound. 

Mr. MAURSTAD. The actuarial soundness of the NFIP? 

Mr. CLEAVER. Yes, soundness. 

Mr. MAURSTAD. Currently, 75 percent of the policies— 

Chairwoman WATERS. The gavel slipped. 

Mr. MAURSTAD. Okay. Currently, 75 percent of the policies are 

risk-based, actuarially rated as the discussion that we’ve had earlier; 25 percent of the policies are discounted as a result of the way 

that the legislation is written and the program was designed. So 

the program loses about $800 million a year in foregone premium 

if that 25 percent that is discounted were, in fact, charged riskbased, actuarially sound premiums. 

Mr. CLEAVER. Thank you, Madam Chairwoman. Thank you, sir. 

Chairwoman WATERS. Thank you very much. 

Mr. Green? 

Mr. GREEN. Thank you, Madam Chairwoman. And I thank the 

witnesses for their time. Unfortunately, we do have to vote from 

time to time, and thank you for staying over. 

A few questions, and I trust that you can provide some ocularity 

on something that is of great concern to me. The first question is, 

are you for the status quo? Yes or no. 

Mr. MAURSTAD. No. 

Mr. GREEN. Okay. If you are not for the status quo, what have 

you proposed to change? 

Mr. MAURSTAD. Relative to strengthening the National Flood Insurance Program, we’ve testified before on essentially, five guiding 

principles to strengthen the program: protect the NFIP integrity by 

covering existing commitments and liabilities; phase out discounted 

premiums; increase NFIP participation incentives; improve program enforcement; and increase community risk awareness by improving information quality and distribution. 

Mr. GREEN. Let me intercede and ask this. How would that help 

a person who was situated as was the case with Mr. Taylor? 

Mr. MAURSTAD. Strengthening the NFIP— 

Mr. GREEN. What does that mean? 

23

Mr. MAURSTAD. That means providing a National Flood Insurance Program that better serves its designed purposes. Strengthening it is certainly not addressed. 

Mr. GREEN. I think that’s what we are attempting to do. 

Terms without definition are sometimes meaningless; and to say 

‘‘strengthen,’’ and not give real substance to what that means 

doesn’t necessarily give Mr. Taylor a lot of comfort; Congressman 

Taylor, excuse me. And it seems to me that while you give words, 

I don’t see the ocularity in them such that I can understand how 

Mr. Taylor or the persons who are similarly situated will benefit. 

Mr. MAURSTAD. Our position is that adding wind coverage to the 

NFIP is not the appropriate way to address the problem that Congressman Taylor has raised. 

Mr. GREEN. Do you agree that Mr. Taylor had wind coverage in 

his policy? 

Mr. MAURSTAD. I’m not sure what coverage Mr. Taylor had on 

his home. He indicated that he had a homeowner’s policy, and most 

homeowners policies certainly have wind coverage, so there is no 

reason for me not to believe that he had wind coverage. 

Mr. GREEN. If we assume that he had wind coverage with his 

policy, and we assume that he did not get immediate satisfaction—

in fact, he had the threat of litigation to get satisfaction, are you 

of the opinion that this is a good way for the consumer to have to 

do business? To have to threaten litigation, hire a lawyer, and 

pledge a portion of whatever return you might receive in terms of 

damages? Are you of the opinion that this is the way the consumer 

should have to do business? 

Mr. MAURSTAD. I believe that litigation should always be a last 

resort. 

Mr. GREEN. So you would have this as a resort of first impression 

as opposed to last? Because that’s what Mr. Taylor had to do, and 

that’s what many people along the Gulf Coast had to do. They had 

to sue. 

Now, this new plan would propose to give people the opportunity 

to have coverage that’s certain so that we take out the notion that 

they have to have some degree of consternation as to whether 

they’re covered or not. And in so doing, they then can buy additional coverage. 

Would you agree that under the new plan, we, in essence, would have a $500,000 deductible for insurance companies? Would you 

agree with this under the new plan? 

Mr. MAURSTAD. As I understand the legislation is written, sure. 

Mr. GREEN. Okay, so an insurance company would have a 

$500,000 deductible. Why would a company oppose doing business 

in a State wherein they get that deductible and where they don’t 

have any loss until there’s a $500,000 loss. They have no loss. Why 

would they oppose that? Doing business in that State? 

Mr. MAURSTAD. Yes, Mr. Green, they certainly may provide the 

excess coverage over that. 

Mr. GREEN. But that’s what this plan would propose. Excess coverage and a degree of certainty for consumers so that they don’t 

find themselves in a position that the Congressman Taylors of the 

world were in, not knowing whether they would get coverage; having to hire lawyers, bring experts in, threatening to sue, having the 

24

Attorney General a part of the litigation process. This is not the 

way we want to treat American citizens, consumers, is it? 

Would you have Mr. Taylor go through this again? 

Mr. MAURSTAD. I would hope that no one would have to go 

through that scenario. 

Mr. GREEN. Okay, well, then if you wouldn’t want him to go 

through this again, isn’t it logical to provide a means by which we 

can be sure that persons who seek to have wind coverage will have 

in fact wind coverage without litigation. We have thousands of people who are now entangled in litigation when they should have had 

an opportunity to simply present the damages and go on. 

If they have the wind coverage and the flood coverage, then they 

have the coverage necessary to avoid litigation. Do you see this as 

a reasonable premise? 

Mr. MAURSTAD. Mr. Green, I certainly understand your support 

for the legislation. 

Mr. GREEN. No. No. Let’s not talk about my support of legislation 

because my time is almost up. 

Do you agree that with this bill, consumers will be protected if 

the bill provides the $500,000 ceiling in coverage and then insurance companies can pick up excess damage? 

Mr. MAURSTAD. No. I’m not sure that would be the outcome. 

Mr. GREEN. Are you not sure that if Congress writes a bill to provide the coverage, that the coverage will be there? So you doubt the 

credibility of Congress to write the legislation? 

Mr. MAURSTAD. I don’t believe that’s what I did. 

Mr. GREEN. Okay, then, so you assume that Congress can do 

what it says it will do. Yes or no. 

Mr. MAURSTAD. Well, yes. 

Mr. GREEN. Okay, if Congress does what it says it will do, and 

then that only leaves excess coverage, do you agree that the person 

who benefits from the $500,000 worth of coverage will in fact have 

coverage? 

Mr. MAURSTAD. Sir, I don’t mean any disrespect to you or the institution, but there are many cases where unintended consequences 

have occurred because of legislation that’s adopted. 

Mr. GREEN. I agree. Let’s talk about intended consequences for 

a moment, however. Unintended consequences could cause a plane 

to land on this building right now. Hopefully, that won’t happen. 

But the intended consequence, do you agree that if it occurs the 

consumer would have coverage? 

Mr. MAURSTAD. The consumer may have coverage at the expense 

of the Federal Treasury. 

Mr. GREEN. But the consumers are having coverage at the expense of the Federal Treasury right now based on claims that they 

filed that they can’t have fulfilled without litigation. The consumer 

is put in a position where either he or she has the courage and the 

ability to sue or they don’t get the coverage. They get nothing. 

So is that what you would have for consumers, an all-or-nothing 

proposition? 

Mr. MAURSTAD. No, I don’t think consumers should ever be 

placed in an all-or-nothing position. 

Mr. GREEN. I yield back. Thank you, Madam Chairwoman. You 

were quite generous. 

25

Chairwoman WATERS. Thank you very much. 

The gentleman from California, Mr. Miller, for 5 minutes. 

Mr. MILLER. This is a really complicated issue. I remember your 

testimony before. We heard from the Attorney General of one State 

that I believe should have been suing the insurance commissioner 

of his own State because he disagreed with what the insurance 

commissioner allowed. And it’s kind of difficult when you get in a 

situation like that and for years, I have been saying that we perhaps need an optional Federal charter for insurance companies so 

we can forego the State requirements today and have a Federal 

charter that is somewhat all-inclusive. 

But in your previous testimony, Mr. Maurstad, before the Oversight and Investigations Subcommittee, you said that FEMA did 

not find any pattern of abuse in write-your-own insurance companies. Would you give me an update? 

Mr. MAURSTAD. At this point, as we continue to review the circumstances, there has been no uncovering of a concerted conspiracy 

or attempt by the write-your-own companies to shift wind coverage 

onto the National Flood Insurance Program. As we continue to 

evaluate our claims, we go out and we assess and we do audits of 

those claims. 

Was the damage by flood and was the appropriate amount compensated to the policyholder for the damage by flood? And we are 

finding that is what occurred. 

Mr. MILLER. When you were here last time, I think we had the 

facts that about 98-plus percent of the claims had been paid. 

Is it in excess of that today? 

Mr. MAURSTAD. I believe it’s a little over 99 percent at this point. 

Mr. MILLER. Does FEMA have a way to ensure that write-yourown insurance companies don’t have the ability to defraud the 

NFIP? 

Mr. MAURSTAD. Sure. There are a number of processes in the 

control system, the auditing process. 

Mr. MILLER. So when wind and flood damage occurs, they have 

the ability to do that? 

Mr. MAURSTAD. Sure, the adjustor that’s on the ground is the 

first individual who works with the policyholder to determine what 

caused the damage to what. Then there are, of course, ways that 

we go through by random inspection, by field audits, a number of 

other oversight responsibilities by the general adjustor of the program. 

If claims were brought to my attention, we review them. There 

are a number of ways in which appropriate oversight is provided 

for the handling of claims. 

Mr. MILLER. Mr. Swagel, I think that currently there are probably $19 trillion worth of policies written from Texas to Maine for 

tornadoes and wind and those types of things. And currently the 

U.S. taxpayers are in debt for about $18 billion from the NFIP, currently today. 

Don’t you believe adding this wind coverage to the National 

Flood Insurance Program exacerbates the problems and adds additional risk to the taxpayers that the private sector should be able, 

through a competitive marketplace, to deal with? 

Mr. SWAGEL. Thank you, Mr. Miller. 

26

Yes, that is really our view, that the private capacity as you say 

does exist, and the Federal taxpayer is already on the hook for 

such a large debt that it’s hard to see the program paying off. And 

adding this new program to it would just make the situation worse. 

Mr. MILLER. I do understand my good friend Mr. Taylor’s situation, and he is my friend. We talk about a situation of rebuilding 

his home, and we joke sometimes. But it’s joking in serious. I understand the situation he goes through. I haven’t had it happen to 

me, but I can associate with what they’re having to go through. But 

we’re dealing with something here that we’re looking at taking the 

market away from write-your-owns and placing it on the Federal 

Government and the taxpayers, when the testimony we received in 

the last hearing clearly showed that there was a major disagreement between attorneys general in States with what the insurance 

commissioner with their own State did and approved in insurance 

policies. 

And that’s very difficult for write-your-owns when they present 

a policy to the State and the State approves it through the insurance commissioner, then the AG comes back and wants to sue everybody to change it. How do you think changing this to the Federal Government would benefit anybody? 

Mr. SWAGEL. No. It’s hard to see how a change to the Federal 

Government would do anything but put the Federal taxpayer at 

risk. And, there’s a long tradition, of course, of State regulation of 

insurance markets. And when you have the disputes, like you said, 

that’s a source of uncertainty in that insurance companies looking 

to provide new coverage will look at those disputes and want a certain regulatory environment before they— 

Mr. MILLER. I’m not asking you to approve or agree that an optional Federal charter is good. Would not the concept of an optional 

Federal charter where we have a charter that’s approved in statute 

by the Federal Government that the insurance companies have an 

option to go in. And if they want to be an optional Federal charter 

or not, would that not be better and more of a market approach 

than going to the government and providing insurance? 

Mr. SWAGEL. I think it would be. One of the strengths of the insurance system in the United States is the competition. It’s what 

the ranking member had said existed in Illinois and we see that 

in the whole Nation, and giving the optional Federal charter would 

foster enhanced competition in many places. 

Mr. MILLER. The problem I had with expanding the flood insurance program, and Ms. Waters and I have suffered the same situation by expanding it to the 100-year historic plain or 500-year historic plain—we don’t even know what a 500-year historic plain is—

would include the entire City of Los Angeles, and would include all 

of Orange County—people who are not currently at risk trying to 

create solvency in a Federal system that has lost a tremendous 

amount of money in a given area. 

But by doing that, you’re passing a burden onto a tremendous 

amount of people who aren’t at risk, and I’m just concerned that, 

and I sympathize with my friends who had losses due to the catastrophe we faced. But by doing that, I believe we’re spreading the 

burden to people who are not at risk requiring them to pay for policies that they would not benefit from to create solvency in high risk 

27

areas. And that is the opposite of a free market system and that’s 

my main concern, that we get away from competition in the free 

market system where if you want to write a policy in the State and 

no matter what insurance company you are, you’re taking a risk. 

You’re rolling the dice. 

If you win, you make money. If you lose, you lose money. But 

placing the burden on the taxpayer is a risk that would be inappropriate, and I’m having a difficult time understanding it. But I 

thank you for your time and your input. 

I thank you for the time, Madam Chairwoman, and I yield back. 

Chairwoman WATERS. You’re welcome. 

Mr. Taylor? 

Mr. TAYLOR. Thank you, Madam Chairwoman, and let me begin 

by asking for your consent to submit for the record a list of insurance companies that have pulled out of coastal American in the 2 

years since Hurricane Katrina. 

Mr. Maurstad, what percentage— 

Chairwoman WATERS. Without objection. 

Mr. TAYLOR. What percentage, according to the National Oceanographic and Atmospheric Administration, what percentage of 

Americans live in coastal America? 

Mr. MAURSTAD. If my memory serves me right, which usually 

fails me at times like this, I’d say 65 percent. 

Mr. TAYLOR. Okay, it was probably closer to 52 percent. So wind 

damage might be just a little bit more than as you said, something 

that effects some people in some places if it’s more than half of all 

America. Would you agree to that? 

Mr. MAURSTAD. I think my comments were I think on the heels 

of your comments that you acknowledged that. 

Mr. TAYLOR. Your quote was that wind only affects a portion of 

some States. 

Mr. MAURSTAD. Yes, 52 percent of all Americans is a lot more 

than a portion of some States. 

Mr. TAYLOR. The second part is, you say that the private market 

already provides wind insurance. Those five people, and I could 

probably supply 8,000 more, if time would permit, who have not 

been paid in 2 years, would certainly disagree. 

The fact that after their company didn’t pay them, that their 

company completely left the State and said, we’re not even coming 

back, would certainly be contrary to what you said. But there are 

some things that you said that I’m really having trouble comprehending because listening to you would have me think that our Nation in no way ended up paying these wind bills, that you’re afraid 

our Nation is going to get stuck with wind bills and that somehow 

we haven’t. 

But I would remind you that according to a memo that you gave 

out on September 21, 2005, talking to the national write-your-own 

insurance companies about what to do after Katrina, you said that 

FEMA will not seek reimbursement from the company when a subsequential review identifies overpayments resulting from the company’s proper use of the FEMA depth data and a reasonable method of developing square foot value and concluding claims. 

Later on, when Ms. Waters, in the follow-up hearing on February 

28th of this year, asked you a direct question, her question was, 

28

as I understand it, you could have damage that occurred from both; 

some by water, some by wind. Are you telling me you do the assessment, you have the information, and you just pay the water. 

You don’t pay the wind or you don’t take any of that into consideration. If you have some coverage there, you pay everything. 

Your answer, and I’m quoting: ‘‘If there’s damage that’s caused 

by both flood and wind, we’re obligated to pay for that damage.’’ 

That means all the damage. So you send out a memo in effect giving the insurance companies a get-out-of-jail-free pass. You say before this committee that when there’s both, we’re going to pay. You 

argue that you don’t want people to pay premiums for the coverage 

that they’re apparently getting. 

But I think what interests me after hearing all this is that there 

were obviously tens of thousands of Katrina claims where we let 

the private sector go out and adjudicate that claim, adjust it, and 

decide which is wind and which is water. So I’m curious after those 

thousands of claims written by human beings that we know are imperfect, how many times since Katrina have you gone back and 

found fault with those claims? 

How many times have you said no, the government shouldn’t 

have paid that? You should have paid that, Allstate or Nationwide 

or State Farm. Because I’m reading some really interesting stories 

in the New Orleans Times-Picayune, where they’re naming street 

addresses. They are naming the people’s names. They are giving instances of eyewitnesses who said, ‘‘I didn’t have any flood damage, 

and yet I got an $80,000 flood insurance check.’’ So how many 

times have you sought reimbursement? 

Mr. MAURSTAD. Well, we can institute an audit for cause at any 

time when any irregularities are brought up. We’ve gone back direct. 

Mr. TAYLOR. How many times, sir? 

Mr. MAURSTAD. I don’t know the exact number. 

Mr. TAYLOR. Is there one? 

Mr. MAURSTAD. Sure, there have been a number of times we’ve 

gone back. 

Mr. TAYLOR. Is it ten? 

Mr. MAURSTAD. More than ten. 

Mr. TAYLOR. Is it more than a hundred? 

Mr. MAURSTAD. Probably. 

Mr. TAYLOR. Well, give me a rough idea. 

Mr. MAURSTAD. I’ll get you that number. 

Mr. TAYLOR. Okay. 

Mr. MAURSTAD. I know that we reviewed 10 percent of the claims 

that were handled from the expedited claim-handling memo that 

you referred to, so that in itself was about 1,600 times we went 

back and reviewed claims. 

Mr. TAYLOR. So, how many times have you sought reimbursement? 

Mr. MAURSTAD. Well, during those times we discovered that they 

paid $5 a square foot for something instead of $4.50, we go back 

and we recover that. We do that, but I don’t have the exact number. 

Mr. TAYLOR. Okay, would you supply that for the record? 

29

Mr. MAURSTAD. I’ll see if I can provide it for the record. We’ll do 

our level best to provide you the answer.

[The following information was provided for the record:] 

‘‘As a result of Hurricane Katrina, FEMA has conducted 

5,294 re-inspections. We have discovered 148 cases of overpayment, totaling $3,704,000. To date, we have recovered 

approximately $1,826,000.’’ 

Mr. TAYLOR. So when you came before this committee and said 

that when there’s both, we pay for both, did you misspeak? 

Mr. MAURSTAD. No, sir. I think that people are misinterpreting 

my comments. What I am indicating is that the standard flood insurance policy says that if there is property that is damaged by 

flood, we are obligated to pay that. If wind is a part of that damage 

also, that is not relevant in our determining what the flood insurance policy owes that policyholder. 

Mr. TAYLOR. Mr. Swagel, I’m curious in your concerns about this. 

Let’s compare this to the founding of the original National Flood 

Insurance Program. At any time when the National Flood Insurance Program became law, was there ever a requirement that it 

pay for itself? 

Mr. SWAGEL. You know, I have to apologize. I don’t know the entire history. So I don’t know in 1968. 

Mr. TAYLOR. The correct answer, sir, is ‘‘no.’’ Okay, I’ll let you 

go back and check. 

Mr. SWAGEL. Okay, yes. I am sorry. I know what the status is 

today. 

Mr. TAYLOR. Are the rates set by law? Is there a legal statute 

that says how much those rates can be raised in an individual 

year? 

Mr. SWAGEL. Well, Mr. Maurstad would probably know the details like that. 

Mr. TAYLOR. The correct answer is ‘‘yes.’’ Now, this contrast is 

with what we’re trying to do, which under the Rules of the House 

can’t even be brought to the Floor unless it pays for itself under 

the pay-go rules, number one. 

Is there a provision in that bill that limits the amount of increase in rates, should there be a short-fall? The answer is ‘‘no.’’ 

Mr. SWAGEL. In your bill, no, there isn’t. 

Mr. TAYLOR. So how can you wax eloquently about the beauty of 

one that has no provision that has to pay for itself; has no provision to catch up; but yet condemn the other one that is trying to 

establish itself in a fiscally responsible manner? 

Chairwoman WATERS. Thank you very much. We’re going to 

move on to the other panel. 

I thank you for being here today, and I thank you for your patience. Again, we know that you were terribly inconvenienced by 

the time that we took on the Floor, but I thank you for remaining. 

All right, we will call our third panel now. Our first witness will 

be Ms. Pam Pogue, vice chair, Association of Floodplain Managers. 

Our second witness will be Ms. Sandy Praeger, commissioner, Kansas Insurance Department, on behalf of the National Association of 

Insurance Commissioners. Our third witness will be Mr. Ted 

Majewski, senior vice president, Harleysville Insurance, on behalf 

30

of the Property Casualty Insurers, the American Insurance Association, and the National Association of Mutual Insurance Companies. 

Our fourth witness will be Ms. Cheryl Small, policy advisor, National Flood Determination Association. Our fifth witness will be 

Mr. W. Anderson Baker, III, CPCU, Gillis, Ellis & Baker, Inc. Our 

sixth witness will be Mr. Robert Hartwig, Ph.D., CPCU, president 

and chief economist, Insurance Information Institute, and our final 

witness will be Mr. David Conrad, senior water resources specialist, National Wildlife Federation. 

Without objection, your written statements will be made part of 

the record. You will now be recognized for a 5-minute summary of 

your testimony. Thank you. 

Ms. Pogue? 

STATEMENT OF PAMELA MAYER POGUE, IMMEDIATE PAST 

CHAIR, ASSOCIATION OF STATE FLOODPLAIN MANAGERS, INC. 

Ms. POGUE. Thank you, Madam Chairwoman. My name is Pam 

Pogue and I am actually the immediate past chair of ASFPM, and 

I am also the State floodplain program manager in the State of 

Rhode Island. 

ASFPM is pleased to comment on the legislation proposed by 

Representative Gene Taylor and co-sponsored by a number of members of the committee, the Multiple Peril Insurance bill. The Association of State Floodplain Managers and its 26 chapters represent 

over 12,000 members—State and local officials and other professionals who are engaged in all aspects of floodplain management, 

including mitigation management, mapping, engineering, planning, 

community development, hydrology forecasting, emergency response, water resources, and insurance. 

Many of our members worked with communities impacted by 

Hurricanes Katrina and Rita, or worked with organizations that 

continue to support these very important rebuilding efforts. All 

ASFPM members are concerned with working to reduce our Nation’s flood-related losses. Our State and local officials are the Federal Government’s partners in implementing flood mitigation programs and we are working to achieve effectiveness and mitigate in 

meeting these shared objectives. 

Because we have been directly involved in aiding recovery from 

the hurricanes of 2005 that devastated the Gulf Coast, we are very 

much aware of the difficulties in resolving insurance claims differentiating between damage caused by flood waters and wind. We 

note the validity of the problem and respect Congressman Taylor’s 

commitment to address the associated issues, which led to the introduction of H.R. 920. However, before enacting this legislation, it 

seems appropriate that Congress work with FEMA to seek administrative means to address these concerns. 

We would also like to note the problem of private insurance 

availability in coastal areas. Companies have been changing their 

policies on where to offer coverage, following major losses and in 

light of predictions of more intense storms that will frequent the 

Gulf and Eastern coasts of the United States. We suggest that this 

problem needs thoughtful analysis in the development of recVerDate 0ct 09 2002 15:57 Nov 19, 2007 Jkt 038391 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\38391.TXT HFIN PsN: TERRIE
31

ommendations, perhaps in the context of overall provision for catastrophic losses. 

Offering Federal wind coverage without analysis of the effects on 

consumers, the insurance industry, and the National Flood Insurance Program can result in a significantly detrimental impact. At 

this time, the House Financial Services Committee is considering 

H.R. 1682, the National Flood Insurance Program Reform Act of 

2007. That bill has a number of key provisions that we and others 

believe should be enacted promptly. 

With regard to H.R. 920, we respectfully suggest that the committee act quickly on H.R. 1682 with the following additions: require that FEMA report on policies and procedures used to adjust 

claims when damage to insured property results from a combination of wind and flood water damage; and require a study of the 

premise and implications of the proposal in H.R. 920, including all 

questions that will be needed to be answered before a new insurance program is undertaken. So, therefore, what we’d like to do is 

pose a number of questions related to H.R. 920 and the Multiple 

Peril Insurance bill. 

One: Congress created the NFIP to fill a gap. The private insurance industry declined to offer flood coverage. H.R. 920 makes wind 

coverage available in all of the Nation’s floodplains, not just coastal 

floodplains in direct competition with the private sector. Is that the 

appropriate role for the Federal Government? 

Two: how big is the potential market for wind and flood insurance; what is the potential new loss exposure? How high would premiums have to be to be actuarial? Is the new wind coverage supposed to cover wind damage, even if there is no associated flooding? 

If no flooding was involved, would a floodplain home and tornado— 

Mr. CLEAVER. [presiding] Ms. Pogue, if you would like, you could 

just submit that to us. 

Ms. POGUE. I have a few more questions and I’m done. 

Mr. JONES. All right. 

Ms. POGUE. The point is, there are a lot of questions. Would the 

private insurance industry be likely to develop a homeowners’ policy that excludes wind damage, or would the homeowners buy two 

policies: one homeowners’ policy with wind included; and one for 

wind and flood. What insurance would there be that the combined 

coverage would be comprehensive? 

Under the NFIP, actuarial rates are charged on structures that 

are built after the adoption of a flood insurance rate map. To rate 

policies for these post-FIRM buildings, homeowners provide surveyed elevation data so that the insurance agent can write the policy based on the risk. Does the bill anticipate the owners of the 

older buildings will have to provide some form of certification that 

the home meets certain wind-resistant construction methods in 

order to determine appropriate, actuarial rates for wind coverage? 

Would it cost a homeowner or business more to have such a certification prepared by a qualified engineer and architect? 

Finally, Section 5 calls for the director to determine appropriate 

land use, zoning, and wind damage prevention measures. This 

would seem to call for a new Federal building code. Would communities be required to adopt such a Federal building code to require 

construction to meet certain wind resistant standards? How would 

32

a community handle conflicts between a new Federal building code 

and currently adopted State or local building codes? 

We appreciate the opportunity to comment on H.R. 920 and look 

forward to continue the discussion on the ways the NFIP and the 

private insurance industry can improve adjusting practices, while 

also looking for ways to reduce future damage and flood damage to 

strengthen the NFIP. 

Thank you for this opportunity. 

[The prepared statement of Ms. Pogue can be found on page 89 

of the appendix.] 

Mr. CLEAVER. Thank you. 

Ms. Praeger? 

STATEMENT OF SANDY PRAEGER, COMMISSIONER, STATE OF 

KANSAS INSURANCE DEPARTMENT, AND PRESIDENT-ELECT, 

NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS 

Ms. PRAEGER. Thank you, Congressman Cleaver, Ranking Member Biggert, and members of the subcommittee. Thank you for the 

opportunity to testify here today on behalf of the National Association of Insurance Commissioners. My name is Sandy Praeger and 

I am the elected insurance commissioner for the State of Kansas. 

I also serve as the president-elect of the NAIC. 

As a citizen and public official of a State that has just suffered 

massive flooding and millions of dollars in losses, I applaud you for 

focusing attention on improving insurance coverage. The recent 

storms and flooding in Kansas pale in comparison to the devastation of Hurricane Katrina, but there are some alarming similarities 

as insurance claims come in. 

Private insurers have stepped in to pay millions in wind claims, 

but there are some flooded communities where the number of people with flood insurance can literally be counted on one hand. With 

regard to flood coverage, we have a national problem of the uninsured and underinsured. The current system of coverage is just not 

good enough. Congressman Taylor has first-hand experience with 

that and we commend him for raising the issue of how comprehensive coverage is delivered to consumers. 

Consumers expect all perils insurance coverage and too often 

they wrongly assume they have it. The NAIC recently conducted a 

survey of homeowners and found that despite the extensive media 

coverage of Hurricane Katrina and the insurance problems that followed, 33 percent of households still incorrectly believe that flooding is covered by the standard homeowner’s policy; and 35 percent 

incorrectly believe that earthquakes are covered. The results are 

alarming, but I would argue that they are really not surprising. 

A single policy for a single price should be available to those who 

want it. Congressman Taylor has proposed one approach that deserves consideration. His bill addresses two main perils affecting 

his constituents: wind and water. But the outcry over wind and 

water could just as easily be heard over earthquake and fire in another region of the country. As this subcommittee considers flood 

insurance reform, we believe it should do so with all natural catastrophes in mind, so that solutions to these problems are comprehensive in nature. 

33

Insuring one’s home currently requires several policies that still 

may leave some residents underinsured. This approach has led to 

gaps in coverage and room for potential bad actors to shift their obligations from one policy to another. These gaps in coverage can result in costly litigation or taxpayer obligation if the Federal Government steps in following a natural disaster. 

The burden of managing the mechanics of multiple insurance 

policies has effectively been placed on the shoulders of consumers. 

Seamless, all perils insurance can and should be an option for 

those who want it. Providing this type of coverage may raise issues 

of affordability, but addressing affordability without first closing 

gaps in coverage is not in the best interest of consumers. With respect to H.R. 920, this approach does address the issue of wind and 

water, but moved the line of contention to other perils. Homeowners would still have to buy fire, theft, liability, and potentially 

excess wind coverage if their home value exceeds the NFIP coverage limits. 

The bill ultimately seeks to improve the quality of coverage for 

consumers; and we support that goal. But we think there are some 

alternatives to consider that place the private market as the first 

line of defense and close gaps in coverage while addressing concerns about affordability. For example, the NFIP could be restructured as a reinsurer to provide first dollar reinsurance to companies writing flood coverage into their standard homeowner’s policy. 

This would allow companies to offer their customers a more attractive product, but it shifts any debate over the cause of loss to the 

insurer and the NFIP, leaving the consumer with a seamless product. 

In the event of a loss, the consumer receives only one check, only 

deals directly with one adjustor and one insurance company. While 

this approach does not address every peril, it is an alternative to 

H.R. 920 that keeps wind coverage in the private market. Another 

concept is to eliminate the flood program and have the private market offer all perils coverage directly in exchange for comprehensive 

coverage and as a way to manage affordability, the Federal Government could provide a backstop or a credit line over a certain magnitude of loss. This would cap catastrophic exposure for the insurers, but would leave the government out of the vast majority of insured events. 

Such an approach would have to be structured to encourage participation by insurers of different sizes and would need to work in 

tandem with State-run catastrophe programs that have been designed to address the risk of a particular region. Insurers in States 

would be the first and second lines of defense, while the Federal 

Government would utilize its ability to spread risk over time. 

Federal involvement is inevitable when a major catastrophe 

strikes, but if better insurance is more widely held by consumers, 

that involvement would be less frequent and flow more as riskbased insurance dollars than as relief dollars. Insurers could also 

factor in this involvement to their pricing and spread their capacity 

more broadly. 

Congressman Taylor had shed light on the gaps in insurance coverage as it’s offered today, and we commend him for that and hope 

our alternatives will be met with an open mind and recognized as 

34

an effort to move toward a common goal. Providing all perils insurance will require a collaborative effort. There are challenges of affordability that are serious considerations for public policymakers. 

Given the complexity and the scope of this issue, the NAIC continues to strongly endorse the concept of a national commission on 

catastrophe preparation to weigh all the options. 

Thank you for inviting me here today to testify and for considering our views. State insurance officials stand ready to assist Congress as you consider this important national issue. 

[The prepared statement of Ms. Praeger can be found on page 95 

of the appendix.] 

Mr. CLEAVER. Thank you very much. 

Mr. Majewski. 

STATEMENT OF TED A. MAJEWSKI, SENIOR VICE PRESIDENT, 

HARLEYSVILLE INSURANCE GROUP, ON BEHALF OF THE 

PROPERTY CASUALTY INSURERS (PCI), THE AMERICAN INSURANCE ASSOCIATION (AIA), AND THE NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES (NAMIC) 

Mr. MAJEWSKI. Thank you, Mr. Chairman. 

My name is Ted Majewski, and I am senior vice president of 

Harleysville Insurance Group, a member of the Property Casualty 

Insurers. Harleysville writes homeowners’, commercial property 

and other property, and casualty insurance, and is domiciled in 

Pennsylvania. Harleysville also participates in the National Flood 

Insurance Program’s Write-Your-Own Program. 

Thank you for the opportunity to appear before you today on behalf of Harleysville, PCI, AIA, and NAMIC, to provide our comments to this important legislation. 

The Multiple Peril Insurance Act of 2007, H.R. 920, is an admirable effort to resolve issues related to property insurance coverage 

disputes that are currently being decided in our State and Federal 

courts. However, Harleysville and a significant portion of the property casualty insurance industry have concerns about the current 

provisions of this legislation, and therefore oppose their being 

added to the National Flood Insurance Reformation and Modernization Act of 2007, H.R. 1682, for the following reasons. 

H.R. 920 would dramatically increase the exposure of the NFIP 

and the Federal Government to catastrophic losses. The States 

along the Gulf Coast and Eastern seaboard contain more than $19 

trillion in insured property values. The majority of these risks are 

currently insured in the private marketplace or in a State residual 

market program where the private insurance industry shares in 

the potential losses. Moving significant numbers of these properties 

from the private insurance marketplace to the NFIP would significantly increase the exposure of loss to the Federal Government and 

despite the provision that calls for actuarially sound rates for the 

windstorm portion of this coverage, increase the potential for a significant taxpayer subsidy. 

H.R. 920 would increase the potential losses of the NFIP at a 

time when the NFIP is already more $17.5 billion in debt. A recent 

Congressional Budget Office report states that the interest alone on 

this debt will run about $900 million a year. The bill purports to 

eliminate the need to determine whether hurricane loss is caused 

35

by wind or water; however, while the number of wind-water disputes that occurred after Katrina is significant, they are relatively 

rare when compared to the more than 3 million insurance claims 

from these events. When flooding does occur, it is rarely a massive 

tidal surge as happened in Katrina. The proposal seems to be 

adopting a one-size fits all approach for all States, when the need 

for such a program is limited to coastal areas of coastal States. 

H.R. 920 would increase the amount of coverage available above 

the current NFIP limits, but even these higher limits would still 

be inadequate for many properties. Many property owners would 

still need to purchase additional coverage from the private market 

and integrate two different insurance policies. One provided by the 

NFIP and one regulated by State insurance departments. Policy integration issues would need to be property addressed in the bill to 

avoid numerous operational challenges and the same types of claim 

disputes that exist today. 

Wind storm residual markets exist in many coastal States. These 

pools typically provide wind-only coverage to homeowners living in 

a designated coastal area who are unable to obtain their coverage 

in the voluntary market. Thus, a private market mechanism providing such coverage already exists in these markets. States have 

designed these residual markets to respond to their unique geographic and insurance market needs. The bill does not address how 

these programs would operate or if they would be replaced with a 

Federal program. 

As insurers, we understand the Katrina wind and water disputes 

that have arisen are a significant problem for homeowners who 

have suffered the loss of their home and belongings. Therefore, 

these issues are being resolved in courts based on contracts purchased by individual policyholders and the decisions that will be 

made by courts who will guide how future hurricane claims are 

handled and will reduce the number of disputes in the future. 

There are additional programs that could help address the sponsors’ concerns and that address the various objections that are contained in this testimony. For example, it’s possible to put a workable dispute mechanism in place. The current program can be 

amended to require the NFIP to participate in State-sponsored mediations to determine the extent of the damage caused by wind 

versus flood as is currently proposed in 1682. 

In summary, passage of H.R. 920 would create a program that 

if not properly structured has the potential to incur enormous deficits following a hurricane of any significance. We would appreciate 

any opportunity to work with the sponsors of the bill and Congress 

on reforms to the NFIP as they are needed and other potential solutions to the issues raised by these events. 

Again, thank you for the opportunity to present our views. 

[The prepared statement of Mr. Majewski can be found on page 

82 of the appendix.] 

Mr. CLEAVER. Thank you very much. 

Ms. Small. 

36

STATEMENT OF CHERYL A. SMALL, POLICY ADVISOR, 

NATIONAL FLOOD DETERMINATION ASSOCIATION 

Ms. SMALL. My name is Cheryl Small, I am the policy advisor for 

the National Flood Determination Association (NFDA), and I am 

pleased to comment on the Multiple Peril Insurance Act of 2007, 

H.R. 920. The NFDA shares the concerns for the viability of the 

National Flood Insurance Program and for the homeowners in 

coastal regions who need reliable and affordable insurance coverage 

to protect against losses from windstorm and flood. 

We respect the fact that Congressman Taylor has introduced 

H.R. 920, which creates a Federal program that would make these 

coverages available to homeowners located in coastal communities. 

The NFDA is a professional association of companies that work 

with federally-regulated lenders to facilitate compliance with the 

NFIP’s mandatory purchase requirements by helping to ensure 

that structures located in special flood hazard areas are covered by 

flood. Lending institutions provide the compliance mechanism for 

the NFIP. Our industry completes approximately 20 to 30 million 

flood risk determinations per year, and we respond to approximately 1,250,000 telephone inquiries from lenders, insurance 

agents, and homeowners regarding the NFIP and flood compliance 

matters. 

The NFDA recognizes and appreciates the critical place the NFIP 

holds by bringing together floodplain management, hazard mitigation, mapping, and planning of flood insurance. We want to see the 

foundation of the NFIP supported and strengthened by thoughtful 

action. 

Mr. CLEAVER. Ms. Small, can you pull the microphone up a little 

closer? 

Ms. SMALL. Sure. 

While we want to see the foundation of the NFIP supported and 

strengthened by thoughtful action, while we support the motives 

and spirit behind the bill, we strongly urge the committee to consider the implications associated with the creation of a Federal 

multi-peril insurance program and suggest that the committee require a study to include a comprehensive assessment of the loss exposure due to windstorm, the market for voluntary windstorm insurance, the effect on the NFIP in the private insurance industry, 

and the implications on flood compliance for federally-regulated 

lenders. 

The NFDA’s concerns center around the financial and administrative impact this program may have on the National Flood Insurance Program, the potential impact of federally-regulated lenders 

in the form of inconsistence compliance guidelines, gaps in coverage, and possible exposure to litigation. Although actuarial rates 

will be implemented, they may not produce sufficient premium income to bear administrative costs and losses in the event of a natural disaster. 

To continue to articulate our concerns, currently the write-yourown companies provide a sales channel through insurance agent 

networks that conduct training, administer claims, and provide policyholder services, including policy issuance. 

What mechanism will be used to provide these services within 

the multi-peril program? 

37

What would be the extent of the administrative burden to the 

NFIP? 

Will FEMA require additional staff expertise pertaining to underwriting actuarial science policy development claims program 

oversight and management? 

What will be the cost in time and money for FEMA to modify the 

NFIP databases and systems to include management reporting and 

requirements for statistical and financial reporting of policies, premiums, and claims? 

Would the Federal multi-peril wind and flood program be authorized to borrow from the U.S. Treasury to cover shortfalls? 

What would be the flood compliance implications for lenders if a 

mortgagor, whose property is in a special flood hazard area, drops 

an optional windstorm and flood policy? 

Will gaps and coverage be created when lenders initiate the process to place flood insurance? 

Will there be a notification obligation for lenders to inform their 

borrowers of the availability of this higher limit coverage? 

What additional exposure to liability will lenders face related to 

separate policies under the NFIP, standard flood versus multiperil? 

We are in favor of prudent action which considers the impact of 

all the various stakeholder groups, and I hope the subcommittee 

continues a dialogue among these groups to develop a course of action which addresses the problems, but does not, inadvertently, create new ones. 

Thank you. 

[The prepared statement of Ms. Small can be found on page 107 

of the appendix.] 

Mr. CLEAVER. Thank you, Ms. Small. 

Mr. Baker? 

STATEMENT OF W. ANDERSON BAKER III, CPCU, ARM, 

PRESIDENT, GILLIS, ELLIS & BAKER, INC. 

Mr. BAKER. Congressman Cleaver and members of the subcommittee, I am Anderson Baker, president of Gillis, Ellis & Baker, 

Incorporated, one of Louisiana’s largest independent insurance 

agencies. 

I appreciate the opportunity to appear before the subcommittee 

today on behalf of Greater New Orleans, Inc. (GNO, Inc.), a 10-parish economic development organization in southeast Louisiana. 

I would like to extend my personal appreciation to the chairwoman for the intense interest she has shown in New Orleans over 

the past 2 years, and also to acknowledge Congressman Taylor 

from our neighboring State of Mississippi for the leadership he has 

demonstrated after these intense hurricanes devastated the Gulf 

Coast and for his leadership on H.R. 920. 

GNO, Inc., has grappled with the maze of insurance challenges 

presented by the post-Katrina environment every day since 

Katrina. Our company has handled thousands of Katrina claims. 

We have as much experience with the insurance challenges facing 

New Orleans and the Gulf Coast as any other local organization, 

and have transferred that experience to advice to GNO, Inc., since 

Katrina. One of the biggest challenges to the recovery in New OrleVerDate 0ct 09 2002 15:57 Nov 19, 2007 Jkt 038391 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\38391.TXT HFIN PsN: TERRIE
38

ans and along the Gulf Coast has been the placement of insurance. 

Prior to Hurricanes Katrina and Rita, the private insurance market would have readily provided wind coverage. Now, insurance 

companies are in most cases either significantly restricting wind 

coverage or are simply no longer providing it at all. 

As an insurance agent in New Orleans, I am forced to place the 

coverages in the surplus lines markets, place the coverages with 

Louisiana’s residual market plan, or not provide the coverage at 

all. How can we expect homeowners and businesses to rebuild New 

Orleans when insurance is either unavailable or not affordable. It 

is essential that the Federal Government work closely with those 

of us on the ground facing the crisis on a daily basis to develop 

common sense solutions to this problem. 

The NFIP has been a valuable insurance program to date, but 

it must be modernized to reflect the current realities. Insurers typically do not wish to provide coverage for an event that can cause 

significant loss to numerous properties at the same time and in the 

same area. They tend to insure random yet predictable events; and 

as the hurricanes aptly demonstrated, there are times when the 

private industry simply does not have the capacity to adequately 

respond to a massive event. 

H.R. 920 will provide an incentive for insurers to continue writing policies in coastal areas by removing the burden of providing 

the initial levels of wind coverage. This will relieve much of the 

risk of uncertainty that exists in the current wind versus flood debate. The result will be more capacity in the private sector, which 

would hasten the rebuilding of my city or any other area similarly 

affected in the future. Under H.R. 920, insurers could structure 

their policies to eliminate the lower level of wind coverage that currently causes such difficulties in the event of a massive loss. 

If the revised NFIP program were actuarially priced as proposed 

by H.R. 920, it would allow for the build-up of capital in the program and diminish the likelihood of large losses incurred after 

Hurricanes Katrina and Rita. It is a reality that an increasing 

number of Americans are now living in coastal regions. In the 

event of major windstorms in the future, the Federal Government 

will certainly be called upon for financial assistance. H.R. 920 

would allow more people to pay into a program that will build up 

reserves for future losses, and thereby reduce some portion of the 

Federal Government’s exposure when the next major hurricane hits 

one of our coastlines. 

I am pleased to add the solid support of GNO, Inc., for H.R. 920. 

The economies of hundreds of counties, parishes, and cities are at 

stake. In this environment, it is essential that Congress act aggressively to provide appropriate relief to the thousands of homeowners 

and businesses hamstrung by the insurance crisis along the Gulf 

Coast. H.R. 920 takes a significant step in that direction. 

Thank you for the opportunity to appear before you today. GNO, 

Inc. and its insurance task force look forward to working with the 

Financial Services Committee on this important legislation. 

I would be pleased to answer any questions that you may have 

or submit additional information that you may require. 

[The prepared statement of Mr. Baker can be found on page 58 

of the appendix.] 

39

Mr. CLEAVER. Thank you very much, Mr. Baker. 

Dr. Hartwig? 

STATEMENT OF ROBERT P. HARTWIG, PH.D., CPCU, PRESIDENT AND CHIEF ECONOMIST, INSURANCE INFORMATION 

INSTITUTE 

Mr. HARTWIG. Good afternoon, Mr. Cleaver, Ranking Member 

Biggert, and members of the subcommittee. 

My name is Robert Hartwig, and I am president and chief economist for the Insurance Information Institute. 

Thank you for the opportunity to appear before the committee 

today to discuss the economic and fiscal ramifications associated 

with the expansion of the National Flood Insurance Program to 

cover windstorm losses as proposed under H.R. 920. 

My testimony today will address five major issues: the true scope 

of windstorm exposure in the United States; the historical difficulties that government-operated property insurers have encountered 

in implementing a rating system that is actuarially sound; the 

distortionary economic effects an expanded program could have 

should H.R. 20 fall short of its stated requirement that rates be actuarially based; recognizing that even if rates are actuarially 

sound, H.R. 920 does not address or correct the fundamental problem of low flood insurance penetration rates; and the fact that the 

ability of the NFIP to offer windstorm coverage at actuarially 

sound rates will be undermined by political decisions made by 

many State-run insurers to subsidize windstorm coverage, thereby 

pricing the Federal coverage out of the market. 

In many parts of the United States, wind is the most costly and 

frequent cause of catastrophic loss, as you can see in Figure 1, on 

the easel to my right. 

As Figure 1 shows, wind plays a role in approximately 80 percent 

of the catastrophe losses paid by insurers. Hurricanes and tropical 

storms accounted for nearly half of the $278 billion in insured catastrophe losses over the past 20 years. Tornadoes accounted for 

another 25 percent. Severe winter storms and other strong wind 

events accounted for another $30 billion or 11 percent in cap losses. 

It’s important to point out that the vast majority of wind losses 

today are paid by private insurers, including those in coastal areas. 

There is no question that government-operated insurers play a 

vital and necessary role as insurers of last resort, but many operated deficits, even in years with light catastrophe losses. The reason: Government-run property insurers are highly susceptible to 

political pressure and frequently are not permitted to charge rates 

or to adopt underwriting criteria that are commensurate with the 

risk being assumed. While H.R. 920 requires that rates be established on an actuarial basis, the financial consequences of not doing 

so historically in other plans have been nothing short of disastrous. 

The NFIP itself, as we have heard several times, has a current deficit of $17.5 billion. Of the 31 State-run Fair Access to Insurance 

Requirement Plans for which data are available, 26 have incurred 

at least one operating deficit since 1999, while all seven beach and 

windstorm plans have sustained at least one underwriting loss 

since that time. 

40

In the course of the last decade, the Fair Plans have also seen 

a more than 50-fold ballooning in their aggregate operating loss 

from $52 million in 1995 to $2.8 billion in 2005. Given this real 

world experience, it is unclear what practical safeguards beyond 

the language in the bill itself could or would be implemented as 

part of H.R. 920 and would prevent deviations from actuariallysound pricing practices. At the Federal and State level, legislators 

and regulators have almost universally chosen to sacrifice actuarially-sound rating and underwriting practices for political gain. 

Though popular with voters, the combination of artificially low 

rates and lax underwriting standards is financially lethal, enabling 

and encouraging rampant or substandard development in vulnerable areas. 

Should coastal dwellers be required to pay more to bring rates 

to an actuarially-sound basis? This is a politically unpopular question to ask, which is precisely the reason why it is seldom answered. Instead, legislatures tend to search for ways to spread the 

cost of financing deficits well beyond the policyholders who actually 

incur the losses, to include property owners who have never filed 

a claim, inland dwellers, and people who take every precaution to 

protect their homes against storm damage. Even auto insurance 

and commercial liability policyholders can be assessed. 

Practical experience has demonstrated repeatedly that government property insurers rarely operate on an actuarially sound 

basis. So a fundamental question to ask is whether expanding the 

NFIP to include optional windstorm coverage will solve the problem associated with discerning wind from water damage. There are 

several reasons to suspect that it will not. 

Low flood penetration rates, as I have already mentioned on 

Chart 2, that you will see up here in a moment—you will see that 

fewer than half of homes and even flood zones have coverage, and 

only 1 percent outside of those zones. Consumers generally skip optional coverages. For instance, we could take another example of 

California. Only 12 percent of homeowners have earthquake coverage in that State, and of course again the minority of homeowners have flood coverage. 

And again, the subsidies that I mentioned earlier price H.R. 920 

windstorm coverage out of the market. To give you an example, 

Florida Citizens Property Insurance Corporation in 2006 became 

the State’s largest insurer of homes and is growing rapidly today 

in large part because the State has consciously decided to subsidize 

every single, new policy written. Despite having accrued deficits 

over the 2004–2005 hurricane seasons totaling some $2.3 billion, 

Governor Charlie Crist earlier this year ordered that Citizens’ rates 

be rolled back and then frozen through 2008. 

So, in conclusion, the proposed expansion of the NFIP to provide 

windstorm coverage as specified under H.R. 920 is risky and potentially an enormous financial undertaking. 

Thank you very much for the opportunity to address the committee today. I would be happy to answer any questions that you 

have. 

[The prepared statement of Mr. Hartwig can be found on page 

68 of the appendix.] 

Mr. CLEAVER. Thank you, Mr. Hartwig. 

41

Mr. Conrad. 

STATEMENT OF DAVID R. CONRAD, SENIOR WATER 

RESOURCES SPECIALIST, NATIONAL WILDLIFE FEDERATION 

Mr. CONRAD. Thank you, Congressman Cleaver, Ranking Member Biggert, and members of the subcommittee. 

The National Wildlife Federation is the Nation’s largest conservation, education, and advocacy organization. We appreciate the 

opportunity to share our views on H.R. 920, the Multiple Peril Insurance Act of 2007. In general, while we understand there are 

substantial issues raised regarding the insurance adjustment process when there are both flood and wind-related damages, the National Wildlife Federation is deeply concerned that adding a wind 

peril dimension to the NFIP could substantially undermine the 

Program’s already precarious financial position, would add greater 

risk and uncertainty, especially for the taxpayers and the public, 

and would distract, we believe unnecessarily, from the critical missions of the NFIP. 

We applaud Representative Taylor and other members especially 

for their continuing efforts to raise the Nation’s awareness of the 

increasing risks associated with coastal storms. Current science is 

predicting that these storms could become more powerful and of 

longer duration, due especially to rising sea levels and warming of 

the climate. The Intergovernmental Panel on Climate Change and 

many prominent climate scientists are warning that such storms 

are likely results of global warming, due to buildup of greenhouse 

gases. 

It is clear also that Hurricanes Katrina, Rita, and Wilma in 

2005, plus powerful hurricanes that struck Florida in 2004, have 

increased the public’s concerns. At the same time, the rash of 

storms have driven the National Flood Insurance Program into the 

most dire financial condition in its history, now with a virtually insurmountable U.S. Treasury debt of approximately $18 billion. We 

are strongly urging Congress to make the critically necessary 

changes in the Nation’s energy systems to directly address causes 

of global warming. Yet, we believe it would not be appropriate or 

wise to add to the current liabilities of the National Flood Insurance Program the potentially very large additional liabilities that 

would be associated with coverage of wind peril, especially given 

that the Nation has a long history of this peril being served by the 

private sector. 

Recent insurance industry estimates of major storms potentially 

striking a number of the more populated coastal areas show that 

the costs of storms like Hurricane Katrina that were in the $15- 

to $20 billion range for the NFIP today could be 3 to 5 times more, 

if wind perils were included. Such costs could potentially overwhelm the program and the costs to taxpayers could balloon to 

staggering levels. This could undermine the ability of the NFIP to 

accomplish its other established goals. 

The National Wildlife Federation has been concerned for years 

that the NFIP is having severe difficulties managing the growth of 

flood-related risk. We see a continual buildup of at-risk development, with little to suggest that our programs are not in many 

ways increasing disasters. That was not how the NFIP was supVerDate 0ct 09 2002 15:57 Nov 19, 2007 Jkt 038391 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 K:\DOCS\38391.TXT HFIN PsN: TERRIE
42

posed to work. Nearly 10 years ago, the National Wildlife Federation released a report called, ‘‘Higher Ground.’’ On the problems of 

repetitive losses where in thousands of communities, buildings 

were experiencing repeated flood-related losses, only to be reconstructed again and again with little or no mitigation of risk, in part 

for lack of incentive to move out of harm’s way. 

The lack of incentive for mitigation was driven by rates that are 

below, some of them far below, true actuarial rates, flood hazard 

maps that are inaccurate or out-of-date, and failure to consider 

changing conditions, and failure of communities and FEMA to enforce even minimum standards of the program, let alone set higher 

standards to reduce or avoid risk. Today, we still find that after 

Congress passed the 2004 amendments and provided funding to address repetitive losses, the new program is still largely not implemented and has failed to spend much of the funds made available 

to reverse that trend. 

In the intervening decade since our report, the number of repetitive loss properties has grown from 74,500 to now over 135,000 

properties, and the cost to the NFIP of these buildings has more 

than tripled to over $8.5 billion. The NFIP continues to face enormous challenges, and the public’s confidence is lacking in the program’s ability to reduce risks, manage costs, and protect the environment. Given this context, if the NFIP were subject to the additional burden of wind perils, it could so tax the program’s capabilities that many other functions would be slowed or lost. 

As the committee knows, the NFIP is engaged in a major effort 

to modernize maps that have fallen far out-of-date. Currently, 

staffing at the NFIP is straining to carry out these and other functions. Yet, we do not believe that the NFIP is equipped to analyze 

and rate wind-related risks as well, whereas the private sector has 

devoted substantial resources for decades to these issues—both rating and hazard mitigation technologies. 

Even when the focus has been on managing risk in the more defined area of floodplains, it is clear that the NFIP has a long way 

to go. New standards must be developed to provide higher levels 

of protection. Flood risk mapping needs to be substantially expanded to support the varied goals of the NFIP, and the NFIP 

needs to be integrated much better with other flood-related programs of the government. 

The addition of the wind-related perils would expand the flood 

program’s footprint far beyond the present level and greatly complicate the potential for success. For this reason, the National Wildlife Federation would oppose H.R. 920 as written. 

Chairwoman WATERS. Thank you very much. 

Mr. CONRAD. Thank you. 

[The prepared statement of Mr. Conrad can be found on page 65 

of the appendix.] 

Chairwoman WATERS. I thank the panelists for your participation, and I will recognize myself for 5 minutes for questions to this 

panel. 

To tell you the truth, I am a bit frustrated with the lack of solutions that have not been presented to us. I joined Mr. Taylor in 

support of his legislation because I thought that he came up with 

a solution that made good sense, particularly since we have learned 

43

that the private insurance companies have been trying every way 

that they possibly can not to pay, when clearly they should be paying. 

And it seems as if the Federal Government has been picking up 

the tab, the Flood Insurance Program, that perhaps should have 

been paid by some of the private insurers. Then, of course, we are 

constantly threatened by the private insurers that they are not 

going to insure anymore. They are going to pull out. They are not 

going to provide coverage. But when there is a solution developed 

based on some of the comments and unhappiness of the insurance 

company, then all of a sudden we hear from the private sector, private insurance companies that that’s not the way to go. 

So what are we to do? Are we to say to the private insurance 

companies, we don’t have any alternatives. Please don’t pull out. 

Please pay the claims. Please don’t abandon the areas that desperately need coverage. What is a compromise solution to this problem? And I’m sorry I didn’t hear all of your testimony. One of you 

may have given a compromise solution. If you did, would you 

please just reiterate it a bit for me and the rest of the members 

who may be left? 

Ms. PRAEGER. Madam Chairwoman? 

Chairwoman WATERS. Yes. 

Ms. PRAEGER. I did suggest on behalf of our national association 

that perhaps Congressman Taylor’s proposal should be more inclusive. We recognized the conflict between wind and water, but we 

pointed out that you could have the same conflict between earthquake and fire, should there be a major earthquake in your home 

State. 

Our proposal was multi-faceted and certainly not thought out 

yet. We are putting on the table some suggestions, and one of them 

is to have homeowners’ policies be all-perils policies, so that you 

don’t have that dispute. And perhaps then cap the catastrophic loss 

with a Federal, first-dollar reinsurance coverage. We have had a 

major tornado hit in Kansas that literally wiped a small community off the face of the map. That was wind. Companies were quick 

to come in. People were paid policy limits, and we have had now 

major flooding in Kansas. And most of our homes did not have 

flood insurance. Many of them were in communities where they 

could participate, but chose not to, and mistakenly thought that 

their homeowners’ policy covered floods. 

So I think moving to an all perils policy with Federal participation in some form, whether it be with bonds that companies buy, 

or with a reinsurance model, we think should be studied. 

Chairwoman WATERS. Without knowing how much participation 

from the Federal Government or the ways in which the private sector and the Federal Government may interact, how many of you on 

this panel agree that we should have something that would be an 

all perils approach to dealing with these disasters? 

How many disagree? 

Would you tell me why you disagree? I can’t see the name. Mr. 

Majewski? 

Mr. MAJEWSKI. Ted Majewski. 

One of the things that insurance is out there for is private enterprise to go out and write insurance. If you put the Federal GovernVerDate 0ct 09 2002 15:57 Nov 19, 2007 Jkt 038391 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\38391.TXT HFIN PsN: TERRIE
44

ment out there doing all-perilall-peril being theft, fire; I mean all 

peril is everything—you have taken something out of the independent market, and I think that is bad for business. 

Chairwoman WATERS. But my question was not all-perils solely 

as a government response. My question was, could it be a combination of private and government? But do you believe that the homeowners, the citizens of this country, should have a policy of some 

kind that covers all perils, whether it is wind, water, as was mentioned, tornado, or earthquake? 

Do you think there is something to that? 

Mr. MAJEWSKI. I think that is an admirable thing to do, to try 

and provide as much coverage as you possibly can provide, with the 

policy. But there would be costs involved with that. I mean, you 

could bring that also to terrorism. You are already working on a 

TRIA Act, currently, and you know the problems that are involved 

with that. So I mean there are a number of perils. 

Chairwoman WATERS. I just want to deal with natural disasters 

right now. 

Mr. MAJEWSKI. Yes, I believe natural disasters could be covered. 

There would be a cost involved with it. 

Chairwoman WATERS. Do you envision that there’s some way 

that the government and the private sector could participate? 

Mr. MAJEWSKI. Absolutely. 

Chairwoman WATERS. And what is that? 

Mr. MAJEWSKI. I believe that what Congressman Taylor has put 

together is a very good attempt to get started on this. I think that 

there are a number of things that were mentioned at this panel or 

on prior ones that if we started to take pieces of those and put 

them together, they would make a lot of sense. 

For example, one of the things that I’ve been thinking about was 

from a catastrophe standpoint. Instead of covering every dollar 

from a FEMA standpoint, and from a Federal Government standpoint, if you were to take a Category 3 storm and above, which 

rarely happens but is really what this whole thing started over, 

was major, major storms, not necessarily the small ones, but the 

largest storms that are out there, which from a probability standpoint will occur, but not as often as smaller storms, and starting 

a program that began with a category, say, 3 or 2 storm and above 

and have participation from a Federal Government standpoint 

there. 

If you could meld something like that into your bill, that would 

then eliminate the need to look at the smaller claims that are out 

there and the smaller storms, and then let the insurance companies handle those, you know, that would be one, I believe, compromise that would be certainly from my standpoint and my company’s standpoint worth working on and worth solving. 

Chairwoman WATERS. Thank you. I think Mr. Watt alluded to 

something like that. 

Mr. MAJEWSKI. Exactly, he did, and that’s why I said it was mentioned earlier. And it makes a lot of sense to take that approach. 

Chairwoman WATERS. All right, thank you very much. 

Ms. Biggert? 

Mrs. BIGGERT. Thank you, Madam Chairwoman. 

45

Could I ask you, before I ask a question, what your intentions 

are in moving this bill forward? We are scheduled to mark-up H.R. 

1682 at the end of the month. Are you looking at Mr. Taylor’s bill 

as being an amendment or do you plan to introduce a new bill? 

Chairwoman WATERS. I am sorry. Would you repeat that? 

Mrs. BIGGERT. I just wondered what your intentions were with 

regard to moving this bill forward if we mark-up H.R. 1682 at the 

end of this month. Are you planning on including this bill within 

that bill, are you going to introduce a new bill, or how does that 

fit in with this bill? 

Chairwoman WATERS. I am not sure how we are going to do it. 

I am going to talk with Mr. Taylor, with Chairman Frank, and 

with you, and we are going to decide. 

Mrs. BIGGERT. Okay, thank you. 

Chairwoman WATERS. Thank you. 

Mrs. BIGGERT. All right, then I have a question for each of the 

panel. 

Chairwoman Waters asked you about a multi-perils bill and I 

would just like a yes or no answer from each of you. 

Would you support the addition of wind coverage to the National 

Flood Insurance Program? 

Ms. Pogue? 

Ms. POGUE. No. One of the— 

Mrs. BIGGERT. Just yes or no. 

Ms. POGUE. No. 

Mrs. BIGGERT. Ms. Praeger? 

Ms. PRAEGER. No. 

Mrs. BIGGERT. Okay, Mr. Majewski? 

Mr. MAJEWSKI. No. 

Mrs. BIGGERT. Okay. Ms. Small? 

Ms. SMALL. No. 

Mrs. BIGGERT. Mr. Baker? 

Mr. BAKER. Yes. 

Mrs. BIGGERT. Mr. Hartwig? 

Mr. HARTWIG. No. 

Mrs. BIGGERT. Mr. Conway? 

Mr. CONWAY. No. 

Mrs. BIGGERT. Okay, thank you. 

And Ms. Pogue testified and she set forth several questions about 

H.R. 920 that I think at this point remain unanswered. 

Would you all consider, do you think? Would you support a GAO 

study to examine such questions, and I think you have all raised 

several questions, in order for Congress to proceed in a more informed manner before we would consider such legislation. 

Ms. Pogue, yes or no? 

Ms. POGUE. Yes. 

Mrs. BIGGERT. Okay, Ms. Praeger? 

Ms. PRAEGER. Yes. 

Mrs. BIGGERT. I’m not going to even try to pronounce your name 

again. 

Mr. MAJEWSKI. Yes. 

Mrs. BIGGERT. Ms. Small? 

Ms. SMALL. Yes. 

Mr. BAKER. No, but I would love to elaborate. 

46

Mrs. BIGGERT. I don’t have time. Dr. Hartwig? 

Mr. HARTWIG. Yes. 

Mr. CONWAY. Yes. 

Mrs. BIGGERT. Okay, thank you, and I am sorry. I have another 

meeting, so that’s why I have to hurry. I appreciate you all coming, 

and I yield back my time. 

Chairwoman WATERS. Thank you very much. Mr. Green, for 5 

minutes. 

Mr. GREEN. Thank you, Madam Chairwoman, and I thank the 

ranking member as well. 

Let me start by saying that this really, while it references Mr. 

Taylor, is not about him. He is symbolic of many other persons who 

are not here to represent themselves, and quite candidly, I thank 

God that he’s here. I regret that it happened to him, but I am 

grateful that he was available to shed a lot of light on a situation 

that probably would not have received the attention that it has received if nor for the Taylors of the world who have the wherewithal 

to make the issue available for all of us to see. 

Having said this, let me continue the trend. We call this voir 

dire, or voir dire, depending on where you’re from when we take 

you en banc and we ask questions. Voir dire is a French term that 

means to speak the truth, so this becomes the truth-telling portion 

of this hearing for members of the venire. That would be you, the 

witnesses. 

Now, having said this, which is what we have been doing, let me 

ask in this way. If the private sector were taking care of this problem in its entirety, do you agree that there would be no need for 

involvement of the public sector. If your answer is yes, you need 

not say anything. Your silence will indicate consent. 

All right. Do you agree that if the private sector refuses to provide any wind coverage at all, the public sector should get involved 

in these coastal areas? If the private sector refuses to provide any 

wind coverage at all, zero, should the public sector get involved? 

If your answer is yes, you need not say anything. Your silence 

will be consent. Now because this is so critical, I would like to get 

your actual consent. Do you agree? We will start with the first lady 

to my left. And is your answer yes? 

Ms. POGUE. My answer is no. 

Mr. GREEN. If the private sector provides, refuses to provide, any 

wind coverage at all, you would not want the public sector involved? 

Ms. POGUE. Oh, I was answering your first question. 

Mr. GREEN. No, as to my second now. 

Ms. POGUE. Your second question? 

Mr. GREEN. Yes. Private sector, zero coverage; would you want 

the public sector involved in providing wind coverage? Would you? 

Ms. POGUE. My answer— 

Mr. GREEN. If the private sector is providing zero wind coverage, 

would, yes. 

Ms. POGUE. Yes. You have me thoroughly confused, yes. 

Mr. GREEN. All right, it’s not going to be tricky. 

All right, let’s go to the next lady. If the private sector provides 

zero wind coverage, would you want the public sector to step in? 

47

Ms. PRAEGER. At that point, I don’t believe we’d have a private 

sector market, sir. 

Mr. GREEN. Okay, without explanation, would you want the public sector? 

Mr. MAJEWSKI. Yes. 

Mr. GREEN. Ma’am? 

Ms. SMALL. Yes. 

Mr. GREEN. Sir? 

Mr. BAKER. Yes. 

Mr. HARTWIG. Yes. 

Mr. GREEN. Sir, if the private sector refuses to provide zero coverage, any coverage, would you want the public sector to step in, 

or would you want people to simply be at the risk of the wind, at 

the risk of nature, and those who have their homes destroyed, that 

is just tough luck. Life is like that. It’s unfortunate that it had to 

be you. Thank God it wasn’t me. 

Is that your attitude, or would you want the public sector to step 

in? 

Mr. CONRAD. I think the public sector would need to step in. 

Mr. GREEN. Excuse, me. Sometimes, when people finish, I don’t 

know whether they said yes or no. So I have to pressure you to say 

yes or no. If the private sector provides zero coverage, would you 

want the public sector to step in? 

Mr. CONRAD. To step in, in some form, yes. 

Mr. GREEN. Okay, now, so the question becomes really how many 

companies will have to leave Louisiana and Texas or perhaps Mississippi, before we decide that we need to do something, that’s really where we are, because if we know that if we have zero help from 

the private sector, then the public sector should do something. The 

question becomes, where is it between zero and 100 percent coverage. Where is it that we should be involved in this process? 

And the contention is that many of these insurance companies 

are leaving the Gulf Coast area or they are threatening to leave, 

one or the other. And at some point, we have to consider the people 

who are left behind, not only because of their homes, but also because of the economic infrastructure that’s in place there. 

If we are not careful and we can continue to dilly-dally to the extent that we could impact the economic order, not only in the Gulf 

Coast area because it dominos and it impacts the entirety of the 

country, we have to consider the stability of the economic order as 

well and insurance is a part of the stabilizing process. So at some 

point we have a responsibility to do something to try to help. 

That appears to be what H.R. 920 proposes to do. Now, friends, 

I don’t know the name of the phobia. Sorry that I don’t, but there 

is this fear that some people have of leaving home. They ask themselves, if I go out of that door, will I trip and fall? And if I go out 

of that door, and I don’t trip and fall, when I get outside, will a 

plane fall on me? And they continue to ask themselves questions, 

and they do this to the extent that they suffer from what’s called 

a paralysis of analysis. 

They engage in analysis to the extent that they never do anything and literally they are people who will stay at home because 

they are afraid. My point to you is that we don’t have that luxury 

in Congress. I believe we have a duty to try to find a solution so 

48

that the economic order receives stability and so that citizens can 

know that they will be insured. And I don’t think that we want to 

put it all on the Federal Government, nor do I want to put it all 

on the private sector. There has to be some balance. H.R. 920 

seems to seek that balance, and I yield back the balance of my 

time. 

Chairwoman WATERS. Mr. Miller? 

Mr. MILLER. Thank you, Madam Chairwoman. I saw you smiling. 

It’s good to see that we can have some fun once in a while. 

When I read the results of a poll, I always look to see how the 

question was asked too, you know, before I just accept the results 

of a poll. But Mr. Hartwig, why would the insurance industry in 

a free market system, and I quote, ‘‘free market system,’’ decide to 

pull out or refuse business in various States? 

Mr. HARTWIG. Well, to begin with, in none of the States at issue 

here do we have a free market system. The ranking member, Mrs. 

Biggert, actually hails from the only State that has complete and 

total flexibility in terms of rates in the entire United States. 

The reality is in States like Florida and other coastal States, you 

do have fairly strict rate regulation laws and laws that govern, of 

course, the forms that are used. To the extent that an insurer cannot generate a rate of return that is sufficient to cover its expected 

losses, that is the reason why you have seen most of the pullback 

that you have seen in coastal areas. 

In some States, in Florida in particular, there is a deliberate attempt to drive insurers out of the State for political reasons. Make 

no mistake about it, that is the reason why this is a very active 

issue for the current Governor and he is underpricing policies deliberately at this point. So insurers do want to participate in markets, even in risky areas. And, by the way, insurers do offer and 

participate in markets that are extremely risky all around the 

world in all sorts of ventures. 

But when you have a regulatory environment that prevents even 

the opportunity for earning a reasonable rate of return over extended periods of time, it is impossible to participate. So if I ask 

the question to all of you in a different way, if a free market system existed, do you believe any State would be without insurance 

for their people. The advantaged probably know they would all 

have it if the free market system existed. 

When the Flood Insurance Program was implemented in the late 

1960’s, the coverage generally was unavailable from coast-to-coast, 

Mr. Hartwig, and how does this rationale for Federal flood insurance differ from the state of wind coverage today? 

Mr. HARTWIG. Well, in wind coverage today, wind coverage is 

generally available all across the United States with the exception 

of some coastal areas where there are some difficulties that are a 

combination of both excessive risk and exposure that insurers do 

have that has caused them to back off some of these policies, combined with rate suppression issues and litigation issues in a number of States. 

Mr. MILLER. So the rates are being mandated so low that the insurance companies will not accept the risk-based rate of return? 

Mr. HARTWIG. That’s precisely it, particularly in States like Florida. Yes. If you are not given the opportunity to at least cover your 

49

costs and a reasonable rate of return, you simply can’t operate in 

that environment. No business could operate. 

Mr. MILLER. So you think it is probably appropriate for the Federal Government to be involved in some flood insurance, but not 

necessarily in wind insurance. 

Mr. HARTWIG. The insurance industry has no problem with the 

National Flood Insurance Program and the insurance industry believes there is an appropriate role for government in every State, 

particularly a safety valve function, until markets stabilize. 

Mr. MILLER. I guess a question for each of you would be, do most 

States operate a free market insurance system that allows the insurer to share a fair price based on their risk. Starting from left 

to right, what would your response be? 

Do you think the States allow or operate a free market system 

for insurance companies that allow the insurer to charge a fair 

price that accurately reflects the risk? 

Ms. POGUE. Congressman Miller, to be honest with you, I 

wouldn’t have a basis for answering that question. It would be 

more the government’s involvement in flood insurance. 

Mr. MILLER. Sure. 

Ms. PRAEGER. I can speak for my State. In Kansas, if companies 

can demonstrate that the rates they are proposing are actuarially 

sound, I can’t statutorily refuse to allow that rate increase. 

Mr. MILLER. Okay. 

Mr. MAJEWSKI. I would say many States operate in a free market 

system. The exception would be on an assigned risk program, 

where you’re taking like the auto insurance and you’re setting a 

rate from a company standpoint and from a State standpoint. It’s 

very difficult for even the State plans to stay solvent, much less the 

independent market side. 

Ms. SMALL. Congressman Miller, I don’t have a basis from which 

to respond to that. 

Mr. MILLER. Okay. 

Mr. BAKER. Congressman Miller, in the State of Louisiana, I can 

say with almost certainty that I cannot obtain a new homeowners 

policy for you in the greater New Orleans area in an area that has 

been flooded. 

Now, it seems a bit counterintuitive, but because the area flooded, I can’t provide wind insurance. But the controversy is such that 

the insurers will not go where there’s a chance of flood if they have 

a chance of having a court enforce a wind ruling on that policy. 

Mr. MILLER. Well, what you are saying is that if they’re not willing to accept the responsibility of flood damage when they are only 

insuring for wind damage? 

Mr. BAKER. The courts are imposing flood damage on them 

where they thought they were going to collect on wind. 

Mr. MILLER. That was my answer. So the insurance companies 

are basically saying, we are only writing a policy for wind. We are 

not writing it for flood. So, why did we accept liability, when 

there’s a flood, we’re going to get assessed for wind damage at the 

same time. 

Mr. BAKER. Well, what I am saying is they won’t take the risk 

of the uncertainty. 

Mr. MILLER. Yes, okay. Mr. Hartwig? 

50

Mr. HARTWIG. The majority of the U.S. property casualty and insurance market operates in an environment that by traditional 

terms, at least in terms of rate flexibility, couldn’t be deemed as 

anywhere near perfect competition. 

Mr. MILLER. Okay. 

Mr. CONRAD. And, Congressman, being from the National Wildlife Federation, I think I will defer to the insurance folks here. 

Mr. MILLER. We will save the ducks. How’s that? 

I am going to ask my last one because I know my time is up. 

But based on the testimony at the last hearing, it sounded like the 

largest problem we have is an Attorney General who disagrees 

with the insurance commissioner. And, Mr. Baker, that seems to be 

a problem in your State because the courts are enforcing policies 

or mandating things that the insurance companies didn’t believe 

was their responsibility. 

I yield back. Thank you. 

Chairwoman WATERS. Mr. Taylor? 

Mr. TAYLOR. Well, Mr. Majewski and Mr. Hartwig, you have certainly earned your paychecks today. 

I want you to know that your defense of the folks who told the Bienvenuttis, with their $600,000 policy, that they weren’t going to 

pay, has been remarkable. They told the Haddens, with their $560,000 policy, that they 

weren’t going to pay. Remarkable. 

Your defense of an industry that is exempt from the Sherman 

Antitrust Act and the McCarran-Ferguson Act where it is perfectly 

legal for State Farm to call Allstate to call Nationwide and say, 

we’re not going to pay. Well, let’s all raise our rates; or you take 

Alabama; you take Florida; you take Texas. No other industry in 

America can do that. Guys, you have earned your pay. 

You are coming before this committee and saying that it is available and we work to make it available from the private sector for 

the public. You have earned your pay. But you see, I have a really 

smart guy working with me. He does research. His name is Brian 

Martin. 

I am going to read a statement from your company, Mr. 

Majewski. This is from your annual report in 1997: ‘‘Our decision 

to reduce property exposure along the Atlantic coast has had the 

desired effect of decreasing our coastal exposure by more than $2 

billion during the past 2 years. And we have reduced or eliminated 

our exposure on 61 percent of the homeowners’ policies we had in 

force in Atlantic coastal counties when the program began in January 1 of 1996.’’ 

Now, you just told us you weren’t going to make it available and 

the Nation doesn’t need to do this. But I am going to go on because 

the next statement is from your company’s press release announcing their earnings for the third quarter of 2005, which incidentally 

is right after Hurricane Katrina. And this is the part of the statement by Michael Brown, the current president and CEO: ‘‘Hurricanes Katrina and Rita had minimal impact on our financial results, in part due to our ongoing effort to effectively manage our 

catastrophe and windstorm exposures, which is a key component of 

our disciplined underwriting approach.’’ It doesn’t sound to me that 

you are going out of your way to write these policies. It sounds to 

51

me, based on quotes from your company publications, that you are 

going out of way not to write them. You don’t want to do it. I have 

heard with great interest Mr. Hartwig’s statements that, you know, 

they can’t do this because you can’t generate a rate of return. 

The company that told this guy they weren’t going to pay on his $560,000 policy made $3.5 billion the year of Katrina. The company 

that told this insurance salesman that they weren’t going to pay 

on his $600,000 policy made $3.5 billion. You see, they not only 

took them at their word that they were a good neighbor, they 

bought from their good neighbor who lived down the street. His 

wife is driving a Lexus convertible. This guy’s living in a FEMA 

trailer. 

So, Mr. Hartwig is telling me they’re a little worried about the 

rate of return, I would remind him that the insurance industry 

that is exempt from Karen Ferguson had a collective profit of $44 

billion after Katrina. The insurance industry that you are so worried about having an effective rate of return had a $60 billion profit 

last year. The same insurance industry that told these folks, we’re 

not going to pay, we’re your good neighbor. We’ll take your premium, but we’re not going to pay. 

Well, Ed Rusk, Jr., who made that decision, he and his board 

doubled their own bonuses, which amounted to almost a $9 million 

bonus for Ed Rusk, Jr., State Farm Insurance Company. Now I appreciate that you don’t see the need for change. I would invite you 

to south Mississippi. I would invite you to Slidell, Louisiana. I 

would invite you to Bayou la Batre, and I would remind you that 

52 percent of Americans live in coastal America and the odds of it 

happening to us again are pretty slim. 

And this, unlike efforts in the industry to paint it about being 

about me, it isn’t. You see, I was one of those people who walked 

into a lawyers office and said, yes, I’ll give you 40 percent of what 

I get because they are not going to give me anything. So right now, 

I am getting 100 percent of nothing, and I am willing to take 60 

percent of something because they are not going to give me anything. And, by the way, if they do that to a Congressman, what do 

you think they’d do to a school teacher or a football coach, or a retired Chief Petty Officer? 

You see, I wasn’t always a Congressman, and I really did put 

myself in that. What if I had just been a corrugated box salesman 

that day, and what if guys like Dickie Scruggs don’t take phone 

calls from corrugated box salesmen? I can’t make everyone I represent a Congressman, but we ought to treat them like one so that 

they don’t have to call a Dickie Scruggs or the Merlin Group or any 

of these other law firms. 

And so I want to tell each of you, you have earned your pay 

today. To defend this, to defend those profits, to defend the practice 

where they can call each other up and say, let’s all raise our rates. 

You take this date; you take that one. Or, even better, let’s all back 

out for a little while and then we’ll come back in and we’ll quadruple the rates and the people will be so desperate because they 

know hurricane season is right around the corner, they’ll pay us 

anything. 

To say that that doesn’t need to change; to say that it’s okay, 

well, you have to live with yourself. And I’m sure, quite frankly, 

52

your financial portfolio probably looks a whole lot better than these 

guys. But the bottom line is, it does have to change. It’s not a 

what-if, it has already happened. So the question is, when does it 

happen in North Carolina? When does it happen in New York? 

When does it happen in New Jersey? When does it happen in Connecticut? When does it happen in Georgia? When does it happen 

in South Carolina? Because it is going to happen. The Navy Oceanographic Lab tells us we are in for 10 years of this, and I believe 

them. We’ve already had our licking. The rest of the country still 

hasn’t had theirs. 

If you don’t think it needs to change, fine; but I know better. And 

I very much appreciate the gentlewoman from California having 

this hearing so people could get a chance to say something. I very 

much appreciate Chairman Frank allowing her to have this hearing, and I very much appreciate that in the 15 months after the 

storm, the guys who used to run this committee didn’t see fit to 

have one hearing on the kind of abuses that took place by the thousands in Mississippi. 

In the months since the Democrats have taken over, they have 

had five, and we have had a promise of a vote. I appreciate your 

thoughts on this, if there are some things we can do to tweak it 

to make it better. But to sit back and do nothing would be the 

greatest wrong of all. 

Thank you, Madam Chairwoman. 

Chairwoman WATERS. Thank you very much. 

Mr. Taylor, would you like to submit those quotes for the record? 

Mr. TAYLOR. Yes, Madam Chairwoman, I would like to submit 

that for the record. I would also like to submit letters from Nationwide Insurance Company and Allstate Insurance Company, as well. 

Chairwoman WATERS. Without objection, such is the order. 

We have been joined by Mr. Pearce. Would you like to have 5 

minutes for questions, Mr. Pearce? 

Mr. PEARCE. Thank you, Madam Chairwoman, I would. 

First, for Mr. Conrad, one of the criticisms of the Flood Insurance 

Program is that it encourages coastal development by homeowners 

to purchase flood insurance at subsidized prices. I would like your 

observation on that. And again, keep in mind we have 5 minutes, 

and I have a couple more questions, so short observations are better. And then the second thing is, would adding wind coverage to 

the Flood Insurance Program do anything to alleviate that problem? So, first of all, if you would address those? 

Mr. CONRAD. Yes, sir. I have spent probably 15 years looking at 

some of those questions attempting to from my vantage point at 

the National Wildlife Federation, we have done some statistical 

work on repetitive losses, which I mentioned in my testimony. 

There are a number of aspects of the National Flood Insurance Program that are providing substantial subsidies, not only in coastal 

areas, but also in some other areas that I think it is getting pretty 

clear have particularly managed to maintain high risk properties 

in those locations. 

There just has been not enough incentive to mitigate the risk, either by elevation or relocation. And, as a result, the Flood Insurance Program has been hurt financially by that. The other question, I’m sorry. 

53

Mr. PEARCE. Just if we had wind, what’s it going to do to alleviate that current situation that you are describing? 

Mr. CONRAD. Okay, I don’t believe that would have, if you added 

wind coverage; it would certainly not lessen the risk associated 

with those properties. And in fact I think it would probably increase the total exposure that ultimately the taxpayers have to the 

risks. 

Mr. PEARCE. Mr. Hartwig, typically insurance companies are in 

areas where the market justifies being there. Since the Katrina catastrophe, tell me a little bit about what’s happening to the market. Are companies staying in those three States or are they actually pulling out? 

If you would, in the principal States affected by Katrina, insurers 

have reduced their exposure, generally speaking, particularly on 

the homeowner side, less of a difference on the commercial lines. 

In other words, the business type of insurance, and the reason for 

that is that there tends to be less regulation on prices in terms of 

commercial property insurance policies. 

Is that reduction across the board, or are there some companies, 

is it some companies are saying we’re going to get that market, let 

us have the profits there. You all move to another market. Or is 

it across the board? 

Mr. HARTWIG. There are some insurers who reduce their exposure less than others. There are some who have simply said, we 

won’t write any new policies, as opposed to outright reduction. So 

there are a variety of tolerances of risk within the insurance industry and a variety of abilities to assume risk and to distribute that 

risk across the world with reinsurance. 

Mr. PEARCE. If H.R. 920, which is again designed to improve 

availability and affordability of home ownership insurance in coastal States, if this bill goes through, can you give me an idea about 

what the market will be like, how the insurance market itself will 

respond to that presence, is it going to have an effect or no effect? 

Mr. HARTWIG. Well, it is unclear what the effect would be. In 

fact, one of the major thrusts of my testimony wasn’t so much with 

respect to what would happen in terms of private insurance. What 

we have as a problem is growing influence in terms of the Staterun insurance. In Florida for example, Citizens Property Insurance 

Corporation is the largest insurance company in the State. 

We are talking more about not what is going to happen in the 

private sector, but what’s going to happen to citizens, and thereby, 

that affects the private sector. Let me give you the dynamics of 

this. If you have a situation where you have actuarially sound 

rates, and under H.R. 920 in terms of a wind program you wind 

up with a situation where you have much, much lower rates for 

wind being offered through the State-run insurer. 

Is the Governor of Florida going to say, I’m going to force all of 

you into this much more expensive program? I don’t think that is 

going to be the case. You have a case of actually competition potentially between a Federal and a State entity with private insurers 

being caught somewhere in between. I will say that the long term 

objective of insurers is consistent with Mr. Taylor’s goal of having 

actuarially sound rates. This is something insurers have been asking for, for decades, and have not yet been able to achieve. 

54

Mr. PEARCE. Any reasons why they have not been able to achieve 

those actuarially sound rates? 

Mr. HARTWIG. Well as I indicated in my testimony, in places like 

Florida and other coastal areas, it is simply not politically feasible 

to allow insurers to charge a rate that is commensurate with the 

risk. And even before Katrina, that is what has caused insurers to 

reduce their exposure to some coastal areas. 

Mr. PEARCE. And so what we face is the evacuation of private insurance and the government will be left giving any insurance that’s 

available in the extreme case. If we were to move to the extreme 

of what’s happening right now, is there any risk that the private 

insurers would ever get completely out of the market? 

Mr. HARTWIG. That’s potentially a danger. It is not what insurers 

want to do, but when we see in Florida with the State-run insurer 

adding 25,000 policies a week with $600,000 in exposure, 1.3 million policyholders. They expect to have 2 million next year. You can 

see where that market is going. 

Mr. PEARCE. Well, we will stay with Mr. Hartwig. On the longterm insurance companies nationwide have profitability and lack of 

profitability, if we take a look at 15 years and if you don’t know 

the answer, I mean if anybody on the panel has the answer. If we 

take a 15-year look at the industry, what sort of profitability do we 

have year-by-year. What sort of losses have we seen roughly? 

Mr. HARTWIG. I can answer that question. And mind you, property casualty insurance is regulated at State levels, so each State 

and each type of insurance needs to stand on its own. So the profits 

Mr. Taylor cited earlier in 2005 were earned entirely outside of his 

State on types of insurance like workers compensation insurance in 

Alaska, which I don’t believe should have any relationship or 

should subsidize homeowners insurance in places like Mississippi. 

But it is the case that in fact for 19 consecutive years, the property casualty insurance industry has underperformed the Fortune 

500 group for example. The average rate of return has been somewhere in the 6 to 7 percent range over the period in question, 

which is roughly half that generated by the Fortune 500 group. It 

isn’t much more than one could have generated risk free on a tenyear Treasury note. 

Mr. PEARCE. So you are telling me that they could have put the 

money in the bank and earned as much as they are earning with 

their routing of insurance claims and paying of the claims and the 

business of insurance? 

Mr. HARTWIG. That is on average across all their operations in 

some States like Florida or Mississippi or Louisiana. The money 

would have better invested by putting it under your bed. Okay? 

Mr. PEARCE. And what we risk if we keep on adding requirements is at some point, the insurance market itself will say, we 

would rather have no risk at 6 percent, than insure these risks at 

6 percent. 

Mr. HARTWIG. Insurance, like any business, needs to look at 

where it can earn a rate of return that is sufficient to basically 

cover its costs with a reasonable profit. In insurance, we have the 

added factor that insurers need to maintain a very significant financial cushion in order to avoid regulatory sanctions and insolvency. Insurers today have to basically keep in the bank roughly 

55

$1 for every dollar they earn in premium. And that’s a very steep 

hurdle, and it’s not one that any State-run entity has to face. 

Mr. PEARCE. Thank you, Madam Chairwoman. I see my time has 

expired. 

Chairwoman WATERS. Well, thank you very much. 

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 30 days 

for members to submit written questions to these witnesses, and to 

place their responses in the record. This panel is now dismissed 

and the hearing is adjourned. 

Thank you all, very much. 

Mr. PEARCE. Madam Chairwoman? 

Chairwoman WATERS. I’m sorry. 

Mr. PEARCE. I was going to ask unanimous consent. 

Chairwoman WATERS. That’s right, I forgot. I was fairly warned. 

Please, Mr. Pearce. 

Mr. PEARCE. If I could, we have a couple of letters here from the 

Consumer Federation of America and the joint letter from NAMIC 

and PCI and AIA under the Financial Services Roundtable. If we 

could get unanimous consent to put those in the record? 

Chairwoman WATERS. Without objection, it is so ordered. 

Mr. PEARCE. Thank you, Madam Chairwoman. 

Chairwoman WATERS. You are welcome. 

The committee is adjourned. 

[Whereupon, at 5:49 p.m., the hearing was adjourned.] 

(57)

A P P E N D I X

July 17, 2007

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