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APPROACHES TO MITIGATING AND 

MANAGING NATURAL CATASTROPHE RISK: 

H.R. 2555, THE HOMEOWNERS’ DEFENSE ACT 

JOINT HEARING 

BEFORE THE

SUBCOMMITTEE ON 

HOUSING AND 

COMMUNITY OPPORTUNITY 

AND THE

SUBCOMMITTEE ON 

CAPITAL MARKETS, INSURANCE, AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

MARCH 10, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–108 

( 

(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 

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 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

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 

STEPHEN F. LYNCH, Massachusetts 

EMANUEL CLEAVER, Missouri 

AL GREEN, Texas 

WM. LACY CLAY, Missouri 

KEITH ELLISON, Minnesota 

JOE DONNELLY, Indiana 

MICHAEL E. CAPUANO, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

LUIS V. GUTIERREZ, Illinois 

STEVE DRIEHAUS, Ohio 

MARY JO KILROY, Ohio 

JIM HIMES, Connecticut 

DAN MAFFEI, New York 

SHELLEY MOORE CAPITO, West Virginia 

THADDEUS G. McCOTTER, Michigan 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

RANDY NEUGEBAUER, Texas 

WALTER B. JONES, JR., North Carolina 

ADAM PUTNAM, Florida 

KENNY MARCHANT, Texas 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

(IV) 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

CAROLYN B. MALONEY, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

CHARLES A. WILSON, Ohio 

BILL FOSTER, Illinois 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

SCOTT GARRETT, New Jersey 

TOM PRICE, Georgia 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

RANDY NEUGEBAUER, Texas 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 10, 2010 ................................................................................................. 1 

Appendix: 

March 10, 2010 ................................................................................................. 39 

WITNESSES 

WEDNESDAY, MARCH 10, 2010 

Ellis, Steve, Vice President, Taxpayers for Common Sense ................................. 14 

McMillan, Charles, Coldwell Banker Residential Brokerage, Dallas-Fort 

Worth, and Immediate Past President, National Association of Realtors 

(NAR) .................................................................................................................... 16 

Pomeroy, Glenn, Chief Executive Officer, California Earthquake Authority 

(CEA) ..................................................................................................................... 12 

Witt, James Lee, former Director of the Federal Emergency Management 

Agency, on behalf of ProtectingAmerica.org ...................................................... 10 

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 40 

Grayson, Hon. Alan .......................................................................................... 42 

Putnam, Hon. Adam H. .................................................................................... 44 

Ellis, Steve ........................................................................................................ 46 

McMillan, Charles ............................................................................................ 52 

Pomeroy, Glenn ................................................................................................ 60 

Witt, James Lee ................................................................................................ 73 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Biggert, Hon. Judy: 

Written statement of the American Insurance Association (AIA) ................ 78 

Written statement of the Cincinnati Insurance Companies ......................... 83 

Written statement of various environmental groups ..................................... 89 

Written statement of Americans for Tax Reform, et al. ................................ 91 

Written statement of the National Association of Mutual Insurance Companies (NAMIC) ............................................................................................ 93 

Written statement of the National Wildlife Federation ................................ 105 

Written statement of Nationwide Insurance .................................................. 116 

Written statement of the Property Casualty Insurers Association of 

America (PCI) ................................................................................................ 122 

Written statement of the Reinsurance Association of America (RAA) ......... 125 

Written statement of SmarterSafer.org .......................................................... 127 

(1) 

APPROACHES TO MITIGATING AND 

MANAGING NATURAL CATASTROPHE RISK: 

H.R. 2555, THE HOMEOWNERS’ DEFENSE ACT 

Wednesday, March 10, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON HOUSING AND

COMMUNITY OPPORTUNITY, AND

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittees met, pursuant to notice, at 2:23 p.m., in room 

2128, Rayburn House Office Building, Hon. Paul E. Kanjorski 

[chairman of the Subcommittee on Capital Markets, Insurance, and 

Government Sponsored Enterprises] presiding. 

Members present: Representatives Kanjorski, Waters, Sherman, 

McCarthy of New York, Baca, Green, Cleaver, Klein, Foster, Carson, Adler; Bachus, Royce, Manzullo, Biggert, Capito, Hensarling, 

Garrett, Campbell, Putnam, Posey, and Jenkins. 

Chairman KANJORSKI. This joint hearing of the Subcommittee on 

Capital Markets, Insurance, and Government Sponsored Enterprises and the Subcommittee on Housing and Community Opportunity will come to order. I yield myself 4 minutes for the purpose 

of making an opening statement. 

I would like to thank Chairwoman Waters, our ranking members, other members of our two subcommittees, and our invited 

witnesses for joining us today for this hearing to explore approaches to mitigating and managing natural catastrophe risk and 

to examine H.R. 2555, the Homeowners’ Defense Act. 

Introduced by Congressman Klein of Florida, H.R. 2555 tackles 

the complex issue of how to address the growing problem of the 

availability and affordability of homeowners’ insurance around the 

country in the wake of ever-bigger natural catastrophes. This hearing represents the second time our subcommittees have met to consider a version of this bill. Last year, the Oversight Subcommittee 

also reviewed these matters. 

Natural catastrophes can produce devastating effects for the affected people and communities. Within our hemisphere, we most 

recently experienced considerable damage as a result of earthquakes in Haiti and Chile. We also know that such earthquakes 

could, at any time, strike the United States. 

2 

In addition to earthquakes, hurricanes are another form of natural catastrophe that threatens American citizens and businesses, 

and which could lead to severe losses and sizeable rebuilding costs. 

In Northeastern Pennsylvania in 1972, Hurricane Agnes ruined 

more than 25,000 homes, damaged nearly 3,000 businesses, and destroyed 5 major bridges. At the time, then-President Richard Nixon 

called the event, ‘‘the greatest natural disaster in U.S. history.’’ 

Since then, Americans have experienced even greater natural catastrophes, which have cost the Federal Government billions of dollars. The Government Accountability Office estimates that the Federal Government, in response to the Gulf Coast storms of 2005— 

Hurricanes Katrina, Rita, and Wilma—made about $26 billion 

available to homeowners who lacked adequate insurance. Even 

with this aid, many of the affected communities are still struggling 

to rebuild. 

In constructing any program to mitigate the structural and financial damages that natural catastrophes can cause, we need to 

ensure that those who benefit bear the costs. The approach taken 

in Mr. Klein’s bill aims to do just that. 

Specifically, the consortium proposed in the legislation would encourage States with insurance funds to voluntarily pool their exposures and cede the risk to the capital markets. I look forward to 

learning more about the increased role our capital markets can 

play in covering the insured losses of natural disasters. To the 

greatest extent possible, we should maximize the risk-bearing capacity of the private sector before calling on the government to assist. 

H.R. 2555 would also provide a Federal guarantee on the debt 

issued through the consortium. While the guarantee approach is 

slightly different than the loan program proposed in similar legislation 2 years ago, the U.S. Treasury is still entitled to recover any 

payments it makes. Thus, the bill aims to protect taxpayers. 

Mr. Klein’s legislation also includes a Federal reinsurance fund 

structured to provide capacity above and beyond private market reinsurance. Lastly, but very importantly, the legislation includes a 

grant program to help develop, enhance, and maintain programs to 

prevent and mitigate losses from natural catastrophes. I view these 

mitigation reforms as a key part of the bill. The implementation of 

effective mitigation plans will help to lower long-term costs. 

In sum, proper planning—both structurally and financially—can 

help to lessen the devastation caused by natural catastrophes. It is 

in this spirit that Mr. Klein has put forth his important legislation. 

Questions have been raised about the need, cost, and potential success of these programs. I look forward to a productive debate on 

these matters. 

I would now like to recognize Ms. Capito of West Virginia for her 

opening statement. 

Mrs. CAPITO. Thank you, Mr. Chairman. And I would like to 

thank Chairwoman Waters and Chairman Kanjorski for holding 

this joint Housing Subcommittee and Capital Markets Subcommittee hearing. 

The legislation before us today is not new. This committee has 

debated this issue for the past two Congresses, and there is by no 

means a consensus that this is the best approach to address the 

3 

availability and affordability of catastrophe insurance for residential property owners in Florida as well as in other States faced 

with risk management challenges presented by major hurricanes 

and other potentially catastrophic natural disaster threats. 

The Homeowners’ Defense Act creates new Federal programs to 

guarantee the catastrophe—I am having trouble with that word— 

catastrophe debt obligations issued by eligible State catastrophe insurance programs, offer reinsurance coverage to eligible State catastrophe insurance programs, and provide for mitigation grants to 

State and local governments. These programs would be established 

by the Treasury and the Department of Housing and Urban Development. 

Before we obligate the United States to hundreds of billions of 

dollars of potential liabilities, we should first have a better understanding of the current marketplace and the need for this legislation. And the chairman alluded to this in his opening statement. 

Many States and private markets can already address the concerns brought forth by this legislation. For example, risks are already spread globally through the reinsurance marketplace, and 

States have struggled with how to balance risks more narrowly 

among a smaller number of participants. 

Furthermore, States already can and do purchase reinsurance 

and sell catastrophe bonds through their risk pools and funds. Finally, if there is an implicit Federal guarantee or assumption of 

risk, this legislation would create a massive potential exposure for 

the taxpayer. 

It is important to note that opposition to this legislation spans 

a wide spectrum, including private industry, taxpayer advocates, 

and environmental groups. These entities raise legitimate concerns 

about the effect this legislation will have on the ability of private 

markets to function efficiently, the environmental impact on coastal areas, and most important, the risk passed to the taxpayer. 

I look forward to hearing from our witnesses today. And again, 

I would like to thank Chairwoman Waters and Chairman Kanjorski for holding this hearing. 

Chairman KANJORSKI. Thank you very much. 

We will now hear from Mr. Klein for 4 minutes. 

Mr. KLEIN. Thank you, Mr. Chairman. I thank the chairman, the 

ranking member, and all the others who have made this hearing 

possible today. This is a chance to hear from many people on this 

committee as well as the experts in the field, and the American 

people as well. 

Reducing the skyrocketing cost of homeowners’ insurance is one 

of my top priorities, and I appreciate this committee’s work to 

stand up for families and other owners of property who have to 

deal with what has become a major cost of homeownership. 

It has been more than 15 years since Hurricane Andrew crashed 

into south Florida, but homeowners are still feeling its impact, not 

only in Florida, but other places as well. Since that storm, my constituents have seen their insurance premiums increase dramatically every summer, storm or no storm. 

As too many Florida homeowners know firsthand, some insurance companies cherry-pick their customers and their risk, refusing 

4 

to write policies or limiting the scope of coverage. That is simply 

wrong, and the time for change is now. 

Yet this issue clearly extends far beyond the borders of the State 

of Florida. An alarming number of families across the country have 

also had their homeowners’ insurance coverage dropped or are currently slated for nonrenewal by their insurance company, including 

homeowners in Massachusetts, New York, North Carolina, South 

Carolina, Alabama, and Texas. In Delaware, New Jersey, and Connecticut, in some cases, property insurance companies have stopped 

writing new policies for residents. 

When families are priced out of the market, they face enormous 

risk. In earthquake-prone California, 88 percent—88 percent—of 

homeowners have no earthquake insurance at all. Increasingly, insurance companies are treating homeowners across the country like 

they have been treating Floridians for years, canceling policies and 

doubling or tripling rates in the wake of a single claim. 

That is why I have worked with my colleagues, Democrats and 

Republicans alike, to address and craft a common-sense solution 

that works for Americans in every corner of the country. Through 

a lot of hard work, we have built a coalition that includes more 

than 70 cosponsoring Members representing over 30 States, coming 

together to fight for a solution that works for families in each of 

our diverse districts. 

Our legislation, the Homeowners’ Defense Act, harnesses the 

power of the private market to pool the risk of all kinds of natural 

disasters, from hurricanes to earthquakes, wildfires, winter storms, 

tornadoes, and more. 

For millions of Americans, the question of a natural disaster hitting their home is not a question of if, but when. By spreading the 

risk, we can make sure that insurance is working like it is supposed to do, to bring down costs for homeowners across the country 

and still allow insurance companies to have a reasonable return on 

their investment. 

With this legislation, we take a proactive approach that allows 

States to responsibly plan for disasters ahead of time—and I am 

sure our witnesses will talk about that—while encouraging strong 

mitigation, which I also believe is important, to minimize the cost 

of natural disasters. By planning ahead, States can reduce their 

losses and get homeowners back on their feet as quickly as possible 

following a disaster. 

It is also very important to note that our program is completely 

voluntary. Once we have set up the pool to spread the risk, States 

make the choice whether they want to participate or not. If you 

don’t participate, no responsibility, no involvement in your insurance policy. States are free to join the pool or not depending on 

what is best for each of them individually. 

The reason our bill is so urgently needed and that it is so strongly supported by disaster experts, senior citizens, and families is 

that unfortunately, in many parts of the country, the system is broken. As things now stand, natural disasters, no matter where they 

happen, impact Americans in all 50 States. Ask taxpayers. 

Cleanup in the aftermath of Hurricane Katrina cost American 

taxpayers nationwide—every single one of us—a total of nearly 

$100 billion. These days, you can’t pick up a newspaper or turn on 

5 

the TV without seeing scenes from the most recent natural disaster. 

The current system is nothing more than a constant cycle of bailouts at taxpayers’ expense. I won’t personally—as I think many 

others won’t—stand for it any more. I believe it is time to focus on 

local responsibility and let the private market do the heavy lifting 

rather than the taxpayers. 

I want to stress that this strategy is a private market solution. 

Although it has become clear in recent weeks that big offshore insurance companies who oppose this bill in many ways are saying 

lots of different things which are misleading the debate here, I am 

here to set the record straight. I believe strongly in the power of 

the free market, and we have no intent to eliminate or subvert the 

insurance industry. 

The fact of the matter is in many parts of the country, the homeowners’ insurance market right now is not working. People have 

been paying premiums for 20 years; they make one claim, see their 

rates shoot up, or they are canceled. This is why this legislation is 

so important at this time. 

So in conclusion, I would just like to say, Mr. Chairman, that I 

think that this committee has come together at a crucial moment. 

This bill did pass in a similar form a year and a half ago, with 

overwhelming bipartisan support. At that time, President Bush did 

not support it. He felt that the market somehow would figure this 

out. It has not, as we expected. So we are now in the position of 

having the opportunity to bring smart minds together from all 

walks of life—and I certainly welcome everybody’s perspectives—to 

make sure we have a bill that will accomplish this goal. 

A common-sense solution like the Homeowners’ Defense Act will 

bring real relief to American families, provide structure to the insurance market, and be a key part of a broader economic recovery. 

And I thank the chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Klein. 

We will now hear from the gentleman from New Jersey, Mr. Garrett. 

Mr. GARRETT. I thank the Chair, and I thank the sponsor of the 

bill for trying to address this important issue. But I must respectfully disagree with the approach. 

At first blush, I believe that the underlying legislation, quite candidly, will not solve the major problem of trying to manage natural 

catastrophic risk but, rather, really could exacerbate the problem 

that we face today. 

This legislation also potentially will create additional moral hazard for people to build and live in these catastrophe-prone areas, 

and subsidize risky homeowners by—well, how does it do that? Reallocating and spreading the risk to less risky taxpayers. 

When you think about it, we sort of see the same thing going on 

right now with the cross-subsidy in the National Flood Insurance 

Program. There you have people who are paying higher rates on 

flood insurance, basically to cover the losses sustained by those living in the high-risk area. 

I would also point out I am a little bit disappointed that Chairman Frank would endorse this legislation, considering the good bipartisan efforts we have made in the past in trying to phase out 

6 

these types of subsidies within the Flood Insurance Program. But 

here we do the opposite. 

I know the coalition of supporters of this legislation have made 

a really good attempt to try to frame the debate as a nationwide 

debate. It is really a debate, basically, about Florida and, to a lesser extent, California. Florida citizens currently have an underfunded disaster insurance liability of around $20 billion. California 

needs about $5 billion for earthquake protection. And conveniently, 

the legislation before us allows for multi-peril coverage for $20 billion, and earthquake coverage for $5 billion. Coincidence? Maybe 

not. 

So it seems to me that every day—I know they wouldn’t say this 

is a bailout, but every day, we seem to wake up in this country to 

someone else getting bailed out. First, it was the banks. Then, it 

was irresponsible homeowners. Then, it was Fannie Mae and 

Freddie Mac. Then, it was the unions. Then, it was the States. And 

just earlier this week, we heard reports that the entire European 

continent is now planning one massive bailout for European countries. 

I heard someone suggest that perhaps what is going on here is 

we are going to come to the day when the Federal Government is 

going to need a bailout. And when that happens, perhaps Chairman Frank will have to rethink his efforts and his opposition to the 

space program, as we may need some other planet to come back 

here and to help bail out this country and this Earth. 

But more to the point. The main reason that we are in this situation is because the governor and a number of elected officials in 

Florida have not had the political will to charge actuarial rates on 

residents living in these disaster-prone areas. 

Now, I have heard some make the argument that we need to do 

this because, well, the Federal Government is on the hook anyway, 

and we will wind up footing the bill when disasters inevitably 

come. But I respectfully disagree. 

In most cases, the Federal Government picks up the tab on infrastructure and other related costs, but not specifically on the homeowners’ insurance policies. An example that Director Witt highlights in his testimony, the $10 billion that went to homeowners in 

Katrina, well, that really happened in large part because of the 

mistakes by the Federal Government with their own mitigation 

programs, not building the levees in the correct way. 

So this idea that the Federal Government needs to add this burden now to prevent it from more later is really a red herring. There 

are many other positive solutions to this problem, such as further 

increased mitigation efforts and additional regulatory reform. And 

I believe that Mr. Ellis is going to discuss the South Carolina and 

the Virginia way to handle this situation much better and more responsibly than perhaps Florida has. 

So in the end, I will conclude by saying I think it is a safe bet 

that we should be addressing these issues, and we can come up 

with solutions to the problems. And I do look forward to ways to 

try to tackle these problems of mitigation and managing natural 

disaster risk. 

With that, I yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Garrett. 

7 

Now we will hear from the gentlelady from California, Ms. 

Waters. 

Chairwoman WATERS. Thank you, Chairman Kanjorski, for joining me for this joint hearing on approaches to mitigating and managing natural catastrophe risk, H.R. 2555, the Homeowners’ Defense Act. I am delighted to see all of our panelists here today. 

But I am especially pleased to see Mr. James Lee Witt, former 

Director of FEMA, who will be testifying here today. I had the opportunity to work with him on one of the biggest earthquakes we 

had in California. He did such a magnificent job, I am sure he is 

able to share with us a lot of information that will be helpful to 

us. 

In the wake of Hurricane Andrew almost 18 years ago, 11 insurers became insolvent and another 63 announced plans to withdraw 

or limit their insurance-writing ability in the State. But the costs 

associated with Hurricane Andrew pale in comparison to those of 

the 2005 hurricanes, Katrina, Rita, and Wilma. Insured losses from 

those storms total over $56 billion. 

Although only one insurer became insolvent as a result of paying 

claims resulting from those storms, following Katrina, some insurers began pulling out of areas along the Gulf Coast. Those who 

haven’t left yet have raised rates on homeowners, with some families seeing a 600 percent increase in their insurance premiums. In 

the meantime, the capacity of wind and earthquake insurance companies has declined by 61 percent and 22 percent, respectively. 

As we all know, much work is still needed to rebuild the Gulf 

Coast. However, without affordable and available homeowners’ insurance, many families will either never return to this region or 

will risk losing everything in another storm. 

The bill introduced by Mr. Klein seeks to address the reinsurance 

crisis facing the Nation’s insurers by creating a consortium to encourage risk transfer into the capital markets, a new Federal reinsurance program for State catastrophe funds, and allowing the 

Federal Government to guarantee loans to State catastrophe insurance programs. 

I am especially interested in how this bill would increase the 

availability of earthquake insurance. The California Earthquake 

Authority, CEA, is the sole provider of earthquake insurance in the 

State of California. However, only 12 percent of Californians have 

earthquake insurance. 

Moreover, since its inception 11 years ago, CEA has been unable 

to accumulate the amount of capital it projects it will need in the 

event of catastrophic earthquake. I am looking forward to hearing 

Mr. Pomeroy’s testimony on how this legislation will allow the CEA 

to reduce its claims-paying costs and accumulate more capital. 

Thank you, Mr. Chairman, and I yield back the balance of my 

time. 

Chairman KANJORSKI. Thank you very much, Ms. Waters. 

And now, we will hear from the gentleman from Texas, Mr. Hensarling. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

By any honest accounting standards, the President’s push on his 

health care agenda is going to cost the Nation $2 trillion. Already, 

8 

the President has submitted to us a budget which will double the 

national debt in 5 years, and triple it in 10 years. 

According to the latest Congressional Budget Office baseline, at 

the end of the 10-year budget window, our Nation will be paying 

$916 billion a year, over $8,000 per household, in interest alone on 

the national debt. Half of our national debt is now owned by foreign interests, mainly China. 

When you look at our Nation’s spending patterns, it has caused 

Congressional Budget Director Elmendorf to state, ‘‘The outlook for 

the Federal budget is bleak. U.S. fiscal policy is on an 

unsustainable path.’’ Economist Robert Samuelson says this spending could ‘‘trigger an economic and political death spiral.’’ 

Former Comptroller General David Walker has said that our 

spending patterns represent a ‘‘fiscal cancer that threatens catastrophic consequences for our country.’’ And we recently read where 

Moody’s has announced that America’s bond offerings may soon 

lose their AAA rating. 

On top of that, we now have H.R. 2555, which creates new Federal guarantees, a new Federal reinsurance program, and a new 

Federal grant program: Title 1 authorizes $100 million for a national catastrophic risk consortium; Title 2, $25 billion for catastrophic obligation guarantees to the States; Title 3, up to $200 billion for reinsurance coverage to eligible State programs; and Title 

4, $75 million for a mitigation grant program. 

I ask the question: How much more money are we going to borrow from the Chinese and send the bill to our children and our 

grandchildren? 

This bill simply represents a bad idea whose time has not come. 

Our Nation is currently on the road to bankruptcy. If we do not 

change our spending ways, then we are looking at a massive tax 

increase, up to 60 percent by the end of this decade, which will 

crush jobs, or massive inflation, which will make us look longingly 

and nostalgically upon the Carter era. 

I know there are those who maintain that the taxpayer has nothing to lose. But we heard these same voices about Fannie and 

Freddie. And now, over a trillion dollars of taxpayer exposure later, 

we know how wrong those opinions were. 

We have gone from bank bailouts to beach condo bailouts. What 

is next? And I haven’t even mentioned the wisdom or the fairness 

of forcing my constituents in Dallas to subsidize someone else’s constituents in Daytona. 

In a free society, how people choose to risk their money is their 

business. How they choose to risk the taxpayer money is my business. H.R. 2555 is unwise, unfair, and unaffordable. 

I yield back the balance of my time. 

Chairman KANJORSKI. The gentleman from Texas, Mr. Green, is 

recognized. 

Mr. GREEN. Thank you, Mr. Chairman. I thank the chairwoman 

of the Subcommittee on Housing, Chairwoman Waters, and I also 

thank Ranking Member Capito. 

In response to something that was said about the chairman of 

the full committee, Chairman Frank, it is no secret that he is not 

shy when it comes to expressing his opinion. It is also equally as 

true that he will listen to others, and while he may not agree, he 

9 

does allow differing opinions to be heard. And I salute the chairman for his willingness to hear from other persons. 

With reference to the statement about the amount of money, the 

$3 trillion, CBO seems to differ with the $3 trillion estimate that 

was called to our attention. There may be many who are reviewing 

these numbers, but CBO seems to be the gold standard that we all 

rely on and refer to. And their number is decidedly different from 

the $3 trillion number that was called to our attention. 

With reference to Title 1 of the Homeowners’ Defense Act, it is 

voluntary. I think it is important to note that it is voluntary, that 

States may or may not participate. Usually, States will do what is 

in their best interest. If it does not benefit a given State, then the 

people of that State will not participate. If it does, then it bodes 

well for what we are trying to accomplish, and the people do participate. 

I think it is worth our consideration. I look forward to hearing 

from the witnesses. I believe that this consortium, a national catastrophic risk consortium, is something worthy of review. I look forward to hearing the witnesses, and I yield back the balance of my 

time. 

Chairman KANJORSKI. Thank you very much, Mr. Green. 

We will now hear from the gentleman from California, Mr. 

Campbell. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

As has been mentioned, after Katrina, the Federal taxpayer sent 

tens of billions of dollars to help reconstruct things in Louisiana. 

Whether it is a hurricane, an earthquake, a tsunami, as we have 

heard about recently, tornado, flood, land subsidence, whatever— 

if a similar natural disaster hit any of our States here, does any 

of us reasonably believe that we are not going to come here to the 

Federal Government and say, ‘‘You helped out Louisiana; help us 

out, too.’’ 

Of course, we are. But that is not the best way to finance this 

stuff. That is not the best way to deal with this. And as has also 

been mentioned, only 12 percent of homeowners in California have 

earthquake insurance, and it is less than that for businesses. Why? 

In part, because everyone expects the Federal Government will 

come bail them out because, look, they did it over there. 

What this bill attempts to do is to replace that very broken, 

wrong way of dealing with natural disasters and enable a government-supported and assisted, yes, but private insurance market so 

that people can have private insurance for these things. We can 

build up insurance around the States. 

Now, I know some people have problems, as has been expressed, 

with the specific mechanisms used in this bill. Fine. Let’s debate 

those. But we need something other than what we have because 

this is just not going to work, either for the taxpayer or for homeowners and residents. 

Thank you. I yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Campbell. 

We will now hear from Mr. Posey. 

Mr. POSEY. Thank you, Mr. Chairman. I would like to echo the 

comments of my colleague from California and express my appreVerDate Nov 24 2008 18:21 Jul 16, 2010 Jkt 056772 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\56772.TXT TERRIE
10 

ciation to my colleague from Florida for bringing forth this legislation. 

Whether people know it or not, or whether they like it or not, 

major parts of nearly every State are merely one natural disaster 

away from catastrophe. And you can sit around and do nothing and 

bury your head in the sand, and wait for that to happen, and then 

come crying to the Federal Government for help; or you can try and 

be a little bit forward-thinking, as the proponent of this bill has 

done, and explore ways to prepare better for the future. 

This concept has worked in many States, to the salvation of 

homeowners and some insurance companies. This is not perfect yet. 

It is not ripe. But we will never find the perfect solution if we don’t 

take the time and give the necessary attention to exploring the various options that are out there. 

Sadly, a lot of people, based on the comments I have heard, do 

not understand the concept of reinsurance. And maybe when they 

find out a little bit more about it, they will be supportive. 

Thank you. 

Chairman KANJORSKI. Thank you very much, Mr. Posey. 

Are there any other members of the committee who seek recognition for an opening statement? The Chair seeing none—oh, I am 

sorry, Mrs. Biggert. 

Mrs. BIGGERT. Mr. Chairman, I don’t have an opening statement. 

But I would like to submit several statements from groups for inclusion in the hearing record: the National Wildlife Federation; an 

environmental groups joint letter; SmarterSafer; Cincinnati Insurance; RIAA; PCI/AIA; fiscal conservative groups joint letter; and 

NAMIC. 

Chairman KANJORSKI. Without objection, it is so ordered. 

I am pleased to welcome our distinguished panel here today. We 

want to thank you all for appearing before the subcommittee. Without objection, your written statements will be made a part of the 

record. 

You will now each be recognized for a 5-minute summary of your 

testimony. Our first witness—I introduce him actually with pride 

because I had the experience of working with Mr. Witt on several 

occasions in several Administrations, and if all Federal leaders and 

managers were of his capacity, we would have a perfectly functioning government. 

So Mr. Witt, we welcome you here as a former Director of the 

Federal Emergency Management Agency and on behalf of 

ProtectingAmerica.org. 

Mr. Witt? 

STATEMENT OF JAMES LEE WITT, FORMER DIRECTOR OF THE 

FEDERAL EMERGENCY MANAGEMENT AGENCY, ON BEHALF 

OF PROTECTINGAMERICA.ORG 

Mr. WITT. Thank you, Mr. Chairman. Mr. Chairman and members of the subcommittees, I want to thank you for the opportunity 

to appear before you today to discuss ways to better prepare and 

protect American families from the devastation caused by natural 

disasters. 

Congressman Klein, I also want to thank you for your leadership 

on this very important issue. 

11 

I was honored to serve as the Director of FEMA under the Clinton Administration from 1993 to 2001. Today, I will speak on these 

issues in my capacity as the co-chairman of ProtectingAmerica.org. 

ProtectingAmerica.org is an organization formed in 2005 to raise 

national awareness about the important responsibilities we all 

have to prepare and protect consumers, families, and communities 

from natural catastrophes. My fellow co-chairman is Admiral 

James Loy, former Deputy Secretary of Homeland Security and 

Commandant of the U.S. Coast Guard (Retired). 

Together, we have built a coalition and a campaign to create a 

comprehensive, integrated management solution that protects 

homes and property at a lower cost, improves preparedness, and reduces the financial burden on consumers and taxpayers, all in an 

effort to speed recovery, protect property, and save money and 

lives. 

There are over 300 organizations in our coalition, including the 

American Red Cross, the International Association of Fire Fighters, 

State Farm, Allstate, municipalities, small businesses, Fortune 100 

companies, and more than 20,000 individual members. The membership is truly broad, diverse, and representative of virtually 

every State in the union. 

We all believe that this hearing is timely. With headlines around 

the world relaying stories from recent tragedies in both Haiti and 

Chile, and on Monday in Turkey, many here at home are taking 

a harder look at whether or not we would be prepared if a similar 

catastrophic event were to happen in the United States. 

A catastrophic event, whether an earthquake striking one of our 

great American cities, a massive hurricane making landfall near 

any of the metropolitan areas from New York to Houston, a wildfire spreading quickly through the western States, or a twister 

tearing through Tornado Alley, would cause such damage that our 

economy would be stunned, private resources quickly depleted, and 

an immediate Federal bailout of hundreds of billions of dollars 

could potentially be required. As a result, they would be far better 

served by a program that uses private insurance dollars to pre-fund 

coverage for the eventuality of a catastrophic natural event. 

I believe that there are three key points critical to any comprehensive solution to a homeowners’ insurance crisis. 

First, a national reinsurance program will generate additional 

capacity, bring more stability to the market, make higher-quality 

insurance more available, and ensure that consumers realize significant cost savings on their homeowners’ insurance. The best way 

to accomplish this is to enable and encourage more States to create 

well-structured, actuarially sound catastrophe funds to supplement 

the protection offered by the current State catastrophe programs in 

California and Florida. 

Second, catastrophe obligation guarantees will provide helpful 

support to the debt issuance of State programs that could serve 

these programs well in distressed market conditions. 

Finally, we believe that a hybrid approach to the prevention and 

mitigation provisions is important. This approach would keep the 

program under the Department of Housing and Urban Development, but incorporate a privately financed national catastrophe 

12 

fund that provides significant investment income to groups like the 

Red Cross and others. 

Stated simply, the status quo is not acceptable. A 2009 report by 

Jonathan Orszag, an economist who formerly served on President 

Clinton’s National Economic Council, found that the current system 

for post-catastrophe financial preparedness is riddled with inefficiencies, and there is a significant gap between the ability of the 

private insurance and reinsurance sectors to provide the protection 

that is required. 

Specifically, Mr. Orszag found that the current system is an ad 

hoc, backward-looking program that makes the government and 

the taxpayers essentially the insurers of last resort. Further, his 

report suggests that a better approach would be one that not only 

ensures that resources are available to fund recovery, but also 

funds prevention, mitigation, and preparedness. 

To that end, we support a comprehensive, integrated plan linking 

the national catastrophe fund with support to first responders, as 

well as strong education and mitigation provisions. A national catastrophe fund will create a privately financed, federally administered layer of reinsurance to complement and stabilize the private 

market reinsurance alternatives, and ensure greater availability 

and affordability for consumers of residential property insurance. 

And let me close with this. The 8 years that I was Director of 

FEMA, 1993 to 2001, based on a 5-year average less the 

Northridge Earthquake—at that time one of the costliest disasters 

we had—the average cost was $3 billion a year in disaster supplemental recovery efforts. And that cost has escalated tenfold from 

those 8 years. 

There are people for whom insurance is not available and not affordable, or who are underinsured. With these conditions, it will be 

a bailout every time one of these events happens. We have to make 

insurance available and affordable if we expect communities to recover and to replace the things that they worked all their lives for, 

and help their economies recover faster. 

So I thank you, and any questions you may have, I will be happy 

to answer. 

[The prepared statement of Mr. Witt can be found on page 73 of 

the appendix.] 

Mr. KLEIN. [presiding] Thank you, Mr. Witt. We appreciate your 

leadership on behalf of FEMA, and you have been a great resource 

in the consideration of this issue, most particularly as understanding the before, the during, and the after, which is a comprehensive approach here. 

Our next witness: We would like to invite Mr. Glen Pomeroy, 

chief executive officer of the California Earthquake Authority, to 

share with us your thoughts. 

Mr. Pomeroy? 

STATEMENT OF GLENN POMEROY, CHIEF EXECUTIVE 

OFFICER, CALIFORNIA EARTHQUAKE AUTHORITY (CEA) 

Mr. POMEROY. Thank you very much, Congressman Klein, and 

subcommittee members. 

On a Monday morning in January 1994, the Northridge earthquake struck southern California. Many lives were lost, and homes 

13 

and businesses were destroyed. It remains one of the most expensive natural disasters in our Nation’s history. 

In its wake, most private insurers were desperate to shed their 

California earthquake exposure, but State law still required them 

to offer it as long as they were selecting homeowners’ policies in 

the State. So most companies stopped writing homeowners’ insurance altogether, and California had a crisis on its hands. 

That is when the State created the California Earthquake Authority, a publicly managed, privately financed, not-for-profit enterprise with the public purpose of making earthquake insurance 

broadly available. 

So, fast-forward 14 years. Today, the CEA insures over 800,000 

homes. We are the largest earthquake writer in the United States, 

and one of the largest in the world. But even though we know another Northridge-sized event will strike within 30 years, only about 

12 percent of California homes have earthquake insurance. 

Some may be hoping that the next ‘‘Big One’’ will miss their 

home, or that the Federal Government will help them rebuild and 

recover following a disaster. We know that there are many others 

who believe they simply cannot afford earthquake insurance, especially given its high cost and high-deductible structure. 

After almost 14 years in this business, and knowing that seven 

out of eight California homes have no quake insurance, it is in the 

interest of everyone—the homeowners in harm’s way and the taxpayers of our State and our Nation—to find a way for more Californians to be able to insure their homes. Otherwise, families and 

communities will not recover when the ‘‘Big One’’ happens. 

Government aid can’t be the only solution, and no one should 

have to surrender their home to foreclosure. The reality is this: We 

are hitting a brick wall in insuring more people because we depend 

too much on expensive reinsurance. 

Reinsurance makes up only one-third of our claim-paying capacity, but it is two-thirds of our overall expenses. Forty percent of 

every premium dollar we collect goes right out the door as reinsurance premium, paid to reinsurers in Europe and London and Bermuda. Since 1996, we have paid $2.6 billion for reinsurance, and 

we have made reinsurance claims of $250,000. And despite that 

history, our reinsurance rates shot up 15 percent last year. 

It is time for CEA financing to become more efficient, and in the 

process, less dependent on expensive reinsurance. Title 2 of H.R. 

2555 is an innovative tool that will allow us to do just that, and 

we are grateful to Congressman Klein for including this provision 

in the bill. 

It is not a bailout. It is not a giveaway. It is not an expensive 

government program. It is none of those. In fact, Title 2 simply provides a limited Federal guarantee so qualified, creditworthy State 

programs like the CEA have guaranteed access to private debt 

markets. 

This year, CEA will spend $224 million on reinsurance. With the 

Title 2 guarantee, we could save about $150 million each year, and 

we would pass these savings directly to our policyholders by cutting 

rates and slashing deductibles. We will still use reinsurance in the 

structure, just less of it. 

14 

And we will maintain our financial strength to handle anything 

Mother Nature may throw in our way. Lower prices, better products, more choices—with those ingredients, we think we can double 

our policyholder count in 5 years. 

We are not seeking to push off our risk on others. Just the opposite: We want to manage our capacity better and more efficiently, 

continue to rate the risks appropriately, and ask Californians to 

bear the risk of loss from California earthquakes. 

There is a less than 1 percent chance we will need to borrow 

using the guarantee. But in an event such a magnitude happens 

and we do need to borrow money in the private debt markets, we 

will repay that debt from premium income going forward. 

We believe, based on discussions between CBO staff and a Senate sponsor of a similar measure, that the CBO score of this approach will be minimal, perhaps as low as $25 million over 10 

years. 

And so the bottom line is this. Today, we ask the CEA policyholders every year to pay in full for huge events that almost never 

happen. There is a better way. Finance a structure using our capital and financial tools like reinsurance in reasonable amounts for 

the ready funds to pay for all the more expected events, and use 

the powerful certainty that if that huge and unlikely event occurs, 

we would have guaranteed access to the private debt markets to 

ensure that we could pay all policyholder claims. 

Ending our overdependence on expenditure reinsurance means 

that more Californians can get the protection they need. And they 

won’t have to pay in advance over and over again for that megacatastrophe California has never experienced. 

Title 2 of this bill is a new approach. It will be effective, and it 

can be a real game-changer. But we need your help, and we thank 

you for your consideration. 

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

60 of the appendix.] 

Mr. KLEIN. Thank you very much, Mr. Pomeroy. I appreciate 

your involvement today, and your experience in this. 

Our third witness is Mr. Steve Ellis, vice president of Taxpayers 

for Common Sense. 

Mr. Ellis, please proceed. 

STATEMENT OF STEVE ELLIS, VICE PRESIDENT, TAXPAYERS 

FOR COMMON SENSE 

Mr. ELLIS. Thank you very much. Good afternoon, Congressman 

Klein, Ranking Member Garrett, and members of the subcommittees. Thank you for inviting me to testify. I am Steve Ellis, vice 

president of Taxpayers for Common Sense, a national, nonpartisan 

budget watchdog. 

Unfortunately, Taxpayers for Common Sense believes H.R. 2555 

is fundamentally flawed, and strongly opposes the legislation. The 

bill would actually end up putting taxpayers at risk, and subsidizing people to live in harm’s way. Americans across the country 

would be forced to pay for a narrow bailout that primarily helps 

the well-off. It doesn’t make sense. 

We are joined in our opposition by SmarterSafer.org; Allied 

Groups, which run the gamut from American Rivers to Americans 

15 

for Prosperity; the National Association of Professional Insurance 

Agents; and the National Wildlife Federation. 

The breadth and depth of the taxpayer, environmental, and industry groups opposed underscores the broad-based concerns with 

H.R. 2555. Much of the argument for the programs under the bill 

relies on a ‘‘pay me now or pay me later’’ approach. Essentially, by 

providing reinsurance and debt guarantees, taxpayers will avoid 

fiscally messy and expensive bailouts of State programs in the 

aftermath of large disasters. 

Unfortunately, we have heard that seductive siren song before 

with the National Flood Insurance Program. Cheap Federal flood 

insurance helped fuel the coastal development boom. Although intended to provide only limited, short-term subsidies and encourage 

responsible construction, it actually served to increase subsidies. Today, a program that takes in roughly $2 billion in premiums annually is $20 billion in debt to the taxpayer. It is extremely likely that most, if not all, of that debt will be forgiven. 

We walked down that primrose path decades ago, and we are 

now stuck with Federal flood insurance. But today, staring into a 

budgetary abyss, with predicted average deficits of $1 trillion a 

year over the next 10 years, we cannot afford to make that costly 

mistake again. 

Let’s be clear about a few points. This bill does not pre-fund response. In any major disaster like Katrina, taxpayers will still have 

to pay for infrastructure repair, debris removal, emergency relief, 

and services. Furthermore, nothing in this legislation forces States 

to use the subsidies to help lower-income homeowners obtain insurance. 

The three major components of H.R. 2555 are all directed at accomplishing the same thing: shifting the cost and risk from bad decisions by a few to the rest of the country. And in so doing, they 

would enable continued subsidized insurance rates, which promotes 

unwise development and increased risk. 

The bill creates a Federal reinsurance program for eligible State 

programs. Currently, only Florida and California qualify, although 

others could join. Curiously, the bill stipulates that the program 

not compete with private markets, and that prices be actuarially 

sound. 

First, reinsurance is available, so it will compete. And second, at 

actuarial rates, the program would be more expensive because it 

would be forced to sell reinsurance to a very narrow pool of highrisk States, whereas the private market could distribute the risk 

worldwide. 

The debt guarantee program would put taxpayers on the hook to 

back State programs that insure earthquake losses at $5 billion or 

other perils at $20 billion. The $20 billion figure fits fairly closely 

with the gap between the total liabilities faced by the Florida Hurricane Catastrophe Fund, the State reinsurance program, and the 

fund’s available hard assets. 

Beware of Federal guarantee programs. They are presented as 

having little or no cost to taxpayers. But if the Federal Government 

picks up the tab for enormous State losses, particularly those of politically powerful States such as Florida and California, much of 

that amount could be forgiven. 

16 

H.R. 2555 creates a National Catastrophe Risk Consortium 

chaired by the Secretary of the Treasury. Although the legislation 

stipulates that the consortium is not part of the U.S. Government, 

it is pretty clear that with board membership and a Federal charter, it will be viewed as such. And its financial actions will be 

viewed as activities with the backing of the Federal Government, 

similar to what occurred with Fannie Mae and Freddie Mac. 

H.R. 2555 notes that natural disasters are going to continue to 

damage and destroy homes, and that the United States needs to be 

better prepared for and better protected against catastrophes. We 

agree. We have long supported efforts to mitigate or eliminate impacts associated with natural disasters. A few ideas: 

Eliminate the parochial earmarks that have littered FEMA’s predisaster mitigation program in recent years. Separately, little of 

the $5 billion in stimulus funds that was given to States for weatherization has been spent. Some of these funds should be redirected 

to catastrophe mitigation efforts. 

Florida should look slightly north to South Carolina and Virginia 

for examples of good policy. South Carolina’s programs have let 

risk, not politics, determine rates in coastal areas, and the State 

has helped residents mitigate their homes. In Virginia, the FAIR 

plan provides a true last-resort coverage for those who can’t get 

coverage elsewhere, and the State has private reinsurance to cover 

claims. 

The major provisions in H.R. 2555 would actually serve as an impediment to a better way forward, expanding subsidies to high-risk 

development and removing market incentives to mitigate future 

storm damages and move people out of harm’s way. 

Higher insurance premiums are never popular, and politicians 

are in the business of being popular. This is a key reason why government-run insurance programs are fraught with fiscal peril. 

Taxpayers for Common Sense’s mission is about making government work. Sometimes, the best way for government to work is to 

not make matters worse. H.R. 2555 would pile subsidy on top of 

subsidy to preserve an insurance house of cards. In these difficult 

budgetary times, we cannot afford to bail out one State for politically expedient decisions of the past. Thank you very much. 

[The prepared statement of Mr. Ellis can be found on page 46 of 

the appendix.] 

Mr. KLEIN. Thank you. 

And our final witness will be Mr. Charles McMillan from 

Coldwell Banker Residential Brokerage, Dallas-Fort Worth, and 

immediate past president of the National Association of Realtors. 

Congratulations on your leadership on the Board of Realtors, which 

is a very important organization in all of our communities. And we 

appreciate your testimony today. Mr. McMillan? 

STATEMENT OF CHARLES McMILLAN, COLDWELL BANKER 

RESIDENTIAL BROKERAGE, DALLAS-FORT WORTH, AND IMMEDIATE PAST PRESIDENT, NATIONAL ASSOCIATION OF REALTORS (NAR) 

Mr. MCMILLAN. Thank you, Congressman Klein. I also want to 

thank Chairwoman Waters, Chairman Kanjorski, Ranking Members Capito and Garrett, and the members of the subcommittees 

17 

for inviting me to present the views of the more than 1.2 million 

members of the National Association of Realtors on approaches to 

managing natural catastrophic risk. 

Recent earthquakes in Chile and Haiti should remind all of us 

of the need for a comprehensive, forward-looking national natural 

disaster policy. However, as it stands today, U.S. policy toward natural catastrophic risk is largely reactive rather than proactive. 

For example, when Hurricane Katrina struck, the Federal Government paid for much of the cleanup, all with taxpayer dollars. Of 

the total provided, $26 billion went directly to underinsured property owners, according to the Government Accountability Office. 

That money would not have been paid to taxpayers had a proactive 

Federal policy been in place to make property insurance more widely available as well as affordable. 

NAR believes that a comprehensive natural disaster policy 

should include property owners, the insurance companies, and each 

of the different levels of government in preparing and paying for 

future catastrophic events. My testimony today offers suggestions 

for what Realtors believe must be a comprehensive approach to addressing future catastrophic natural disasters. 

Specifically, we support the creation of a Federal policy to address catastrophic natural disasters that: ensures the insurance 

coverage is available and affordable; acknowledges the personal responsibility of those living in high-risk areas to mitigate, which includes adequate incentives; acknowledges the importance of building codes and smart land use decisions; recognizes the role of 

States as the appropriate regulators of property insurance markets, 

while identifying the proper role of Federal Government intervention in cases of mega-catastrophes; and reinforces the proper role 

of all levels of government for investing in critical infrastructure, 

including levees, dams, and bridges. 

Several pieces of legislation that would accomplish many of these 

goals are currently pending before you. Your bill, Congressman 

Klein, H.R. 2555, which has been mentioned several times during 

the testimony, the Homeowners’ Defense Act, would offer the most 

comprehensive solution, in our opinion, by providing access to Federal reinsurance and a guarantee for State loans. 

It provides stable funding sources so there is more consistency in 

insurance availability, as well as affordability. Key components of 

the bill have also been introduced as stand-alone measures by Representatives Ginny Brown-Waite and Loretta Sanchez. 

Others have introduced legislation which provides tax incentives, 

including H.R. 308 by Representative Gus Bilirakis for property 

mitigation, and H.R. 998 by Representative Tom Rooney for insurance company reserve funds to pay claims arising from catastrophic 

events. 

All of these ideas could work together as critical elements of a 

comprehensive solution. Not only would such measures protect the 

private market from collapse, but they also ensure that resources 

are available to rebuild after the next mega-catastrophe. 

Simply stated, these ideas would create a national policy to 

proactively address the inevitable rather than waiting for the next 

crisis to occur and rely upon taxpayer-funded bailouts. 

18 

Realtors thank Representative Klein for your efforts, sir, and we 

urge the committee to hold a markup at the earliest opportunity. 

NAR believes that all reasonable proposals should be considered as 

a part of a comprehensive solution to address future catastrophes, 

and we look forward to working with you on such measures in the 

months ahead. 

Thank you again for inviting me to present the views of the National Association of Realtors, and I will be happy to answer any 

questions that you or other members of the subcommittees may 

have. 

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

52 of the appendix.] 

Mr. KLEIN. Thank you very much, Mr. McMillan. And I would 

like to thank all of you for coming today and being part of this discussion. This is something I think all four of you understand, although some of you had some different opinions on how to approach this, it is not if, it is when. 

And we understand that whether it is maybe 50 States, maybe 

45 States, maybe 30 States, but there will be natural disasters over 

the next number of years. We have had an ad hoc approach for a 

long time. 

So I think what we will do is, I would like to thank you. I am 

going to just reserve 5 minutes for myself for asking some questions, and then we will move it along to other members. 

First of all, as I said, I know the question is: How do you manage 

the risk? And what I have been most intrigued by in working on 

this for the last number of months, and with a lot of input from 

people who like some of the ideas, we really molded something that 

ended up being a good bipartisan consensus. 

But I think the most important thing, and Mr. Witt, maybe you 

mentioned this, and I think Mr. McMillan as well: It is the view 

of a comprehensive approach. Before understanding, there is planning, whether it is mitigation, whether it is building codes, all the 

things that take place before, and the management of insurance in 

a way that will help homeowners manage one of the most expensive pieces of homeownership. 

Secondly, it is how you deal with an event during and then after. 

We also know that there are a lot of expenses that occur right after 

major natural disasters. And those can even be mitigated with 

proper State planning. 

And again, we are not here to say to each State, you have to do 

it a particular way, because each State will be dealing with it differently. But the eligibility for participation in this does require a 

great amount of mitigation, a great amount of responsibility for 

planning properly. 

Mr. Witt, you were FEMA Director for a number of years, and 

I think you handled, in my notes here, over 360 disasters, which 

is extraordinary. If you could just discuss with us how this notion 

of a prefunded system created by the bill—how that is better than 

a system on the back end, in which we are just cutting a check 

after the fact. 

Mr. WITT. Thank you, Congressman Klein, for the question. 

First, let me just say that when I was Director of FEMA, we created what we will call a public/private partnership with the private 

19 

sector. We had over 2,500 core business partners in a program 

called Project Impact. 

It worked. The funds were leveraged to mitigate the risk in these 

communities, 250 communities across the United States. This program is a pre-funded catastrophe fund. And if a State wants to 

join, pass, and create the fund, it is a partnership from the private 

sector industry. By creating this fund, the Federal Government 

then would be the backstop if it was so catastrophic that the fund 

was depleted. 

But the idea of trying to create a cost-effective insurance homeowners’ premium in today’s world is difficult. We have to do better. 

This is not a bailout. If you look at every event, the 360 disasters 

I responded to, who funded that? The taxpayers, in every single 

event; and not only the response, but also in the longer-term recovery. 

If you were a homeowner and your home got destroyed, or it was 

minimally damaged and you were underinsured, that family, if 

they could make it habitable, was eligible for up to a $10,000 

FEMA grant to make it liveable, or 18 months of temporary housing, all funded by the taxpayer. 

Now, I think that a pre-funded, private sector catastrophic fund 

at the national level, with funding from each State as they come 

on board, is a smarter way to go. 

And you talked about mitigation and prevention. We did a cost/ 

benefit analysis on mitigation and prevention after the Midwest 

floods in 1993, and we found that every dollar spent saved $4 to 

$5 in future losses. 

The mitigation, prevention, public awareness, and education is a 

really important part of this because we can continue to minimize 

the risk and the loss, and continue to drive down the premiums so 

more people can afford to buy them. 

Mr. KLEIN. Thank you. And if I can ask Mr. McMillan: You and 

your colleagues are in the business of selling homes. Can you tell 

me how, in many places around the United States, the lack of 

available or affordable homeowners’ insurance is affecting the overall recovery and our general economy? 

Mr. MCMILLAN. Absolutely. I would be delighted to. One of the 

myths that is often fueling the divisiveness in this debate is that 

this is about a bailout for luxury homeowners in Florida and California. And the final exhibit, I have from 2005 to 2008, a number 

of instances within which a tornado took a turn from Florida and 

went into Indiana and Illinois and what have you, tornadoes and 

hurricanes and things of that nature. 

The bottom line is, whereas there is a statistical probability that 

there are areas that might be more affected, we have found in the 

past 5 years, that the entire Nation is at risk at some point or another for things that are happening that statistically haven’t happened in the last 100 years. 

So I am in agreement that we must have a comprehensive policy. 

And past discussion was to leave it on those homeowners so affected. The result of that is that the homeowners in the entire infrastructure of the Nation have been left ill-prepared because of the 

lack of availability of homeowners’ insurance when these catastrophes occur. 

20 

Mr. KLEIN. Okay. Thank you very much. I will turn it over to Mr. 

Garrett for 5 minutes. 

Mr. GARRETT. Thank you. 

First, a question to the panel, and anyone can answer. In Florida, you have a couple of programs right now. Right? You have the 

Florida Hurricane Catastrophe Fund, which provides reinsurance 

to insurers on hurricane losses. And you have the Florida Citizens 

Property Insurance fund as well. Both, to my understanding, are 

underfunded in terms of being able to meet their potential claims 

to going forward. 

So before we were to implement this legislation, before we set up 

a Federal backstop for any State catastrophe fund, shouldn’t we 

make sure that those funds are already properly capitalized and 

funded? Mr. Ellis, it seems like you are grabbing the microphone. 

Mr. ELLIS. Yes. Thank you very much, Ranking Member Garrett. 

You are correct that—well, one is that the Citizens Insurance, 

the State insurance fund in Florida is the largest insurer, and the 

rates are artificially low. They buy reinsurance from the State reinsurance fund. 

The State reinsurance fund, and it is hard to tease out exactly 

what the numbers are, but when you look at it through both some 

other documents and then you look out from their annual report 

or their audit, it looks like there is about a $20 billion gap between 

assets and total liabilities. 

Total liabilities, basically there is about $4 billion in assets, and 

then plus $20 billion gets to the total liabilities. Obviously, it is unlikely that the full $20 billion would be called upon at any one moment. But certainly, you are looking at—potentially, if there was 

a large natural disaster, an enormous bond issue would have to 

come out from the State of Florida to actually try to fill that gap. 

So certainly Florida—and they are taking steps. They are looking 

at—Citizens has agreed to—or the State legislature has indicated 

that they want to have a 10 percent increase in homeowner insurance rates each year for the next several years. 

And so they are doing work to close that gap. And I think that 

is certainly something that Florida needs to be looking at as one 

of our concerns about this overall program, stepping in, that it will 

actually be a disincentive to trying to do those measures. 

Mr. GARRETT. Okay. Mr. Witt, it looks like you were—were you 

going to grab the microphone? 

Mr. WITT. Yes. Thank you. 

Mr. GARRETT. Sure. 

Mr. WITT. Really, the problems with the Florida CAT fund are 

actually an indication of the need for a national backstop. The Florida CAT fund actually worked in 2004 and 2005. It paid out $37 

billion that the taxpayers across the country didn’t have to pay out. 

So it actually worked. 

Also, I think that a few comments made earlier about this was 

a bailout for property on the coast or helping to build up the 

coast—let me tell you something. If you can afford to build a house 

on the coast, on the oceanfront, you probably don’t need to worry 

about insurance. You probably can afford it. So I don’t think this 

is going to enhance that. 

21 

But the Florida CAT fund actually worked. And it paid out al- most $10 billion in hurricane funds in 15 years. 

Mr. GARRETT. But the rates on these funds, to date, have not 

been actuarially sound. Is that correct? 

Mr. WITT. They are actuarially sound in Florida on the CAT fund 

that they have. 

Mr. ELLIS. I don’t know how exactly they could be if it is tremendously underfunded compared to the liabilities. But— 

Mr. GARRETT. Yes. I have never heard anybody make that assertion before, that they are actuarially sound rates. I have always 

heard that they have not been soundly set, that they have been set 

too low that it is basically that they have not been able to get the 

wherewithal to change that. 

Mr. ELLIS. But even beyond that, Ranking Member Garrett, I 

would just point out that in 2007, there was a change done by the 

State of Florida under Governor Crist that actually expanded Citizens Insurance. 

So even though the CAT fund responded well in 2004 and 2005, 

in 2007, under Governor Crist, they expanded the ability to get coverage under the Citizens Insurance, which then dramatically increased the risk. And that is also what catapulted Citizens to being 

the largest home insurance company in the State. 

Mr. GARRETT. And it looks like I only have 1 minute left, so I 

will throw this out quickly. I wanted to get to Mr. McMillan’s comment with regard to mitigation and enforcement of State laws. And 

I think you said it should be done on the State level, that is a really good way to make sure of building codes and what have you. 

I don’t have time to get to that, but I think that is a good point 

that you made in your testimony. That is the way to get it done, 

and unfortunately that is not being done. And I think that is to the 

chagrin and to the detriment of both the municipalities, the counties, and the States, and also the homeowners there. 

Would you just agree with that, in short? 

Mr. MCMILLAN. I would agree with that. 

Mr. GARRETT. I thank you, and I think that is a point that we 

need to make. I appreciate that. 

If I have 30 seconds left, one major point that was made, and 

maybe it is conflicted on, is whether or not—what the Federal Government actually pays out. The Federal Government right now 

pays our temporary assistance and infrastructure assistance in 

these cases when you have these things. 

Katrina was a little bit different because, hey, the Federal Government messed up there—oh, there is a light on this one—and 

does anybody want to just quickly say whether or not we are—are 

we really subsidizing the insurance in these situations, or will that 

be an added subsidy once these plans go into place? Mr. McMillan, 

do you want to respond? 

Mr. MCMILLAN. If I might, briefly, I think this is one of the areas 

where we talk about reinsurance. Without this government backstop, we have to depend on the open market. And one of the things 

that is making this reinsurance—and subsequently the insurance 

to the homeowner—unaffordable is that they have to work with extremely fluctuating market rates. With this backdrop, there would 

be much more stability. And I would dare say, in California and 

22 

Florida and throughout, we would have many more participants in 

that pool. 

Mr. KLEIN. Ms. Waters, for 5 minutes. 

Chairwoman WATERS. Thank you very much. 

Mr. Pomeroy, even though Mr. Klein started this work and has 

worked diligently because of the hurricanes and floods, you and I 

are a little bit more focused on earthquakes because of where I 

come from and where you come from. 

I would like to just take a moment to explore, given that you 

have been insurance commissioner of North Dakota and you are 

now head of the largest provider of earthquake insurance in California, can you explain in greater detail how the mechanisms in 

this bill make good risk management sense to States like California and North Dakota, that are exposed to such very different 

natural catastrophe risk? What can this do for us? 

Mr. POMEROY. Thank you. Thank you very much, Congresswoman Waters. Actually, my strong opinions as to why this is absolutely the direction we need to be heading to in terms of risk management were formed by my time as an insurance commissioner in 

North Dakota from 1992 to the year 2000, commissioner during a 

time, during 1997, when we had a horrible disaster in Grand 

Forks, North Dakota. 

The City entirely evacuated, entirely flooded. A horrible disaster. 

And fortunately, James Lee Witt was the FEMA Director at that 

time, and marshaled an incredibly impressive Federal response to 

come into that community, help it recover, help it get back on its 

feet. And North Dakotans forever are grateful for not only Mr. 

Witt’s leadership, but for the response of the United States Government. 

Well, now we are talking about California, and California earthquakes. If there is a similar but different natural disaster in our 

State, and you have a massive earthquake with massive destruction, most of which is uninsured, of course, there will be a similar 

Federal relief effort, as Californians will then look to North Dakotans and others for the kind of help that they have been providing 

other States during their times of disaster. 

It just makes more sense to get more people to take the steps to 

privately insure their own homes so they can quickly recover, and 

get their families back in their homes, and get their communities 

moving again without having to go stand in line to try to seek assistance from various agencies. 

It is better for folks to take the responsibility up-front, and insure their properties. The problem is, it is hard to do right now because it is expensive. So what we are trying to do is make it more 

affordable, thereby making it more available. 

Chairwoman WATERS. In your testimony, you mentioned the goal 

of the California Earthquake Authority through this legislation is 

to double the percentage of Californians who have earthquake insurance from 12 percent to 25 percent in 5 years, as I understand 

your position. The CEA believes that this goal can be achieved with 

the $5 billion debt guarantee provided in Title 2 of the bill. Please explain how the $5 billion debt guarantee in this bill can 

double the number of Californians with access to earthquake insurance following the next inevitable California earthquake. 

23 

Mr. POMEROY. Thank you, Congresswoman. Yes. We are currently limited today by the fact that we are dealing with a risk that 

the private sector basically walked away from. And yet we need to 

figure out a way to manage it and provide coverage for Californians 

who wish to obtain it. 

Yet the financing that is available to us makes it tough because 

we really have no choice today other than to acquire a tremendous 

amount of our claims-paying capacity from the global reinsurance 

markets. It is very expensive, and prices do fluctuate. 

And so 40 percent of everything we collect from our policyholders 

goes right out the door by way of reinsurance premium. Almost 

zero dollars have been paid back to us over time, despite the fact 

that we have paid $2.6 billion for that coverage since we opened 

our doors. 

And so by moving into this new and innovative approach that is 

called for in this bill, we will be able to lower our costs substantially. We will still obtain reinsurance. We will still have claimspaying capacity. We will still have our financial strength. But we 

will make our coverage more affordable, so we will get more people 

covered. We will grow our capital base during the process, lower 

premiums, we will lower our deductibles, and therefore have a policy that is going to be more meaningful as earthquakes actually do 

occur because we are going to be able to pay for claims. 

By creating a better value proposition for consumers, we are 

going to get more homes insured. 

Chairwoman WATERS. That makes good sense. Thank you very 

much. I yield back the balance of my time. 

Mr. KLEIN. The gentlelady yields back. 

Mrs. Biggert? 

Mrs. BIGGERT. Thank you, Mr. Chairman. I would ask unanimous consent to submit the testimony of Nationwide Insurance to 

the hearing record. 

Mr. KLEIN. Without objection, it is so ordered. 

Mrs. BIGGERT. Thank you. It really is a shame that our environmental groups and the reinsurance industry and any regulator, 

State regulator, are not represented here today. And Mr. Chairman, I think it is important that we have, with such a bill, which 

could cost many of our constituents, taxpayers who are not residents of Florida or California—that we hear from all sides of this 

debate. And so I would request of the committee that we hold another hearing on this bill so we can hear from these other stakeholders. 

And then my question to the panel is: Do Florida and California 

allow insurance businesses to charge actuarially sound risk-based 

rates? And I guess, Mr. Pomeroy, maybe you could answer that for 

me. 

Mr. POMEROY. Yes. Thank you, Congresswoman. The answer is 

absolutely, yes. And in fact, the California Earthquake Authority 

is required by law to charge actuarially sound rates for the coverage that we write. 

Mrs. BIGGERT. Are there price controls and caps? 

Mr. POMEROY. There is State regulation of insurance, obviously, 

and the California Earthquake Authority is a regulated entity. We 

submit our rates to the department for their review. There are not 

24 

price caps; however, there is the appropriate State oversight, as 

there is throughout the country. 

Mrs. BIGGERT. Do you think that there—it seems like in some of 

these States that competition—it really drives out competition and 

leaves the consumer with fewer choices and higher rates. If Florida 

and California—and that happens in Florida and California. Is that 

true? 

Mr. POMEROY. If I may, Congresswoman, what drove companies 

out of California in terms of earthquake coverage was the 

Northridge earthquake. Companies were devastated by the losses 

that far outstripped premiums that they had collected or sought to 

collect. And companies really wanted nothing more to do with that 

risk. 

And so the State was left with having to have homeowners go it 

alone and shoulder their own risk, or put together some creative 

solution, which has been in existence and operating successfully for 

14 years. It is just that we want to take it to the next level and 

make coverage more affordable, and therefore get more homes 

within the program. 

Mrs. BIGGERT. And do you think that, for example, my constituents in Illinois should provide a subsidy for the State of Florida 

and California or the consumers of those States? 

Mr. POMEROY. Congresswoman, I think that is an excellent question. And we are not here seeking any subsidy. We don’t believe a 

subsidy is necessary. The California Earthquake Authority stands 

on its own. It is just that as we seek to put our financing structure 

in place, we have the ability to borrow money currently; it is just 

that after a huge and devastating event, we don’t currently have 

the certainty that the private debt markets would be responsive. 

We can pay the debt back. We just have to make sure that we 

have access to the debt in the first place. And so our request is give 

us this little assistance in the form of the Federal guarantee. Allow 

us to get more homes properly protected. We will pay the claims 

when they occur so that the State will be less in a position of having to come out to you all after a devastating event, when we have 

all this uninsured loss. 

Mrs. BIGGERT. I guess I just have to put in a plug for Illinois, 

which has been kind of a model State for insurance. And one of the 

reasons is because there are no price controls or rate control, and 

that we get more competition because more insurance companies 

are willing to come to the State. 

Mr. ELLIS. Congresswoman Biggert? 

Mrs. BIGGERT. Yes, Mr. Ellis? 

Mr. ELLIS. There are, in Florida, some challenges there as far 

as—it is part of the reason why many of the companies have left 

the State. The State is trying to force more companies to come back 

in through a variety of means. 

And then I would just point out that in the testimony of the California Earthquake Authority, there was a lot made about how 

there is no State money that is going into the California Earthquake Authority. It is under the auspices of the State government. 

But essentially, what we are asking here is that the Federal taxpayer back the bonds there for the California Earthquake AuthorVerDate Nov 24 2008 18:21 Jul 16, 2010 Jkt 056772 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\56772.TXT TERRIE
25 

ity, and actually to then make it so that they are less reliant on 

reinsurance. 

And I would just point out that, unfortunately, I have not made 

a claim on my car insurance for many, many years, but I have paid 

my car insurance every single year. That is unfortunately the way 

insurance works—or fortunately that’s the way it works. 

And so the idea that they have paid a lot of money to reinsurance and haven’t gotten any return, well, thankfully. That means 

that there hasn’t been an earthquake. They haven’t actually had to 

tap it. That is part of what insurance is about. 

Mrs. BIGGERT. Well, what about—let’s turn to Florida. And Florida doesn’t allow risk-based pricing. Right? 

Mr. ELLIS. I am not—I have never lived in Florida. I would have 

to look exactly to get to that level of detail. But my understanding 

is is that there is not—that they are not able to charge commensurate with risk such that—and are actually undercut. And it is probably more that they are undercut by low prices from Citizens. 

Mrs. BIGGERT. Okay. Just one other quick question. And I understand that the— 

Mr. KLEIN. You are out of time. 

Mrs. BIGGERT. I yield back. 

Mr. KLEIN. Okay. Let’s see. I now recognize Mrs. McCarthy from 

New York for 5 minutes. 

Mrs. MCCARTHY OF NEW YORK. Thank you. 

Mr. Ellis, I think that you just made a case on why we need to 

have some sort of catastrophe insurance, basically saying the insurance companies wouldn’t come into the States. I know we are hearing about California and I know we are hearing about Florida. 

But I just want to ask the experts out there, like New York, most 

of our insurance companies have moved out even though we 

haven’t had a major hurricane since maybe the 1960’s. I’m not 

sure. But they have all pulled out, mainly because they think we 

are going to get a hurricane soon. 

But I guess the question I really want to ask is: How many 

States do you think will actually partake in this? Because, obviously, the more States that would take it, the better. 

But the other thing is, too, the government right now doesn’t— 

I need to know exactly why the government should back the States 

on these issues because we don’t do anything on guaranteed municipal bonds now for local areas. And during this time of recession 

and our States, our cities, are having a hard time just paying their 

bills, how do we know that they will be able to pay us back, the 

Federal taxpayer back? 

I guess those are the concerns I have. And I will just pick up one 

thing that Mrs. Biggert had said, too. If we are going to rebuild in 

areas that have hurricanes, earthquakes—I know California, they 

have their codes. But some States are still building on hurricane 

areas along the coastline and not taking the proper precautions of 

putting the correct piles, I guess, the house on the piles and things 

like that. 

If we are going to do something like this, shouldn’t we have language in there that, to be covered, that you have to have the best 

technology out there? Anyone can answer that. 

26 

Mr. WITT. Let me first answer part of it, and I know that Mr. 

McMillan wants to say a few words. 

First of all, it is not—this is not just about California and Florida. This is about the whole country. This is about those high-risk 

States where we have events frequently and more often than others. 

New York, in 1938, was hit with a very large nor’easter hurricane. New York has an earthquake fault. And when you get in the 

middle United States, you start out from Tennessee, Arkansas, Indiana, Illinois, all with the New Madrid earthquake fault, which 

had an 8.0 earthquake in 1811, 1812; had two of them that rang 

the church bells in Boston. It just wasn’t inhabited at that time as 

much as it is today. 

So the risk that we face today is nationwide, not just Florida and 

California. And I think the most important—I was the CEO of the 

International Code Council for 3 years in building codes, building 

standards, electrical, plumbing. And the State of Florida at that 

time, when Governor Jeb Bush was down there, they did not have 

statewide building codes in all of Florida. But they do now. 

After Katrina, the State of Louisiana did not have statewide 

building codes, and it was just along the coast. But Governor Blanco and the legislators passed a statewide building code. 

So it is really important that part of this, and the funding from 

this, goes for the support of statewide building codes, the enforcement of them, and the mitigation and prevention side of it. It is 

very important because we can mitigate a lot of these losses. 

Mr. ELLIS. Congresswoman, I would just point out that in my 

testimony, I talked about South Carolina and how South Carolina 

has allowed prices of insurance to be commensurate with risk along 

the coast. And they have actually seen insurance companies coming 

into the State. 

And so certainly that is one of the things, that you can move insurance out of the State by having more restriction or underpricing 

them, like Citizens has done; or you can do things that will try to 

encourage that. 

And then secondly, absolutely other regulatory measures and 

other means and building codes and everything else along those 

lines are critically important. I don’t think anybody here has indicated that we don’t need to be doing something more. We are just 

saying, not this. 

Mrs. MCCARTHY OF NEW YORK. Just to follow up on that, it just 

so happened my brother-in-law was talking to me about this the 

other day. He does live in North Carolina on the coast. He bought 

the property and built a house probably 15 or 20 years ago. 

His insurance for that area was close to $8,000 a year. North 

Carolina just came in with their own fund, and I think he is paying 

$3,000 a year now. That is quite a big difference. And I think, 

knowing my brother-in-law, if there was another insurance company around that would have given him a cheaper price, believe 

me, he would have. 

So I think that we still have a problem with people. And I am 

one of those who believed if you were going to take an FHA loan 

out for a house, and if you were anywhere near—whether it is a 

27 

flood coast or an earthquake, that you had to have the right insurance behind that. I still believe in that. 

I think this is a debate, but I think it is a debate that we need 

to have because I think the Federal Government ends up paying 

an awful lot of money for any of the national—we call emergency 

funding around here. But it still comes out to a lot of money. 

Thank you. 

Mr. KLEIN. Thank you. And just to reserve myself 1 minute here, 

just to clarify. On Florida’s issue, for example, Florida by law has 

to be actuarially sound. I am not here to tell you what risk-based 

pricing is, Mr. Ellis. Maybe you can define it. What is risk-based 

pricing? 

Mr. ELLIS. Well, certainly. For instance, the Flood Insurance Program is supposed to be actuarially sound. It is stipulated in law. 

But it never took into account catastrophic losses, which is why, 

even though it was dipping along and basically being able to pay 

out its losses, borrowing from the government and paying it back, 

we ended up with a program that takes in $2 billion a year and 

is $20 billion in debt. 

Mr. KLEIN. Well, I understand that. What is risk-based pricing? 

How do you— 

Mr. ELLIS. Well, risk-based pricing is going to be about characterizing the actual risks to that property, that area, and then being 

able to pay out that price over a long term in a macro sense. 

Mr. KLEIN. How is that different from being actuarially sound? 

Mr. ELLIS. It is not necessarily different than being actuarially 

sound. 

Mr. KLEIN. All right. And just also to clarify, I think the 

gentlelady from New York was talking about the fact that we talk 

about property on the coast, not on the coast, as it relates hurricanes. 

I will just tell you from our experience, in the four hurricanes 

that did hit Florida after not having any hurricanes in my area for 

50 years, people paying their premiums in every year, the four hurricanes, although people on the coast were paying more—and 

should pay more; I am all for the recognition that people who live 

in high-risk areas should pay more, and that is appropriate—most 

of the damage took place inland because the hurricanes came from 

the west inland. 

So it was very interesting. I used to call it the I-95 mountain 

range. That was how they used to charge one price on one side of— 

I-95 is a road; I know you know that. It has nothing to do with any 

topography, no mountains, no nothing. It is just sort of an arbitrary 

point, which was a little interesting the way it was handled. 

I will now recognize Mr. Campbell from California for 5 minutes. 

Mr. CAMPBELL. Thank you, Mr. Chairman. And I first want to 

thank Mr. Witt for mentioning that this isn’t just a Florida and 

California thing. In fact, but for circumstances that didn’t quite 

turn out, we could have been talking about a tsunami in Hawaii 

and Oregon today, from last week, perhaps. 

And another thing: We talk about big disasters, but just another 

little thing that can happen. In my district about 6 or 7 years ago 

or so, there was a landslide that was just caused by a lot of rain. 

28 

A hillside gave way. Twelve houses were destroyed. Not hundreds, 

not thousands; 12 houses were destroyed. 

But in checking into it, I found no one was insured. And the reason no one was insured is there is no insurance for that available, 

period, anywhere. And these people not only lost their homes, they 

lost the land because the land disappeared. So these 12 families 

were destroyed, absolutely devastated. There was no insurance 

available, and it was not a big enough disaster to get any attention 

for anything here. 

So I think part of what we are talking about here is that there 

are disasters of one sort or another that can occur—I think Pennsylvania has insurance for this, by the way, because I think it is 

required because they have land subsidence issues there frequently. 

But there are natural disasters like this that can occur in small 

groups or big groups all over the country, in all kinds of different 

places. Some are insurable. Some are not. Some have expensive insurance. What we are talking about is trying to figure out a way 

to provide something for all of those people in all 50 States. 

I would like to spend the rest of the time talking about California 

and earthquakes, because I am from California, and because Mr. 

Pomeroy is here. But I actually want to address the questions to 

the other 3 of you because we have talked about the fact that only 

12 percent of homes in California have earthquake insurance. 

A few other facts you may or may not know. California law requires that everyone who is shopping for or who is offered homeowners’ insurance be offered earthquake insurance. So everyone 

has to be offered it. 

Someone earlier said the California Earthquake Authority is the 

only insurer of earthquake insurance. That is not true. I am insured in my house with earthquake insurance not from the CEA. 

And there are various other insurance companies that offer earthquake insurance in California. But 12 percent is the total, not just 

the CEA. 

Now, Mr. Pomeroy has said that given one of the proposals in 

this bill, he thinks perhaps we could double it to 25 percent of 

total. That is still not enough. 

Let me ask the rest of the three of you because there is all this 

talk about high risk and so forth. Earthquakes in California, unless 

you want to eliminate San Francisco, Los Angeles, and just about 

everything in between, this isn’t about people building in high-risk 

areas. This isn’t about only expensive homes or whatever. This is 

about everybody, ‘‘everybody’’ representing 1 out of every 12 people 

in the United States, just in California. 

So what can we do? What else can we do? What other ways are 

there to get this thing up? You heard Mr. Pomeroy say some people 

just say, oh, the Federal Government will bail me out. I’m not 

going to buy this insurance because they’ll come in and take care 

of me. And we have to break that cycle, certainly. And as Mr. Pomeroy suggested, right now it’s relatively expensive. The deductibles 

are high. And so there is that as well. 

Ideas from the rest of you, please, because I think it could—it is 

not just about California. This sort of thing, it is so broad and so 

diverse that it is a lesson for the whole country, I think. 

29 

Mr. McMillan? 

Mr. MCMILLAN. I would like to make a quick comment, Congressman Campbell, and that is the next thing that we can do is 

to have a national comprehensive disaster preparedness plan. As I 

see the balking in the discussion about whether to approve or jump 

on certain sections of H.R. 2555, it is that the taxpayer will pay 

for this. 

The taxpayer is paying for it now, without a plan. And I think 

it is so important, as we have suggested in our testimony, that we 

be proactive as opposed to reactive. Now a disaster happens, it is 

declared a Federal disaster, and the taxpayers pay it without any 

discussion about repaying it. At least that will be in the discussion 

with the comprehensive Federal plan. 

Thank you for the privilege of sharing that. 

Mr. CAMPBELL. Other thoughts? Mr. Ellis? 

Mr. ELLIS. Yes, sir. Certainly, we certainly agree with preparedness. And actually, there has been some stuff on wildfires in the 

last decade or so that has dealt with preparedness and trying to 

figure out communities to have wildfire plans and figure out what 

is going to burn, how they are going to deal with this, and all these 

type of issues. And certainly that is important. 

I will just point out that unfortunately, no matter what we do, 

the taxpayer is going to pay after a natural disaster. It has done 

that. It will do that. There is critical infrastructure that is going 

to be rebuilt that is either going to be paid for by the State taxpayer or, even more likely, the Federal taxpayer. 

But beyond that, unfortunately we are talking about human nature here that we are trying to adjust. And there are people who 

don’t buy health insurance. There are people who don’t buy flood 

insurance who live in the flood plain, who are in the 100-year flood 

plain. And so these are issues that we have to deal with. 

Some of it is education. Some of it is trying to do—in building 

codes to make communities less resistant. And some of it is about 

the fact that we have to have some tough love sometimes when 

people don’t actually—don’t pay, and how much we are willing to 

bail them out. 

Mr. CAMPBELL. Mr. Witt? 

Mr. WITT. Thank you, Mr. Chairman. It is interesting. I don’t 

know how many people in this chamber have ever been through an 

event of any magnitude. But I have. I lost our home and everything 

in it when I was 12 years old with a fire. A tornado blew our house 

off of the foundation when I was 6. My wife says I am a disaster. 

[laughter] 

Mr. WITT. But let me just say, when you talked about the 

mudslides in California—and I remember them really, really well, 

several of them, particularly after the Laguna Beach fire and the 

Malibu fire and others—those 12 homes, that was a catastrophic 

event to those 12 families. Whether it is 1 home or 5,000, it is a 

catastrophic event to that family. 

I think that we can do more, and we can do it better, and we 

can put less burden on the taxpayers by supporting the private 

funded catastrophic fund and have more people insured. This is 

really, really critical in this day and age, with the economy the way 

30 

it is right now. And it just really frustrates me to no end when I 

see these type of losses. 

I was just in Haiti. I made three trips to Haiti with President 

Clinton. Those people there make $2 max a day in labor. They 

don’t have anything. We are blessed with everything. And it is time 

to make the change in giving people an opportunity to not only protect themselves, but to protect the things that they have worked so 

hard for all their life. And a lot of these people don’t have that ability because they can’t afford it and it is not available. 

California has probably done more than any State in the country 

in seismic building codes, retrofit, particularly of critical care facilities, schools, nursing homes, and hospitals. Every country around 

the world looks at California’s seismic building codes as a model for 

their own country. Japan does. Everybody does. 

So the mitigation, preparedness, and a public/private partnership 

in developing a catastrophe fund is really critical in this time of 

our lives. And I just hope that everyone listens to this and everybody looks at it this way: it is not about any one. It is about everyone. And we need to make a difference here. 

Mr. CAMPBELL. I thank the gentleman. Thank you. I yield back. 

Mr. KLEIN. Thank you, Mr. Campbell. 

Mr. Cleaver, for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Mr. Ellis, thank you for being here, first. Thank all of your for 

the generosity of your time. 

Mr. Ellis, in your prepared remarks, you mention that the FEMA 

pre-disaster mitigation program has been littered with earmarks. 

What earmarks? 

Mr. ELLIS. What earmarks? I think, the last time I looked, out 

of the $100 million program, about a quarter of that was earmarked. I would have to get you the exact numbers, sir, but— 

Mr. CLEAVER. No. I’m not asking for numbers. What—and maybe 

the disconnect is the definition of an earmark. So, I am not sure— 

Mr. ELLIS. Congressionally defined earmarks, sir. It is—in the 

DHS bill, under FEMA’s pre-disaster mitigation program, in the 

last couple years there has been a growth of earmarks in that particular program to individual projects. 

It is not completely earmarks, but it is one of the areas that we 

are concerned about because it is a competitively awarded program, 

and it has earmarks scattered through it. 

Mr. CLEAVER. So members are designating money to that area— 

Mr. ELLIS. To some project in their particular district. 

Mr. CLEAVER. —because, if they don’t, badly needed mitigation 

won’t occur. Is that— 

Mr. ELLIS. I don’t know if that is necessarily the case, sir. What 

I am saying, Congressman Cleaver, is that this is a merit-based 

program. There are parameters that are established by FEMA to 

try to award the funding under the pre-disaster mitigation program. 

But in some cases, lawmakers are earmarking funding. They are 

jumping the line. And so, essentially, some other community that 

also has critical— 

Mr. CLEAVER. Jumping the line? 

31 

Mr. ELLIS. Jumping the line, meaning that FEMA gets a pot of 

money to assign out to various things. They have a bunch of parameters that communities need to meet to qualify. 

Mr. CLEAVER. Yes, sir. 

Mr. ELLIS. They award the funding to these various entities. 

Mr. CLEAVER. Yes, sir. 

Mr. ELLIS. Some of these, Congressman, are now, because lawmakers are getting earmarks, are going ahead of other communities that don’t have as powerful of a lawmaker to get the earmark into that program and designate it to go to their particular 

project. 

Mr. CLEAVER. So they should wait on a bureaucrat to do it? 

Mr. ELLIS. No, sir. Essentially, this comes down to the whole 

issue of earmarks. But, Congress should bring the bureaucrats in 

front of them and work with them to develop the program to make 

sure that it is done correctly. And if they don’t do it right, haul 

them back the next year and hold them accountable, sir. 

Mr. CLEAVER. Okay. I wish you were a Member of Congress. I 

hate to say that is completely unrealistic. It sounds good on the 

evening news or something like that. But it is not real. And I think 

even my colleagues on the other side will tell you the same thing. 

Congress has only a few responsibilities, and one of them is 

spending the money. 

Mr. ELLIS. Absolutely, Congressman. 

Mr. CLEAVER. And so, I hate to give that responsibility to some 

guy in the basement of some building—I live in Kansas City, Missouri—who has never crossed the Mississippi and wouldn’t know 

Kansas City, Missouri, from Milwaukee, Wisconsin. 

But the other point here is that you suggested that our money 

should be used to do this, on page 5. You say, under the American 

Recovery and Reinvestment Act— 

Mr. ELLIS. Correct. Yes, sir. 

Mr. CLEAVER. —the stimulus, nearly $5 billion has been given to 

States. And you go on to say, ‘‘Maybe this money should be taken.’’ 

Mr. ELLIS. Not taken, sir. I am suggesting that essentially—just 

recently the Inspector General came out with a report saying that 

an alarming amount of money—I think it is like $4.7 billion out of 

the $5 billion that has gone out for weatherization—has not actually been spent by the States, mostly because the States’ weatherization programs are incredibly overwhelmed. I think Connecticut 

got 16 times what it had in the past. 

And so all I am saying is here is a place where we could redirect 

some of that funding, still as stimulus still going out in this—I am 

not trying to reclaim it—and still saying the States should use that 

money, but allow it to be used in mitigation efforts as well as 

weatherization. 

Mr. CLEAVER. Okay. Two points and I am through, Mr. Chairman. 

The first point is—well, I am assuming you supported the statement? 

Mr. ELLIS. We did not come out one way or another. We were 

mostly for making sure the money was spent accountably and 

transparently. 

Mr. CLEAVER. So you were neutral on the stimulus? 

32 

Mr. ELLIS. We did not take a position one way or another, no, 

sir. 

Mr. CLEAVER. So you were neutral on the stimulus? 

Mr. ELLIS. Correct. 

Mr. CLEAVER. Okay. The last part of it is, I agree with the slowness with which the money has gone out, but that is a statement 

about running that program more effectively. And one of the things 

that we are elected to do is to try to deal with problems in the districts from which we come. And that is why they have been using 

any pot of money that they can in order to address problems. 

That is what we are supposed to do. And I would not criticize a 

Republican or a Democrat or an independent or an Oakland Raider 

for—I am from Kansas City— 

Mr. ELLIS. I know, sir. So is my dad. 

Mr. CLEAVER. —to remind you—but to try to deal with problems. 

I wish a Republican, could get as much money as there might be 

needed to deal with problems in New Orleans. And so I guess we 

may have a philosophical difference about what Members of Congress are supposed to do. 

But I do agree with you that the money has gone out slowly, and 

it means we have to do a better job of getting that money out, not 

necessarily transferring it to another agency. 

Mr. ELLIS. I certainly agree that it needs to be dealt with better. 

Yes, sir. 

Mr. KLEIN. Okay. I thank the gentleman from Missouri. 

And now the gentleman from Florida, Mr. Posey, for 5 minutes. 

Mr. POSEY. Thank you, Mr. Chairman. 

I am a free market guy. But experience has shown me that unregulated insurance markets do not mean they are free markets as 

people are taught in academia. They are manipulated. You can talk 

about all the availability of reinsurance. I know, in Florida, every 

single reinsurance company had the exact, identical, same rate. 

That is a free market. What a coincidence. Just what a coincidence. 

Comparing South Carolina’s exposure to Florida’s exposure 

doesn’t pass the straight-face test in front of anyone that knows the 

difference between the Florida coastline and the South Carolina 

coastline. 

And I think it ought to be stated for the record that when Florida 

did expand its catastrophe fund, much to the chagrin of many insurance companies, big insurance companies, it brought in—it was 

responsible for bringing in—the only new business that we had. 

The big insurance companies were allowed at one time to have 

pup companies in Florida, so that means your home office in 

Bloomington or wherever was no longer responsible for paying 

claims in Florida. It would be the new company that was founded 

with no more than the minimal amount of capital. And if it blew 

away in the next storm, it was just too bad for all the policyholders. And the CAT fund was to guard against that. 

And because we have an expanded CAT fund, we have new business, new companies coming into Florida, hopefully that will stay 

there and will continue to invest there and not just reap the year’s 

profits and cry when the storms come later. 

I have been an accountability wonk for many years. I am a 

former ALEC, National Legislator of the Year, for passing accountVerDate Nov 24 2008 18:21 Jul 16, 2010 Jkt 056772 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\56772.TXT TERRIE
33 

ability legislation ALEC called the best to come out of any capital 

in over a decade. But I have never heard of Taxpayers for Common 

Sense. 

And I wonder—you keep referring to ‘‘we.’’ Who is that? Who is 

‘‘we?’’ 

Mr. ELLIS. Taxpayers for Common Sense? We are happy to celebrate our 15th anniversary. We are a national, nonpartisan budget 

watchdog. We are based here in D.C. I have been with the organization for 10 years. I would be glad to answer any other questions. 

My colleague is the person who dubbed the ‘‘Bridge to Nowhere’’ 

the ‘‘Bridge to Nowhere.’’ I don’t know exactly what you are—we 

have some members. We have mailing lists for our products. We do 

advocacy work on budget issues. 

I don’t know exactly, Congressman, what else— 

Mr. POSEY. Well, I just—I know Mr. McMillan’s group and I 

know the other people’s groups and I have had experience with 

them. I have never seen you before or heard of your organization 

before. So I just wanted some information for my own— 

Mr. ELLIS. Absolutely. I would be glad to come by and talk to you 

about us any time at your leisure, sir. 

Mr. POSEY. Okay. Thank you, Mr. Chairman. I yield back. 

Mr. KLEIN. I thank the gentleman. 

Mr. Sherman from California? 

Mr. SHERMAN. Thank you. 

Mr. Witt, I represent Northridge. People all over the San Fernando Valley thank you again and again every day for the help 

FEMA extended to us in 1994. 

Mr. Pomeroy, thanks for your work to try to prepare us to recover from the next earthquake. 

Mr. Ellis, I want to thank you for your tireless efforts to move 

this country away from democracy and toward empowering bureaucrats, bureaucracy or bureaucratocracy. Your hard work has not 

gone unnoticed. 

There are those who say that, oh, we shouldn’t provide better 

disaster insurance because that will just encourage people to live 

where we don’t want them to live. And if you are talking about a 

few areas near rivers that flood every year, that may be; maybe we 

shouldn’t build there. 

But if you want to say that nothing should be built near an 

earthquake fault, you lose your largest State, or at least your most 

populous State. I think Mr. Pomeroy would agree with me that well 

over half the population of California—I see him nodding—lives 

near an earthquake fault. 

And if you wanted to vacate every area that might be hit with 

a hurricane—Mr. Klein, is that your whole State or just two-thirds 

of it? 

Mr. KLEIN. Probably a good two-thirds, if not the whole State. 

Every county. 

Mr. SHERMAN. So those who support vacating areas subject to 

hurricanes and earthquakes ought to tear some stars off the flag 

as their symbol of their position. 

We have to encourage people to buy earthquake insurance. Either you can help me now, or you can pay me later. That is to say, 

if nobody in California buys earthquake insurance, when we are 

34 

hit, we are coming to Washington, and we are coming for everybody who is uninsured. 

Right now, you have to be offered earthquake insurance when 

you buy a house. The only problem is enormous deductible, enormous premium, and I know Mr. Campbell buys it; I don’t know 

anybody else who does. The reason is that the reinsurance is so expensive that is passed on to consumers. 

And so we need a system in which we can provide reasonable insurance even if the Federal Government undertakes some slight 

risk, or you can live in a world where you believe the Federal Government isn’t at risk as long as we have no program because God 

knows there is no risk of an earthquake in California and there is 

no risk that Californians would come here to try to collect their uninsured losses from the Federal Government. 

Neither of those is a significant possibility. The only thing that 

is an actuarial risk to the United States is if we pass a bill. Then, 

we acknowledge that there is some possible risk to the Treasury, 

a diminished risk, I might add, but then we would have to acknowledge it. 

Mr. Pomeroy, does the CEA operate on an actuarially sound 

basis? Title 2 of Mr. Klein’s bill creates a conditional guarantee 

program like CEA, in effect a CEA for CEA. What are the chances 

that the CEA would need to borrow more money? Could you handle 

another Northridge earthquake without access to Title 2? 

Mr. POMEROY. Thank you, Congressman. That is an excellent 

question. And yes, the answer is clearly yes, the CEA does charge 

actuarially sound rates, which is why it is so expensive and most 

people feel they can’t afford it. 

Moving to this more efficient structure, we would maintain our 

financial strength. We would be able to pay the claims of all of the 

earthquakes that we are going to see. We would not need to borrow—and I should have emphasized this more in my testimony— 

we would not need to borrow, in the vast majority of any scenario 

we can imagine. 

All of our modeling, our scientific-based modeling, indicates that 

the probability of our needing to borrow, if H.R. 2555 becomes law, 

is between .5 and 1 percent, a minuscule probability of the need 

to borrow. 

We look back over history, we have had earthquakes in California going back to 1906: the great San Francisco shake; 

Northridge; the famous World Series earthquake back in the 

1980’s, Loma Prieta. We could handle any one of those without the 

need to borrow. 

Mr. SHERMAN. Let me try and squeeze in one more question. 

Mr. Ellis, your testimony in opposition to this bill is largely premised on comparisons to the National Flood Insurance Program. 

Since the National Flood Insurance Program is in the jurisdiction 

of another subcommittee, I wanted to make the differences clear 

between this bill and the NFIP. 

Isn’t it true that the rate subsidies you reference when discussing the NFIP are written in as part of the National Flood Insurance Act, and that there are no similar subsidies or 

grandfathering in the bill that we are considering today? 

35 

If Mr. Klein’s bill doesn’t include provisions like the subsidies 

specifically written into the National Flood Insurance Act, wouldn’t 

you agree that Mr. Klein’s bill—or how can you argue, rather, that 

Mr. Klein’s bill will lead to the same subsidized insurance rates 

that you blame on the NFIP? You are comparing apples and oranges— 

Mr. ELLIS. No, sir. There is an explicit subsidy in the NFIP for 

pre-firm properties before the flood insurance rate maps were created. Separately— 

Mr. SHERMAN. And is there such a subsidy— 

Mr. ELLIS. There is separately—in the Flood Insurance Program, 

there is a subsidy that exists because they did not take into account catastrophic risks, which is why you end up with a $2 billiona-year program having $20 billion in debt to taxpayers. 

Clearly, properties other than flood—other post-firm properties 

are flooded. You have cases of repetitive losses within that program. You have a variety of different characteristics of that which 

are replicated. And I think at this is still— 

Mr. SHERMAN. Excuse me. You mentioned the grandfathering. Is 

there any grandfathering in Mr. Klein’s bill? 

Mr. ELLIS. No, sir. There is no grandfathering. But that is not 

the only subsidy in the Flood Insurance Program, sir. 

And on the democracy issue, I would just argue that we are 

about democracy and democratizing the budget. That is why we 

publish a variety of objective documents, to make the budget more 

transparent and more accountable to the American taxpayer. 

Mr. SHERMAN. Sir, reclaiming my time, you have a point of view. 

You are not just a library. And you work every day to try to diminish the power of elected officials— 

Mr. ELLIS. No, sir. 

Mr. SHERMAN. —and increase the power of bureaucrats. I yield 

back. 

Mr. ELLIS. No, sir. 

Mr. KLEIN. Our last member, Mr. Royce from California, for 5 

minutes. 

Mr. ROYCE. Yes. I guess I will ask Mr. Ellis some questions as 

well from Taxpayers for Common Sense. One of them has to do— 

I take it part of his concern, perhaps, is with the liability issue 

here, really, because if we consider the current liabilities that taxpayers face, we have $104 trillion in unfunded liabilities for Social 

Security. That might give this organization pause. It certainly 

seems to give our Federal Reserve Chairman a lot of worry. We have that $104 trillion I mentioned in Social Security and Medicare liability. We have $12 trillion in debt. We have $1.6 trillion in deficit this year. Obviously, there is a concern that taxpayers might be overextended. 

But I think the real worry on the part of the Federal Reserve 

Chairman is that when Moody’s made that call—what was that, 3 

weeks ago—where they said we might have to downgrade; they 

warned they might have to downgrade the AAA rating of sovereign 

debt, of our U.S. Treasuries—that, in tandem with the comments 

by the Fed Chairman that we are on an unsustainable path, when 

he testified to the Financial Services Committee, I think that probably gives some organizations a reason to wonder how much 

36 

weight, how much of a burden, can you add without it breaking the 

back and creating a reaction over at Moody’s or just in the public 

in terms of all of the liabilities we have taken on. 

We have double-digit increases in the Federal appropriations 

bills this year. We have the argument, on the new health care entitlement program that it is going to break even, but I think a lot 

of people are somewhat suspicious that an entitlement program is 

going to break even. So eventually we have to take a step back. 

And I would ask Mr. Ellis if I could get his thoughts. 

Mr. Ellis, are you concerned with the broader implications this 

bill will have in terms of setting a precedent that cannot easily be 

reversed when it comes to guaranteeing State and municipal debt? 

Mr. ELLIS. Well, certainly this would be the first time that I am 

aware of that we would be starting to back—well, not the first 

time, but it certainly would be a big step towards backing State 

debt and then potentially, yes, moving towards the municipal debt. 

It would be one of the only ones today that is doing that. Yes, sir. 

Mr. ROYCE. So your best judgment when you look at this, you see 

a government program that is going to guarantee State and municipal debt, probably grow, and probably have liabilities there that 

are going to add eventually to the debt and the pressures on the 

dollar, I would suspect, and on our Treasuries? 

Mr. ELLIS. Well, certainly, at least right now, it is going to be 

State debt, at least under this program. And $25 billion is where 

it is capped right now, $5 billion in earthquake, $20 billion for 

other losses. 

Clearly, programs like this, if it becomes more popular, could 

grow and it could mushroom. Yes, sir. 

Mr. ROYCE. So we would set a precedent if we passed it. The one 

aspect of this that I’m a little encouraged about, unlike previous 

drafts, this attempts to go beyond simply cleaning up the mess 

Citizens Insurance created in Florida. 

But I think the overriding concern has to be our current fiscal 

situation, especially at the Federal level, and the message that we 

are sending, and how that translates out of the market. 

And I don’t know how—after the words of warning we got from 

the Federal Reserve Chairman here, I don’t know why we would 

want to stampede down this road because it would be one more signal to Moody’s and to others, to the credit rating agencies, that we 

are taking on additional risks. And those would be my observations, Mr. Chairman. 

Mr. Ellis, would you like to close with any other observations? 

Mr. ELLIS. No. I think that certainly sums it up, Congressman 

Royce, very well. And thank you for your comments. 

Mr. ROYCE. Thank you. 

Mr. KLEIN. I would like to thank the gentlemen and the members of the committee. Just if I can reserve 1 minute here, just to 

make a point. 

The discussions about the debt, obviously, everyone in Congress 

and every American is concerned about debt, our national debt. 

And again, what we have tried to think through very carefully, and 

we will look forward—as a work in process, we will look forward 

to continuing to make this bill better, is to reduce that national exVerDate Nov 24 2008 18:21 Jul 16, 2010 Jkt 056772 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\56772.TXT TERRIE
37 

posure, which I think is very open-ended at this moment and has 

been for many years. 

And if we can manage this in a way in which we can hopefully 

reduce that amount of liability and underwrite it through private 

insurance, I think that seems to be a better model. 

But again, we thank Mr. Witt, Mr. Pomeroy, Mr. Ellis, and Mr. 

McMillan for taking time out of your very busy days and your professions to be here today. We appreciate that. I will note that some 

members may have additional questions for this panel, which they 

may submit in writing. 

Before we adjourn, the written statements of the following organizations will also be made a part of this record of this hearing: the 

testimony of Congresswoman Loretta Sanchez; the American Red 

Cross; International Association of Fire Chiefs; National MultiHousing Council and National Apartment Association; National Catastrophe Policy Coalition; Association of State Flood Plain Managers; and Independent Insurance Agents and Brokers of America. 

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. 

The panel is now dismissed and the hearing is now adjourned. 

[Whereupon, at 4:17 p.m., the hearing was adjourned.] 

(39) 

A P P E N D I X 

March 10, 2010 

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