U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

76–463 2012

EXAMINING THE ROLE OF GOVERNMENT 

ASSISTANCE FOR DISASTER VICTIMS: 

A REVIEW OF H.R. 3042 

HEARING 

BEFORE THE

SUBCOMMITTEE ON ECONOMIC GROWTH, 

TAX AND CAPITAL ACCESS 

OF THE

COMMITTEE ON SMALL BUSINESS 

UNITED STATES 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

HEARING HELD 

FEBRUARY 16, 2012 

Small Business Committee Document Number 112–055 

Available via the GPO Website: www.fdsys.gov/house 


jbell on DSK7SPTVN1PROD with E:\Seals\Congress.#13
(II) 

HOUSE COMMITTEE ON SMALL BUSINESS 

SAM GRAVES, Missouri, Chairman 

ROSCOE BARTLETT, Maryland 

STEVE CHABOT, Ohio 

STEVE KING, Iowa 

MIKE COFFMAN, Colorado 

MICK MULVANEY, South Carolina 

SCOTT TIPTON, Colorado 

JEFF LANDRY, Louisiana 

JAIME HERRERA BEUTLER, Washington 

ALLEN WEST, Florida 

RENEE ELLMERS, North Carolina 

JOE WALSH, Illinois 

LOU BARLETTA, Pennsylvania 

RICHARD HANNA, New York 

ROBERT SCHILLING, Illinois 

NYDIA VELA ́ ZQUEZ, New York, Ranking Member 

KURT SCHRADER, Oregon 

MARK CRITZ, Pennsylvania 

JASON ALTMIRE, Pennsylvania 

YVETTE CLARKE, New York 

JUDY CHU, California 

DAVID CICILLINE, Rhode Island 

CEDRIC RICHMOND, Louisiana 

JANICE HAHN, California 

GARY PETERS, Michigan 

BILL OWENS, New York 

BILL KEATING, Massachusetts 

LORI SALLEY, Staff Director 

PAUL SASS, DEPUTY Staff Director 

BARRY PINELES, Chief Counsel 

MICHAEL DAY, Minority Staff Director 


jbell on DSK7SPTVN1PROD with 
(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Hon. Joe Walsh ........................................................................................................ 1 

Hon. Kurt Schrader ................................................................................................. 2 

WITNESSES 

Doug Hoell, Director, North Carolina Division of Emergency Management, 

Raleigh, N.C ......................................................................................................... 3 

Gene Tighe, Owner, GT Fabrication, Inc., Pittston, PA ....................................... 5 

Howard Kunreuther, Ph.D., James G. Dinan Professor of Decision Sciences 

& Public Policy, Co-Director Risk Management and Decision Processes Center, University of Pennsylvania, Philadelphia, PA ............................................ 8 

David B. Muhlhausen, Ph.D., Research Fellow in Empirical Policy Analysis, 

The Heritage Foundation, Washington, DC ...................................................... 10 

APPENDIX 

Prepared Statements: 

Doug Hoell, Director, North Carolina Division of Emergency Management, Raleigh, N.C ....................................................................................... 22 

Gene Tighe, Owner, GT Fabrication, Inc., Pittson, PA ................................. 28 

Howard Kunreuther, Ph.D., James G. Dinan Professor of Decision 

Sciences & Public Policy, Co-Director Risk Management and Decision 

Processes Center, University of Pennsylvania, Philadelphia, PA ............. 31 

David B. Muhlhausen, Ph.D., Research Fellow in Empirical Policy Analysis, The Heritage Foundation, Washington DC ........................................ 38 

Questions for the Record: 

None 

Answers for the Record: 

None 

Additional Materials for the Record: 

‘‘Redesigning Flood Insurance,’’ by Erwann Michel-Kerjan and Howard 

Kunreuther .................................................................................................... 45 

‘‘People Get Ready: Disaster Preparedness,’’ by Howard Kunreuther and 

Erwann Michel-Kerjan ................................................................................. 46 


jbell on DSK7SPTVN1PROD with 

jbell on DSK7SPTVN1PROD with 
(1) 

EXAMINING THE ROLE OF GOVERNMENT ASSISTANCE FOR DISASTER VICTIMS: A REVIEW OF H.R. 3042 

THURSDAY, FEBRUARY 16, 2012 

HOUSE OF REPRESENTATIVES,

COMMITTEE ON SMALL BUSINESS, 

SUBCOMMITTEE ON ECONOMIC GROWTH, 

TAX AND CAPITAL ACCESS, 

Washington, DC. 

The Committee met, pursuant to call, at 10 a.m., in room 2360, 

Rayburn House Office Building. Hon. Joe Walsh (chairman of the 

subcommittee) presiding. 

Present: Representatives Walsh, Barletta, Chabot, and Schrader. 

Chairman WALSH. Good morning, everyone. Welcome. I call this 

hearing of the Committee on Small Business, Subcommittee on 

Economic Growth and Access to Capital to Order. 

I would like to thank all of our witnesses for being here today. 

We look forward to your testimony. Let me give just a very brief 

opening statement. 

How to help our fellow citizens in their time of need is one of the 

most important questions we deal with as a society and as it relates to government. In the aftermath of a disaster, when a storm 

takes everything you have, the true test of resiliency is revealed. 

After a storm, homeowners and businesses grab a broom, a power 

washer, a chainsaw, and get to work trying to rebuild their lives. 

To do this disaster victims need money to rent a generator and 

purchase construction supplies. One thing they do not need is endless paperwork delays and confusing directions on how to obtain 

assistance. 

Under the current system, both state and federal resources are 

mobilized to respond to a disaster where they work hand-in-hand 

to conduct search and rescue operations, offer immediate food and 

shelter needs, and long-term rebuilding assistance. To help rebuild, 

the government offers both subsidized and unsubsidized financial 

assistance. This allows our neighbors access to funds when they 

need it most. 

Today we are here to try to answer a couple important questions. 

Is this assistance appropriate? And if so, how can it be given most 

effectively? How do we balance the American ideal of self-reliance 

with the practice of we as taxpayers paying to ensure the extra resources are available for those trying to rebuild. 

To help us answer these questions we have a distinguished panel 

of witnesses here today. These witnesses will inform us about their 


jbell on DSK7SPTVN1PROD with 
2 

experience in the aftermath of a disaster and provide their 

thoughts about the proper role of government. I look forward to 

this discussion today and I now yield to the ranking member for 

his opening statement. 

Mr. SCHRADER. Thank you, Mr. Chairman. 

In today’s era of modern technology and all the comforts we enjoy 

we sometimes think we are beyond Mother Nature’s reach and we 

get reminded again and again, whether it is Katrina or Irene, that 

indeed Mother Nature can make a huge difference in each and 

every one of our lives. This disaster, Hurricane Irene, of course, 

started down in North Carolina, came all the way up the coast 

through New York and into New England causing unprecedented 

amounts of damage to people’s homes and America’s small businesses. The recovery tools that we have at our disposal in SBA for 

small businesses and homeowners are only effective if our agency 

utilizes them correctly. In the wake of Irene, the SBA deployed 398 

disaster assistance workers to staff 160 recovery centers all up and 

down the Eastern seaboard. 

As of the beginning of this month, SBA issued over 183,000 loan 

applications and already approved 8,000 loans, totaling over $200 

million. Most of these loans were processed within the agency’s target timeframe of 10 days or less. And that was a big improvement 

over Hurricane Katrina. And while the response I think was a step 

in the right direction, we also have some improvements that need 

to happen. For the victims of Irene only one out of every three applications for assistance was approved. That is lower than the Hurricane Katrina rate of 51 percent. It is also about half of the agency’s historical approval rate so we would like to understand that. 

And despite the fact this disaster happened over eight months ago, 

only 60 percent of the funds that have been allocated have actually 

been dispersed. So that amounts to about $77 million of actual assistance that has found its way into the pockets of disaster victims 

so far. 

So these figures do suggest we need some reforms. We look forward to hearing from the panel about what form those should take. 

It is, I think, for those reasons that H.R. 3042, the Disaster Loan 

Fairness Act has been introduced. It is hopefully going to address 

some of the shortcomings that we have identified so far. We will 

play off of what we hear today from our witnesses about any other 

improvements that need to happen. And I think it is just really 

bottom-line important to understand that it is the small businesses 

that are job creators here for our country right now. The Northeast 

and Eastern seaboard are a big part of this great country’s job creation machine that we want to get back on track, and a lot of businesses, you know, 40, 60 percent of them do not recover after a disaster in the small business area. So we really need to make sure 

these programs work. Between Katrina and Irene, unfortunately 

we have gotten some great lessons to hopefully learn from. We do 

not want to learn away again in a bad way. I am looking forward 

to hearing this hearing help us understand things a little bit better. 

And with that I yield back, Mr. Chair. 

Chairman WALSH. Thank you, Mr. Schrader. 


jbell on DSK7SPTVN1PROD with 
3 

I understand that there is a request for Mr. Barletta from Pennsylvania, a member of the Small Business Committee, to join us for 

today’s Subcommittee hearing. If that is okay with the ranking 

member, welcome, Mr. Barletta. 

Let me just quickly go over the rules for our witnesses. If any 

of the other committee members have an opening statement prepared I ask that it be submitted for the record. You will each have 

about five minutes to deliver your testimony. The light will start 

out as green. When you have one minute remaining the light will 

turn yellow, and finally it will turn red at the end of your five minutes. Do your best to keep it within that five minutes. 

STATEMENTS OF DOUG HOELL, DIRECTOR, NORTH CAROLINA 

DIVISION OF EMERGENCY MANAGEMENT, TESTIFYING ON 

BEHALF OF NATIONAL EMERGENCY MANAGEMENT ASSOCIATION; GENE TIGHE, OWNER, GT FABRICATION, INC.; HOWARD KUNREUTHER, PROFESSOR, WHARTON SCHOOL, UNIVERSITY OF PENNSYLVANIA; DAVID B. MUHLHAUSEN, PH.D., 

RESEARCH FELLOW IN EMPIRICAL POLICY ANALYSIS, THE 

HERITAGE FOUNDATION 

Chairman WALSH. Let me introduce our first witness today, 

Doug Hoell, director of the North Carolina Division of Emergency 

Management. In this position Doug is responsible for disaster response for the state of North Carolina. Doug began his career in 

emergency management in 1976 and worked for the Raleigh Wake 

County Emergency Preparedness, the North Carolina Division of 

Emergency Management and FEMA. Doug became assistant director of the North Carolina Division of Emergency Management in 

1998 and director in 2005. Mr. Hoell is testifying on behalf of the 

National Emergency Managers Association. Welcome. I look forward to your testimony. 

STATEMENT OF DOUG HOELL 

Mr. HOELL. Thank you, Chairman Walsh. Good morning to all of 

you. And thank you Ranking Member Schrader for the opportunity 

to talk and to all the distinguished members of the Committee or 

the Subcommittee. 

My name is Doug Hoell. I am director of the North Carolina Division of Emergency Management, and again, thank you for the opportunity to present testimony today on behalf of the National 

Emergency Management Association. 

NEMA represents the state emergency management directors of 

all 50 states, the District of Columbia, and the U.S. territories. I 

have included my full statement for the record, so I will give you 

a quick overview now and look forward to answering your questions. 

While not a traditional first responder agency, the Small Business Administration is a critical partner to states and localities affected by a wide variety of disasters. Following a disaster, Small 

Business Administration has the capability to mobilize staff from 

the Office of Disaster Assistance to begin disseminating public information about what services the SBA can provide to supplement 

many long-term federal recovery programs. 


jbell on DSK7SPTVN1PROD with 
4 

While a major disaster declaration is awarded by the president, 

affected citizens begin the registration and eligibility determination 

process through FEMA. The entry point to FEMA assistance is 

through FEMA’s individual assistance program. The first step in 

that process is to have the applicant complete an application for a 

Small Business Administration loan. An applicant may have insurance, but it may not be enough to return them to their pre-disaster 

standard of living. Often, citizens encounter damages and devastation from disasters which are ineligible under FEMA disaster recovery programs. SBA loans can help return a damaged home to 

its pre-disaster condition, including implementation of mitigation 

measures. 

Following Hurricane Irene last year in North Carolina, SBA loaned more than $43 million to eligible North Carolina citizens. 

Due to the importance of small business in a local community, 

SBA’s Economic Injury Disaster Loan is a program that supports 

the whole community approach to disaster recovery. The Economic 

Injury Disaster Loan affords business owners continuity of operations by loaning to eligible businesses the funds to meet their ongoing obligations and to pay ordinary and necessary operating expenses. 

SBA was a critical resource in the state of North Carolina when 

a landslide on U.S. Highway 129 impeded traffic and prevented the 

day-to-day operations of business owners between North Carolina 

and Tennessee. The Economic Injury Disaster Loan Declaration 

made it possible for the businesses in both states to continue critical trade and accessibility functions. Programs designed to help 

disaster survivors are useless unless citizens understand the options available to them. SBA does a considerable amount of work 

in communities around the country, making personal contacts with 

Chambers of Commerce, with congressional offices, with state and 

local elected officials, with business organizations, and with community groups. SBA and state agency public information officers 

develop press releases announcing availability of disaster loans in 

affected areas. 

Media outlets are also informed of the declaration, and they are 

enlisted to alert the affected citizens to every opportunity to seek 

and receive assistance for their disaster recovery. In testimony 

given by the General Accounting Office before this Committee back 

in November 2011, William Shear referenced steps SBA continues 

to take to improve their marketing and outreach efforts. We look 

forward to continuing dialogue with SBA and are encouraged by 

their increased attention to the needs of individuals and communities. 

As a profession, emergency management stakeholders have focused a great deal on partnerships, which help us achieve a resilient and sustainable nation. FEMA administrator Craig Fugate has 

stressed the importance of the whole of community, and FEMA’s 

position as a member of a much larger team to support the response and recovery to all hazards. There is no doubt that the SBA 

Office of Disaster Assistance is a vital member of the emergency 

management team, and we value their contributions to our communities. The continued challenge of protecting the nation from a variety of hazards within the reality of fiscal uncertainty elevates the 


jbell on DSK7SPTVN1PROD with 
5 

importance of cooperation throughout the emergency management 

community and makes leveraging resources from across the federal 

family even more critical. Positive relationships between federal, 

state, and local government stakeholders are the lynchpin to coordinated recovery efforts supporting resilient individuals, prosperous businesses, and thriving economies. 

Thank you for the opportunity to testify today and your continued attention to disaster assistance matters under your purview. 

Your attention and leadership in this matter are greatly appreciated, and NEMA remains a ready resource for the Committee as 

you tackle tough issues of recovery from disasters. 

Chairman WALSH. Perfect timing, Mr. Hoell. Thank you for your 

testimony. 

Mr. HOELL. You are welcome. 

Chairman WALSH. I would now like to yield to Mr. Barletta from 

Pennsylvania to introduce our next witness. 

Mr. BARLETTA. Thank you, Mr. Chairman. And thank you for allowing me to participate today. 

I am pleased to welcome Mr. Gene Tighe, a constituent and small 

business owner from Pittstown, Pennsylvania. Mr. Tighe manages 

sales for his family business, GT Fabrication, Inc., a precision 

metal fabricating business serving clients around the United 

States. His family has run the company for over two decades and 

I am proud to say they have a reputation for reliability, precision, 

quality, and competitiveness throughout the entire industry. Despite strong competition from abroad, this American owned and operated business continues to serve our citizens despite the tough 

economic climate and the devastating flooding that ravaged Pennsylvania and the Northeast. I am glad Mr. Tighe accepted the Committee’s invitation to hear what his family and company went 

through in order to reopen after the flooding. His testimony will 

contribute to the debate over the role of the federal government in 

providing disaster relief to our nation’s citizens when they are most 

vulnerable. 

Thank you, Mr. Tighe. 

STATEMENT OF GENE TIGHE 

Mr. TIGHE. Thank you. Mr. Chairman, Ranking Member Schrader, thank you for inviting me here today to tell my story about 

the flood caused by Tropical Storm Lee. 

My name is Gene O. Tighe. I manage sales for our family business, GT Fabrication, Inc., a precision metal fabricating and powder coating business. My parents, Gene and Debbie Tighe, started 

the company more than 20 years ago. My sister Tracey and I have 

joined the family operation. 

Our company has had its ups and downs. We supplied large clients, like Pride Mobility. However, like so many other manufacturers, we lost many of our main customers to overseas competitors. 

We have not given up; we have adapted. We widened our customer 

base and produced more products in new industries. Our family 

business has survived many hurdles, but most recently natural disaster threatened to close our doors. 

My story begins on September 7, 2011, at 2 in the afternoon. Projections showed the Susquehanna River would rise to 35 feet by 3 


jbell on DSK7SPTVN1PROD with 
6 

p.m. the next day. Just two hours later, predictions changed, bumping it up to 38 feet by 3 o’clock. My family and our employees immediately knew our company would face heavy damages because 

our building is located 100 yards away from the Susquehanna 

River in Pittstown, Pennsylvania. 

We have been flooded before. We knew that this time we could 

not move some of our equipment. We had six machines in the excess of 25,000 pounds, so we started moving smaller equipment, 

materials, computers, and files. We worked through the night to 

move materials up to our back building. When our back building 

was built four feet higher because of past floods, we stored materials on pallet racking to try to keep them out of harm’s way. After 

working through the night, by September 8th at 8 a.m., the water 

crept into our parking lot. By 9 a.m., we had a foot of water in our 

downstairs building. We did all we possibly could do and exited the 

facility. Water levels were rising at a breakneck speed. 

In four previous floods, the river has never risen so quickly. Millions of dollars of equipment left in the building and we knew we 

were in trouble. Despite paying $15,000 for flood insurance every 

year, we knew we could only expect to collect a maximum half million dollars in contents and a half million dollars in building damages. By the time the Susquehanna River crested at 1 a.m., September 9th, all I could see of GT Fabrication was the very top of 

our building. 

My family and I were devastated. Our 30 employees were devastated. We did not know if our family business could survive this, 

and that is a horrible feeling. The watermark on GT Fabrication’s 

building was recorded at 15 feet. On our back building, which was 

raised 4 feet to serve as a precaution against flooding, the watermark was recorded at 9 feet. 

On September 10th, almost two days after flooding began, the 

water finally receded to 12 inches. I was the first one to enter the 

building to see the damage. As soon as I got into the building my 

heart sank. The destruction that the flood caused was by far the 

worst it has ever been. I really could not believe what I was seeing. 

Simply put, it looked like a bomb went off. 

My family, friends, and several of our employees were waiting 

outside for me to tell them the news. All I could say to them was 

it is bad but we will bounce back. But they had no idea. I pulled 

my father aside to warn him that we had a lot of work ahead of 

us if we wanted to stay in business. I could see defeat in his eyes. 

The successful business he had built from the ground up was wiped 

out just like that. The next day we did the only thing we knew to 

do; we got to work. We ordered three 40-yard trash hoppers, a 

three-phase generator, power washers, brooms. We spent tens of 

thousands of dollars to start the cleanup process. We had the dry 

gut clean both buildings but almost everything was destroyed. 

At the exact same time we also had to do damage control with 

our customers. We had to outsource all of our work to finish our 

pending orders. We set our customers up with our other vendors, 

our competitors, until GT Fabrication could get back on its feet. 

Additionally, I knew that we desperately needed financial help because we were not doing any business and we were draining the 

company’s funds on cleanup efforts. 


jbell on DSK7SPTVN1PROD with 
7 

I spoke to a Small Business Administration Disaster representative, who told me to quickly complete the application for a disaster 

loan. As soon as I could fill out the documents I brought the paperwork to the SBA Disaster Response site. The SBA staff looked it 

over and told me I was missing a few documents. I immediately 

brought the missing documents back down to the disaster site. The 

SBA official even complimented me on my thorough completion of 

the application. 

We had to throw almost $1 million worth of supplies and demolish the inside lobby and office. After almost three weeks of backbreaking cleaning, an SBA inspector visited GT Fabrication to assess the damages and take pictures. A few days after the inspector’s visit we received an SBA Disaster Assistance packet which 

stated they wanted us to provide monthly sales figures for the past 

three years. Additionally, SBA noted that they again needed Tax 

Form 8821. More than a month after filling our original application 

out, we received an SBA loan request to complete Tax Form 8821 

for the third time. This time we included a letter stating we had 

completed this document twice previously. When you are in disaster mode working 15 hours a day, 7 days a week to save your 

family business, you do not have time to fill out all this paperwork, 

especially after many of our records were destroyed by 15 feet of 

water during the flood. Regardless, we provided the SBA with information that they needed as quickly as possible. It actually 

seemed as though the SBA was trying to purposefully discourage 

us from applying for an SBA loan. 

We had to find something else in the meantime. GT Fabrication 

was fully not back to business and we had not yet received an SBA 

loan. The company bank account was running dry. Then, Pennsylvania state senator, Senator Yudichak called us to tell us about the 

Luzerne County Flood Recovery Loan Program. This is a $4 million 

low interest loan program that had a borrowing limit of $100,000. 

The program applies a 1 percent interest rate with no borrower’s 

fee. This quick, easy loan saved GT Fabrication by providing us an 

infusion of cash that we so desperately needed. 

Today, GT Fabrication is back in business, though we are only 

operating at 70 percent. I have been able to get almost two-thirds 

of my employees back to work. We look forward to getting back to 

100 percent and growing our business so we can do our part in 

turning around our local, state, and national economy. It is my belief that small businesses like ours will add jobs to the U.S. economy, but I am disappointed that the federal government has not 

provided more effective assistance to small businesses at this time 

of greatest need. Our experience was marked by bureaucratic red 

tape and an ineffective disaster loan program. 

The City of Pittstown has been very helpful retaining consultants 

to help us relocate to a larger facility and a safe distance from the 

river, and Luzerne County provided us the loan that saved our 

business. But sadly, the federal government, in my view, failed. I 

hope that my story can shed some light on the problems that other 

small businesses face. 

I want to thank the members of this Committee, particularly 

Congressman Barletta, for working to improve the effectiveness of 


jbell on DSK7SPTVN1PROD with 
8 

the SBA Loan Programs. Thank you again for the opportunity to 

be here today, and I will be happy to answer any questions. 

Chairman WALSH. Thank you, Mr. Tighe. Thank you for that 

powerful, powerful testimony. 

I would now like to recognize Ranking Member Schrader, who is 

going to introduce our next witness. 

Mr. SCHRADER. Thank you, Mr. Chairman. 

Howard Kunreuther, James G. Dinan Professor of Decision 

Sciences and Public Policy at Wharton School, University of Pennsylvania. In addition to his research, writing, and teaching, he has 

also been co-director of the Wharton Risk Management Decision 

Process Center, where he works on improving the roles of public 

and private sectors in reducing losses from natural disasters and 

aiding the recovery process following a catastrophic disaster. 

Thank you for joining us. 

STATEMENT OF HOWARD KUNREUTHER 

Mr. KUNREUTHER. Thank you very much, Representative Schrader and Chairman Walsh, and other members of the Committee. 

I appreciate the invitation to testify here on this particular bill. 

And I do want to make a point right at the outset that I am very 

sympathetic to what Mr. Tighe has said with respect to the challenges and problems that he faced. But I want to raise really three 

points in my testimony. 

The first is why is the proposed legislation to extend SBA disaster loans at 1 percent to cover both disaster losses and other outstanding debts likely to increase future losses from natural disasters? Second, can we utilize mechanisms, like insurance, coupled 

with other policy tools, to reduce future losses so that the SBA can 

play a secondary role in providing funds for disaster recovery? And 

there is no question SBA may have a role to play. Third, how can 

the National Flood Insurance Program, which is now up for renewal and discussion, be modified so as to set a tone as to ways 

that the public and private sectors can work together to reduce 

losses from floods and other disasters like storm surge from hurricanes? 

So those are the three points I would like to emphasize. 

Let me talk about the first point and raise two issues. Dr. 

Muhlhausen may be saying more about one of them. 

With respect to the SBA provision of 1 percent loan, it creates 

a moral hazard problem in the following sense. It encourages people to locate their home and businesses in hazard prone areas 

while at the same time reducing the economic incentive to purchase insurance and invest in mitigation measures prior to a disaster. So we have to be aware of the fact that if you are going to 

get very low interest loans people may say I do not need to be protected. 

The proposed program also has the potential of creating a situation where people actually may be better off after the disaster than 

before financially. If you receive a 1 percent loan for retiring your 

old debts as well as your disaster losses, the actual payments 

would be lower than they were before the disaster if you had previous SBA loans. I have an example in my testimony to highlight 

this point. 


jbell on DSK7SPTVN1PROD with 
9 

Let me turn to the second point on the role of insurance and 

other policy tools to reduce future losses. Insurance has three basic 

purposes that it can actually aid in this process. One is it provides 

a signal of risk to individuals and firms in their current location. 

If you have premiums that reflect risk, then you will actually be 

able to know whether or not you have a very severe hazard. Second, it will encourage property owners to invest in loss reducing 

measures. If you can get a premium discount—because you should 

if you invest in something that reduces your losses—then you may 

be in a position where you will be encouraged to do so. And the 

third point is insurance supports economic resiliency. Insured individuals and firms can make a claim to obtain funds to help pay for 

the loss caused by the catastrophe. I recognize that the Flood Insurance Program may have to extend coverage limits. 

Let me provide two guiding principles that have reflected our 

work in this area with respect to insurance. Principle No. 1 is that 

insurance premiums should reflect risk for the reasons that I have 

stated. So people have a signal of how hazardous it is and they will 

want to invest in mitigation measures. Principle No. 2 is just as 

important and it is called equity and affordability. When you have 

premiums that reflect risk, there may be people who need special 

treatment. They should not be given a subsidized insurance premium; they should be given an insurance voucher, like a food 

stamp. It enables one to still see what the premium is on the basis 

of the risk, and have an opportunity to obtain a premium discount 

if they invest in mitigation measures. 

I would like to put forward a few ideas for the National Flood 

Insurance Program reform which have been discussed with Congress that would actually try to move in that direction. The first 

is multi-year insurance not tied to the individual but to the property because people cancel their policies if they turn out that they 

have not received a claim. It is hard to convince people that the 

best return on an insurance policy is no return at all. You should 

celebrate not having a loss. 

The second point is we would want insurance vouchers for those 

needing special treatment. Third, you may want to consider required insurance for property owners because many people do not 

have policies. And the fourth point is multi-year loans for mitigation. If the mitigation measure to reduce the losses is a cost effective one, the actual cost of the loan may be actually less than the 

premium reduction one receives, so it will be financially attractive 

for people to invest in mitigation. And finally, well-enforced building codes. Having said all of that, there certainly will be a role that 

the SBA will have to play after a disaster, but the emphasis should 

be to place more attention on reducing these losses beforehand. 

To conclude, our country has entered a new era of catastrophes. 

Our exposure is growing and the damage from disasters over the 

next few years is likely to be more devastating than what we experienced during this past decade. When the next catastrophe occurs, 

the federal government will very likely come to the rescue again. 

If the public’s response to recent disasters is an indicator of their 

future behavior, new spending records will be spent with respect to 

federal assistance unless steps are taken to reduce future losses, 

and they should be undertaken now. And so with all due respect 


jbell on DSK7SPTVN1PROD with 
10 

to all of the challenges after a disaster I would like to at least 

argue that we better try to do more to prevent these losses from 

occurring. 

Thank you very much. 

Chairman WALSH. Thank you, Doctor. 

Our final witness that I have the pleasure of introducing is Dr. 

Muhlhausen, research fellow in Empirical Policy Analysis at The 

Heritage Foundation here in town. Dr. Muhlhausen joined Heritage 

in 1999 after serving on the staff for the Senate Judiciary Committee. He holds a doctorate in Public Policy from the University 

of Maryland, Baltimore County, and a bachelor’s degree in Political 

Science and Justice Studies from Frostburg State University. Dr. 

Muhlhausen is also an adjunct professor at George Mason University. 

Welcome, sir. You have five minutes. 

STATEMENT OF DAVID B. MUHLHAUSEN 

Mr. MUHLHAUSEN. Thank you. My name is David Muhlhausen. 

I am a research fellow in Empirical Policy Analysis in the Center 

for Data Analysis at the Heritage Foundation. I thank Chairman 

Joe Walsh, Ranking Member Kurt Schrader, and the rest of the 

Committee for the opportunity to testify today on the Disaster 

Loan Fairness Act. The views I express in this testimony are my 

own and should not be construed as representing any official position of The Heritage Foundation. 

After the president declares a major disaster, the Disaster Loan 

Fairness Act would set the interest rates for the Small Business 

Administration’s Disaster Loan Program at 1 percent for eligible 

applicants. Unfortunately, as my testimony will illustrate, the Disaster Loan Fairness Act does not provide the necessary reform to 

our nation’s disaster prevention and recovery programs. 

My testimony focuses on three deficiencies of the legislation. 

First, by providing more generous benefits, the legislation does 

nothing to reduce the overreliance of state and local governments 

on the federal government for the provision of recovery assistance. 

Far too frequently the federal government has been the primary 

source of recovery efforts for natural disasters that are inherently 

localized in small geographic areas and do not rise to the level that 

should require action by the federal government. Increasingly, 

Americans are becoming overly dependent on federal assistance 

after natural disasters occur. 

Further, disaster assistance appears to have become a political 

tool because the number of disaster declarations is significantly 

higher in election years compared to nonelection years. Since 1996, 

the year President Clinton sought reelection, the number of disaster declarations issued by FEMA dramatically increased. The 

chart in my written testimony demonstrates this trend. The previous record of the most declarations in a year was set by President 

Clinton in 1996 with 158 incidences. President Obama smashed 

this record with 242 declarations in 2011. Given that 2012 is a 

presidential election year, I doubt this record is going to last very 

long. Essentially, this trend is the result of disaster responses that 

were once entirely local in nature and handled by state and local 


jbell on DSK7SPTVN1PROD with 
11 

governments becoming nationalized and thus, the responsibility of 

the federal government. 

Second, with out-of-control spending surging and public debt 

threatening our nation’s stability, Disaster Loan Fairness Act increases federal spending. Instead of practicing fiscal constraint, the 

legislation does not reduce the cost of future disaster recoveries. 

Reform should be focused on preventative measures that limit the 

cost of disasters. Contrarily, this legislation puts the federal taxpayer on the hook for more spending. 

Third, increasing the generosity of SBA disaster loans creates a 

moral hazard by providing greater encouragement for homeowners, 

renters, and businesses to avoid purchasing adequate disaster insurance because natural disasters are low probability events. 

Clearly, having adequate insurance before disasters occur is the responsible course of action. SBA disaster loans are intended to help 

applicants return their property to the same condition as before the 

disaster. The unintended consequence of this requirement is applicants are forced to rebuild in the same disaster-prone location. For 

example, instead of relocating out of a town sitting in a major flood 

zone, applicants are required to rebuild in the same exact location. 

Thus, applicants are still located in a high-risk area, preventing a 

long-term solution from taking place. While this dilemma exists 

with or without the passage of the Disaster Loan Fairness Act, the 

legislation only increases the incentive to rebuild in high-risk 

areas. 

In conclusion, the Disaster Loan Fairness Act is neither fair to 

the federal taxpayer, nor an effective reform of our nation’s disaster prevention recovery policies. Instead of considering this legislation, Congress should focus on reforms that will make American 

more resilient to disasters and reduce recovery costs imposed on 

the federal taxpayer. 

That is all. Thank you. 

Chairman WALSH. Thank you, Dr. Muhlhausen for your testimony. 

Let me begin with just a couple questions. Mr. Hoell, Dr. 

Muhlhausen alluded to and as did Dr. Kunreuther alluded to the 

fact that federal government is seemingly taking more of the responsibility for disaster assistance away from the states. How 

would you respond to that? Good thing? Bad thing? And do you see 

the same sort of trend? 

Mr. HOELL. I would say to you that there are criteria that we 

have to meet for a presidential disaster declaration under the Stafford Act. And so when we have disasters that affect the state of 

North Carolina, we look to those criteria. There is a certain per 

capital cost, you know, to the individuals in the state of North 

Carolina. Our threshold for public assistance, for example, is over 

$10 million. And, you know, that is statewide. And then you have 

to meet the criteria on a county-by-county basis for a county to be 

declared. So that is on the public assistance side. On the individual 

assistance side more where the SBA would come to bear would be, 

you know, you have got to have numbers of people affected—businesses and people. And so again, I think that there are criteria 

that we have to meet. 


jbell on DSK7SPTVN1PROD with 
12 

I favor the mitigation efforts. I think mitigation is a good thing 

but I would tell you that the mitigation program, the way it is established is a very slow process and it takes us two or three years 

probably to buy properties or elevate properties and things of that 

nature. 

Chairman WALSH. Has that criteria changed? 

Mr. HOELL. The hazard mitigation criteria? Or the criteria for 

federal declaration? Yes, it has. In fact, the figures keep going up 

and they just changed this year and in fact, went up a little bit 

higher. I do not know exact numbers. I am certain we can get them 

for you if you like. 

Chairman WALSH. Would you concur with Dr. Muhlhausen that 

the trend is toward much greater federal assistance? 

Mr. KUNREUTHER. I think that is absolutely the case and I think 

that what Mr. Hoell indicated is an important direction one has to 

go. We really do have to encourage mitigation using the National 

Flood Insurance Program (NFIP) as a starting point. If you can reform the NFIP, mitigation can be a lot more attractive than it currently is. That is why the whole idea of long-term contracts, longterm multi-year insurance tied to the property, along with a multiyear loan, could change that situation radically so that people will 

then appreciate the fact that when they have a loan they do not 

have to necessarily pay the upfront cost. This is what discourages 

many homeowners from investing in mitigation. They will now 

know that they have a longer term payment and they will get 

something back in the context of an insurance premium. So it is 

in that direction that we would want to go. Then the SBA program 

would have a perspective that I think it does not have today. It is 

being used because people have not taken this action and everyone 

is then demanding assistance after the fact. 

Chairman WALSH. Dr. Muhlhausen, expand briefly on this notion 

of overly dependent on disaster relief. Why is that? How does that 

play out? 

Mr. MUHLHAUSEN. Well, I think there is a political benefit. I 

think after each natural disaster occurs, I think politicians, unfortunately, are upping the ante, wanting to provide more disaster assistance to outdo what was done previously. And so I think Americans have come to expect the federal government to act. 

And I think Mr. Tighe’s case is a case study that should be considered where state and local governments provide assistance to his 

business, not the federal government. And it sounds like his business is doing well and existing and is continuing and was relocated 

out of a flood plain. And if he did get an SBA disaster loan, would 

he have been allowed to relocate his business or would it still be 

sitting in the same area that was so prone to flooding? 

And so I think that disaster assistance first must be local in nature based on state and local governments, and then only rise to 

the level of federal assistance when it overwhelms the capacity of 

state and local governments to handle the situation. And so I think 

there has definitely been a normative change when the Stafford Act 

has been declared by FEMA. 

Chairman WALSH. Last question. Mr. Tighe, let us bring this to 

you. It is a fascinating policy discussion. 

Mr. TIGHE. Yes. 


jbell on DSK7SPTVN1PROD with 
13 

Chairman WALSH. But you can bring this home like nobody else 

in this room. 

Mr. TIGHE. Yes. 

Chairman WALSH. Expand on what Dr. Muhlhausen said. I 

mean, is there—in your testimony you clearly expressed greater 

pleasure with the way that local and state reacted to you as opposed to federal. I mean, but as you now look back is there anything differently you would have or could have done? 

Mr. TIGHE. At the time, I mean, if anybody has ever been 

through a disaster—we have actually been through four of them. 

By far this one was the worst. When you are in a disaster mode 

you really are not thinking about filling out paperwork and doing 

this and doing that, but also in the same breath you have to be 

very conscious of how much money you are pulling out of your 

bank account before you go below the zero line. You know, at the 

time I went to the local Chamber of Commerce. I spoke to a SBA 

disaster official. He told me to fill it out and get it in. You know, 

I was a little leery about the 6 percent loan but, you know, I said 

would it be good for me to just get in the system? He said absolutely. Get in the system and then, you know, if something happens 

down the road, you know, we will look at it. 

My biggest problem with them was just the communication back 

and forth. You know, they have had me fill out the same documents four or five times. And then, you know, at the end of the 

day, you know, we were draining our bank account. I had to go 

somewhere else. The Luzerne County Flood Recovery Program, I 

mean, it was not enough money by far; it was very little but it did 

give us a quick infusion of cash. And we were able to get back in 

business. And like I said, we are not back in business by any 

means. Seventy percent, mostly powder coating and some manufacturing, but I have a million dollars worth of machines in that 

building and, you know, I have been trying to get relocated for 

years. And, you know, I just keep getting stonewalled. I mean, obviously I would like not to be flooded ever again. You know, we 

have a 35,000 square foot building with machines that weigh 

25,000 pounds. You would have to give me two weeks to move that 

equipment. I need cranes to come in. I need riggers to come in. 

When I find out the day before that the river is going to flood, 

there is nothing I can do. My hands are tied. 

So, I mean, you know, going forward I think, you know, the state 

did help us out but, you know, if I was able to get the SBA loan 

for a disaster, I mean, we are an established company. We have 

been in business for over 20 years. 

Chairman WALSH. If you had gone to your local bank do you 

know what your interest rate would have been? 

Mr. TIGHE. I do not know exactly but I think it would have been 

around the same. 

Chairman WALSH. Okay. Great. Thank you. 

Mr. Schrader. 

Mr. SCHRADER. Thank you, Mr. Chairman. 

Sorry about what happened to you. That is a business person’s 

worst nightmare. 

Mr. TIGHE. Thank you. 

Mr. SCHRADER. Not being able to get out of that. 


jbell on DSK7SPTVN1PROD with 
14 

Mr. Hoell, given some of the comments from Mr. Tighe on this 

communication issue with SBA and having to fill the same forms 

out several times, can you comment on why that would even happen? 

Mr. HOELL. You know, it is hard to say. The Small Business Administration has been a good partner with us and they have serviced a lot of people in the state of North Carolina. In fact, after 

Hurricane Irene, over 19,000 people made application to the Small 

Business Administration and received $43 million in loans. So I 

cannot tell you that we have had a lot of difficulty with the paperwork process. 

Mr. SCHRADER. If you were to have difficulty, is there a mechanism? You know, it is probably personality-driven in the real world. 

Do you have a mechanism? Does SBA to your knowledge have a 

mechanism to deal with that sort of thing so that if a person in the 

middle of a disaster says, ‘‘Man, I am filling this form out again,’’ 

they can call someone or they can get somebody up the food chain, 

if you will? 

Mr. HOELL. When we have a disaster there are community outreach people that work for the Federal Emergency Management 

Agency and SBA has people that also are out there in the community outreach to deal with people who are having difficulty. You 

know, but the challenge is, like Mr. Tighe says, he is busy trying 

to recover his business and he may not have the time to engage 

with them, you know, in more conversation or more paperwork that 

they have to deal with. But there are people who are trying to address the needs of the disaster victims out there. 

Mr. SCHRADER. Not well enough. 

Mr. Tighe, do you want to comment on that? 

Mr. TIGHE. Yes. I actually talked to SBA field representatives. I 

have talked to SBA staff members. As a matter of fact, I went out 

of my way to talk to them and ask them why I was filling this 8821 

Tax Form out so many times. And they could not answer the question. 

And the same thing with I got a letter from them from Texas 

and, you know, it was postmarked for Monday. It was due back in 

their office on Sunday. Mail does not run on Sunday. Seven days 

I have got to get it. I asked the lady, you know, can you explain 

to me how I am supposed to do this? And she says—— 

Mr. SCHRADER. And why seven days? 

Mr. TIGHE. Yes. Exactly. And she said, ‘‘I am sorry. That is just 

the way it is.’’ 

Mr. SCHRADER. All right. 

Mr. TIGHE. So we kind of get straight answers. You know, they 

do not really want to get into it. And usually when you ask somebody else they say, well, I do not know. 

Mr. SCHRADER. Yes. Ask the next guy. 

Mr. TIGHE. Yes. Ask the next guy. 

Mr. SCHRADER. Let us talk about the moral hazard issue. That 

is something I am concerned about and I think that, you know, 

what is the even proper role between SBA and flood insurance? I 

mean, SBA would be a super disaster assistance, when things go 

beyond the norm, and obviously our flood insurance programs are 

not doing what they should be doing and we do not want to give 


jbell on DSK7SPTVN1PROD with 
15 

a very low—we all on this panel are worried about our debt and 

deficit at the federal level and so we are very conscious about the 

cost of this particular piece of legislation potentially. 

So what is the balance, if you will? I will be curious, both Dr. 

Kunreuther and Dr. Muhlhausen on what is the right balance? 

What is the role of the SBA versus flood insurance? What specific 

mitigation changes do we need to make in either program in your 

opinion to be more effective? And what is the magic interest rate 

that gets the right point to avoid moral hazard? 

Mr. KUNREUTHER. Well, first I do want to say before I respond 

to that, the sympathetic aspect that we have for your particular position. And I think a lot of the work that we are doing is very much 

in the spirit of the question that you are raising. To the extent that 

one can take steps beforehand, even in the sense of having enough 

insurance so that you would be protected against the particular 

losses that one has, that is a very important element. The SBA 

may have to come in at the end of the day to provide disaster relief 

for those who need special treatment. And the question of the interest rate is an important one for people who can get credit and 

who may have enough income. You may want to have a different 

interest rate which is the current policy for ones who actually are 

in special need. 

I think Representative Schrader, the question you are asking is 

the central one with respect to what has to be done. Where do you 

find mitigation coming into play? Where do you find insurance coming into play to avoid a number of problems that we are hearing 

from Mr. Tighe and from others who suffer these losses? If you can 

somehow make mitigation attractive enough, if you can do things 

that let people understand, let businesses understand and residents understand that there are very good reasons for doing this. 

The moral hazard problem is that victims are not going to get the 

kind of federal relief that would otherwise be forthcoming that Dr. 

Muhlhausen mentioned in his testimony and that we have lots of 

data to suggest. In a presidential election you know that moreso 

than at other times you are going to have an enormous amount of 

support. We all have sympathy after a disaster. As we are concerned about being in that situation. 

So our feeling is that if you can take the steps beforehand, if you 

can recognize that insurance has a vital role to play in terms of letting people not only know about what the risk is but at the same 

time rewarding people for taking action to reduce their loss, then 

I think we can stem these losses from natural catastrophes. 

The other point I would want to make is that the affordability 

issue is critically important here. So that having a voucher, like a 

food stamp, that is designated for insurance, for people in special 

need is central to making this work for political reasons and for equity and efficiency reasons. Let me give you just two examples. 

The first is that if you have a better flood map or you find a dam 

or levee is decommissioned, there is a resistance to these changes 

by Congress because they feel their constituents will have to pay 

higher premiums. We would say let everyone know what the insurance premium is that reflects the risk, but give these individuals 

an insurance voucher to recognize that now you are increasing 

their premiums. The voucher could be decreased over time but at 


jbell on DSK7SPTVN1PROD with 
16 

least these communities will have better flood maps and a better 

notion of what the risk is. The same thing would happen with low 

income people, if Congress raises the flood insurance premium to 

reflect the risk, one needs a voucher for special treatment. 

The last point I will make on the mitigation side. If you have a 

voucher and a person still invests in a mitigation measure, they 

still should get a premium discount. Just because they have a 

voucher, there is no reason why they should not be rewarded for 

reducing the losses. The voucher was given for equity and affordability. If at that point a homeowner or a business says we still 

want to mitigate, there is every reason to want to reward it with 

a premium discount and with a long-term loan to encourage it. So 

it is on those directions that we believe you can address the moral 

hazard problem in a way that will be effective from the point of 

view of businesses like Mr. Tighe’s and homeowners who are living 

in these hazard prone areas. 

Mr. MUHLHAUSEN. I think Professor Kunreuther’s policy ideas 

are very encouraging and I think they need to be looked into at a 

much greater depth. Right now I cannot sign off on them but I am 

very enthusiastic about exploring his ideas more and working with 

him in the future. 

What I do think is that premiums should reflect risk. And this 

means that there should be regulatory reform on the federal and 

state level. And that is one of the first steps to get us to a solution. 

For affordability, I think some of these affordability solutions such 

as these vouchers would be best worked at the local level since 

most disasters are inherently occurring in small geographic areas. 

They are localized and can be best dealt with in the first place by 

state and local governments. And I think they best know their 

needs and maybe the states can set up their own voucher programs. And whether or not there will be another layer with the 

federal government providing such assistance is something that 

may be explored. But I think on a fundamental level I think these 

solutions need to come from the ground up before they come from 

the top down from the federal government. 

Mr. SCHRADER. Thank you. 

Chairman WALSH. Quickly. 

Mr. KUNREUTHER. I am very sympathetic to what Dr. 

Muhlhausen said except that since the Flood Insurance Program 

since it is a national program. Vouchers may have to come from 

FEMA or some government organization. So that would be the one 

exception. 

Chairman WALSH. Thank you. Let me turn to Mr. Barletta. 

Mr. BARLETTA. Thank you very much. 

Let me just go back for a few moments and tell you what I experienced during this latest flood, Hurricane Irene, and Tropical 

Storm Lee, which was really a double-barrel disaster to our area. 

As I traveled throughout my district, I went from community to 

community, walked the streets, and it was the same scene everywhere I went. Mr. Tighe’s story here is very familiar but it was 

even further than that actually. I watched as—I stood on porches 

and watched grown men cry. Literally cry. I have had senior citizens tell me that they are not going back into their homes again. 

I have had businesses telling me we are going to collect the insurVerDate Mar 15 2010 04:55 Dec 15, 2012 Jkt 076463 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 E:\HR\OC\A463.XXX A463

jbell on DSK7SPTVN1PROD with 
17 

ance and we are done. We are not going back into business again. 

We are not going to go through this again. We cannot do this anymore. 

See, in my part of the state, in Pennsylvania, in Northeastern 

Pennsylvania, we have the highest unemployment rate in the state. 

And it sounds good here in Washington in this beautiful building 

to say, well, Mr. Tighe, just move. Go somewhere else. And when 

he does, what happens to the people that worked there in our area 

that already is experiencing a high unemployment? What happens 

to their jobs? What is the cost to the economy if he takes your advice and he goes somewhere far away so this does not happen 

again? Does that help or does that hurt? 

I have a couple questions. If you can look at those photos over 

there, that is much what I saw throughout my entire district. Now, 

I certainly do not believe that these people would move into an 

area like this so that they could take advantage of some government loan program that we are going to be offering. But I want to 

ask. The question is, Dr. Muhlhausen, do you believe that helping 

those folk would be politically motivating? 

Mr. MUHLHAUSEN. I think upping the ante, making sure that 

federal assistance becomes more generous throughout the year is 

politically motivated. 

Mr. BARLETTA. No, I am asking, these folk right here, these are 

real people. These are real people. So do you think us coming in 

to help them is politically motivated? That I would say maybe 

these people would vote for me if I came and gave them help? Do 

you think that enters anybody’s mind? When you are witnessing 

people carrying their life’s possessions to the sidewalk to be hauled 

away—their memories, their pictures, memorabilia, things that 

have been given to them from generation to generation—do you actually believe that when you walk those streets that those folks— 

that political motivation would be the reason for trying to help 

them? 

Mr. MUHLHAUSEN. No, I think there are people who come out of 

the woodwork to help their neighbors. I think that is good. I think 

local politicians, local programs can provide assistance. But I think 

the fact that we see that there is an uptick, a statistically significant increase in presidential disaster declarations during an election year, we know that some of this assistance is politically motivated. It is empirically demonstrated. 

Mr. BARLETTA. I am not talking about—this was not an election 

year. What about these folks? 

Mr. MUHLHAUSEN. Well, I am sure we can always help them out 

and that is good. 

Mr. BARLETTA. Yes. Here is how we will help them out. Let me 

tell you how we will help them out. If you can get—you have a 

business and you can get credit somewhere else, this is what the 

United States will do and this is what SBA will do. We will help 

you out. If you can get credit somewhere else we will offer you a 

6 percent loan. Now, you ask the question is the Disaster Loan 

Fairness Act fair to the taxpayers? Well, let me ask you. Do you 

think this is fair to the American taxpayers? In the last two years 

we gave Pakistan—Pakistan—$215 million for flood disaster relief. 

Did we insist that Pakistan—did we require them to have mitigaVerDate Mar 15 2010 04:55 Dec 15, 2012 Jkt 076463 PO 00000 Frm 00021 Fmt 6633 Sfmt 6602 E:\HR\OC\A463.XXX A463

jbell on DSK7SPTVN1PROD with 
18 

tion first before we use American tax dollars? Did we ask them do 

they have insurance before we give American tax dollars? Do you 

know what interest they are paying? Not 6 percent like we would 

have offered Mr. Tighe; 0 percent. Zero percent. Is that fair to the 

American taxpayers? And do you know what the payback is? There 

is no payback. They do not have to pay it back. 

So I would tell Mr. Tighe if he wanted to move, maybe we want 

to say maybe you should move to Pakistan where we would have 

offered a 0 percent loan and you would not have to pay the money 

back. We are trying to keep manufacturers and people in business, 

sir. We are not trying to make a profit or say, well, maybe you are 

going to take advantage of it. We gave Japan $94 million for the recent tsunami and earth- quake. We gave Haiti $838 million for disasters there. In fact, we 

gave $4.98 billion—billion dollars in humanitarian assistance. 

Now, we are all very proud of that because when disasters strike 

America is the first to help, and I am proud to say that I am an 

American and we do that. But sir, I believe we should be helping 

Americans first. Now, this loan disaster bill is not going to cost the 

taxpayers anything because I am offsetting it with aid, international aid, disaster aid, that would cover the cost. So should we 

not—my question is should we not help Americans firsts? 

Mr. MUHLHAUSEN. I think flaws in our foreign aid system are an 

entirely different issue, and two wrongs do not make a right. So if 

our foreign aid system has questionable policies that is a separate 

issue for a separate hearing and actually a separate committee. 

But I will add that we should be compassionate to help people recover from disasters; the question is the best way to do it. And the 

best way is to have preventative measures, help people mitigate 

against future disasters. And the problem with the SBA program 

is that it presents a moral hazard that people—it is an incentive 

not to have adequate insurance. It is an incentive not to—— 

Mr. BARLETTA. But you are not answering my question. Should 

we not, if we could, take the money from international disaster relief—before we help people who are affected by a flood in Pakistan, 

not help our own neighbors, our own friends, if this will not cost 

the American taxpayers? If a 1 percent loan—this is not a small 

business loan. We are not encouraging people to open up a risky 

business; we are saying your business has been lost or your home 

has been lost to no fault of your own. And if we could not have a 

cost directly on the taxpayers by offsetting it with international 

disaster aid, why would we not do that? I am just failing to miss— 

I understand what you are saying and I am all for mitigation. And 

many of the people who were affected here, sir, did not have flood 

insurance because they were told they were not in a flood plain. 

And do you know how long, Dr. Kunreuther, it takes before you 

see a check? I have constituents that have waited six months for 

an insurance check. Six months. What does that business do in the 

meantime? This sounds good here but when you are walking the 

streets and standing on the porches of these people it does not 

work. And how do you justify that we help other people before we 

help Americans? 

Mr. MUHLHAUSEN. Nowhere in my testimony have I justified 

helping foreigners over Americans. So I think the question right 


jbell on DSK7SPTVN1PROD with 
19 

here does not pertain to me. Maybe you need to ask Congress, your 

fellow congressmen, why aid is going to these foreign countries that 

you think are so questionable. 

Mr. BARLETTA. Well, can I ask you this then? If I told you today 

that the 1 percent CBO has suggested that there will be no affect 

on direct spending and that if we offset the discretionary cost by 

taking it out of international foreign disaster relief, if I told you 

that would you then think that this bill maybe is a good idea that 

we are helping Mr. Tighe stay in business and other people stay 

in business before we help someone else? 

Mr. MUHLHAUSEN. I think Mr. Tighe stayed in business without 

SBA loans and he would have stayed in business without reforms. 

Mr. BARLETTA. If we can offset the costs? 

Mr. MUHLHAUSEN. I think offsetting would be an improvement in 

a flawed bill. It is not control for the moral hazard issue. It does 

not account for the fact that we are having too many disaster declarations that should be not nationalized; they should be handled 

best by local governments. 

Mr. BARLETTA. But for those that are. For those that are. For 

these folks right here. 

Mr. MUHLHAUSEN. There is a case where if there is a natural disaster that is so devastating that it is beyond the capacity of state 

and local governments, there may be a case for SBA disaster loans. 

But if it is just a tornado, if it is a flood that people knew they 

were in a flood high-risk area for years and they continued to have 

their business located there, that presents a moral hazard issue. 

The policy should be we should not encourage people to be in dangerous areas. We should encourage people to be in safe areas. 

Mr. BARLETTA. Well, when should they move? You know, there 

could be an earthquake in California, so should everyone move 

from California? People in the Midwest, you know, there could be 

a tornado. Should they move out? Where will we move? 

Mr. MUHLHAUSEN. Well, in the case of hurricanes or, I mean, 

earthquakes you have to have good building codes to make sure the 

buildings can withstand a severe earthquake. So obviously you 

would not have people leave California. But if you are sitting in an 

area where it is easy to move, where if you can move one mile up 

the road and be completely safe from a flood, that is a better solution than continuing a business in an area that is going to get 

flooded repeatedly. 

Mr. BARLETTA. And for the folk who are not in a flood plain but 

still lose everything to a flood, I guess my point is, you know, there 

are people who lose their homes, their possessions, their businesses, and choose to take the insurance. Because we talked a lot 

about insurance today. And we seem to think that that is going to 

solve the problem. But if Mr. Tighe takes his insurance check and 

decides I am done, does that help America? Is there not a return 

to the American taxpayer by helping American businesses stay in 

business? Because of a disaster that was no fault of their own and 

will not cost the American taxpayers any money because we are 

going to take it from other countries that we are helping rather 

than—— 


jbell on DSK7SPTVN1PROD with 
20 

Chairman WALSH. Let me just interject, Mr. Barletta. Why do 

you not take a breath, Dr. Muhlhausen. Dr. Kunreuther, why do 

you not jump in here. 

Mr. KUNREUTHER. I think you are raising issues that are central 

to the challenges we face with natural disasters. When we focus, 

as you are with your photos and with our example, Mr. Tighe, on 

specific situations, we all want to help. We all want to do something to assist on equity and sympathy grounds. But Representative Barletta, I think that what Dr. Muhlhausen and I have been 

saying is can we learn lessens from Mr. Tighe’s experience for others to think about these events beforehand in a way that will be 

attractive but where there are actions they are taking? 

And what I mean by that is if it turns out that you had higher 

limits, for example, on flood insurance, the private sector may be 

able to even come in. 

We finished a study suggesting the private sector can supplement the federal government on that. And so you have full protection if you were given incentives and we would have to talk with 

Mr. Tighe—and each individual business and home will be different on that—to take steps beforehand. In order to reduce it we 

would avoid a lot of the situations that you are talking about. And 

so I think we are all on the same page here. 

Mr. BARLETTA. Where we are different—and I agree with you. 

Mr. KUNREUTHER. Okay. 

Mr. BARLETTA. I agree with exactly what you are saying. And I 

am with you. I get it. Where the disconnect is is at the time when 

we do offer an SBA loan, I mean, we are surely not suggesting do 

away with SBA disaster loans. So if we do all that you say, and 

I agree we should. That is a good idea. That is good policy. But for 

the times when we do offer those SBA loans, why would we not 

offer a 1 percent loan and give Americans a chance and an opportunity to get back up on their feet, to decide I am going to stay in 

business, and offset that cost. We make good points here but if we 

are going to offset the cost, what I am saying is let us not help that 

business in Pakistan before we help somebody in Pittstown, Pennsylvania. I cannot justify that and there is no argument—I do not 

believe that as an American we can make—that we would rather 

help businesses somewhere in the world before we will help our 

own Americans here at home. 

Mr. KUNREUTHER. I am not going to get into the foreign domestic 

trade offs in my response. 

Mr. BARLETTA. It is part of this bill. 

Mr. KUNREUTHER. I understand the point and I think that there 

are reasons to ask where should our money go. But let me answer 

your point directly on the 1 percent loans. At the end of the day 

when there is a disaster we have to ask ourselves who is in need. 

There are likely to be businesses who could afford to take out a 

loan at a normal interest rate. However, affordability needs to be 

put on the table. If someone cannot afford the premium and it happens to be a small business that may be in real need, one has to 

consider whether there should be special treatment given to it. 

The SBA disaster loan program does exactly that today as you 

know. It happens to have higher interest rates, 4 percent and 8 

percent, depending on whether there is an affordability problem. 


jbell on DSK7SPTVN1PROD with 
21 

The question that you are posing is should you go down to 1 percent. That is a value judgment. It is a judgment that everyone has 

to make as to how much assistance we want to give and whether 

or not that money could have been spent better in other ways. I 

will not answer that question directly because I think at the end 

of the day we as a society, and Congress plays that role, has to 

judge at what point do we want to provide special relief. And it certainly could be argued that if it turns out someone would not be 

able to stay in business unless they were able to get a very, very 

small loan, a low interest loan, then you may want to go in that 

direction. 

But I think as a general policy, and I think that is what we are 

talking about here in the way of the legislation, it sets the tone 

that really argues for post-disaster relief rather than protection beforehand. And that is the reason I think Dr. Muhlhausen and I are 

making the comments we are. Let us take some steps beforehand 

rather than focus purely after. 

Mr. KUNREUTHER. And I appreciate the arguments that you are 

making but we cannot ignore the fact that we give Pakistan flood 

disaster relief at 0 interest. I know we are not here to solve but 

we are. We are part of Congress and we do look at the big picture. 

And the big picture is I am sitting here seeing that we gave Pakistan $215 million with 0 interest. How can we justify that and 

argue here in your testimony saying, well, if an American business 

could afford to pay something else, why should not an American 

business pay 6 percent interest if they could? But why should 

somebody in Pakistan, who I do not even know, pay 0 percent interest? That is the question that I am asking my colleagues here. 

Do you think that is fair? 

Chairman WALSH. It sounds like a wonderful topic as well for another hearing. I will give you time for a very brief answer because 

Mr. Barletta’s time has expired. Go ahead, Dr. Kunreuther, if you 

want to weigh into that at all. 

Mr. KUNREUTHER. No, I am not going to weigh into that because 

I really want to second what Dr. Muhlhausen said. I think there 

are two separate issues. I think one has to ask the question in 

Pakistan whether or not you are going to give a 0 percent interest 

rate if you are going to do it for other reasons, rather than sort of 

make the comparison between what we do in this country. I think 

that is an issue that should be put on the table but not in the context of this particular piece of legislation. 

Chairman WALSH. Thank you. Mr. Barletta, thank you. 

On behalf of the entire Subcommittee I would like to thank all 

of our witnesses for being here today. The testimony that you provided will be helpful as we continue to consider amendments to 

SBA’s Disaster Assistance Programs. 

As was mentioned in the opening, we want to make sure that our 

neighbors have the right tools to get back on their feet after a disaster. None of us question that. The question is how best to fund 

and supply those tools. The faster people get back on their feet, the 

better off we will all be as a nation. 

With that, without objection, I ask that the record be kept open 

for five legislative days. Without objection, so ordered. 

This hearing is now adjourned. 


jbell on DSK7SPTVN1PROD with 
22 

[Whereupon, at 11:10 a.m., the Subcommittee hearing was adjourned.] 


jbell on DSK7SPTVN1PROD with 
23 


jbell on DSK7SPTVN1PROD with Insert offset folio 61 here 76463A.001

MR. DOUG HOELL 

Vice Chair, NEMA Preparedness Committee 

Director, North Carolina Division of Emergency Management 

TESTIMONY 

Before the House Committee on Small Business 

Subcommittee on Economic Growth, Tax and Capital Access 

Examining the Role of Government Assistance for Disaster Victims: 

A Review of H.R. 3042 

February 16, 2012 

NATIONAL EMERGENCY 

MANAGEMENT ASSOCIATION 

National Emergency Management Association 

Hall of the States 

444 North Capitol Street, NW 

Washington, DC 20001 

(Ph) 202-624-5459 
24 


jbell on DSK7SPTVN1PROD with Insert offset folio 62 here 76463A.002

Introduction 

Testimony of Mr. Doug Hoell 

National Emergency Management Association 

February 16,2012 

Good Morning Chainnan Walsh, Ranking Member Schrader and distinguished members of the 

Subcommittee. My name is Doug Hoell and I am the Director of the North Carolina Division of 

Emergency Management. Thank you for the opportunity to present testimony today on behalf of the 

National Emergency Management Association (NEMA). NEMA represents the state emergency 

management directors of all 50 states, the District of Columbia, and the U.S. Territories. We are happy to 

be here to discuss the role of the Small Business Administration (SBA) in disaster assistance. 

While not a traditional "first responder" agency, SBA is a critical partner to States and localities affected 

by a wide variety of disasters. Following a disastcr, SBA has the capability to mobilize staff from the 

Office of Disaster Assistance to begin disseminating public infonnation about what services SBA can 

provide to supplement many long-term federal recovery programs. 

Types of Assistance for Major Disaster Declarations 

When a major disaster declaration is awarded by the President, affected citizens begin the registration and 

eligibility detennination process through the Federal Emergency Management Agency (FEMA) by 

applying either through the agency's toll free number, on-line, or by visiting any established Disaster 

Recovery Center (DRC). A decision is made immediately to detennine if the applicant should be moved 

to FEMA' s Individual Assistance (IA) Program for grant consideration or whether their SBA application 

warrants further evaluation. The issuance of an SBA application is tantamount to recovery. An applicant 

may have insurance but it may not be enough to return them to their pre-disaster standard of living. The 

$200,000 loan to homeowners, the $40,000 loan available for personal property (to homeowners and 

renters) and the $1.4 million dollar loan to business owners far exceed the basic IA grant whose intent is 

to bring an individual back to safe, sanitary, and functional living. 

Often citizens encounter damages and devastation from disasters which are ineligible under nonna] 

FEMA disaster recovery programs, but remain important to them during recovery. SBA loans can help 

return the home to its pre-disaster state including the implementation of mitigation measures. The 

Page 2 of 6 
25 


jbell on DSK7SPTVN1PROD with Insert offset folio 63 here 76463A.003

challenge has become how to infonn applicants that if they do not return their SBA application, the 

recovery process is halted and could prevent them from receiving any other available assistance. 

Due to the importance of small businesses in a local community, SBA's Economic Injury Disaster Loan 

(EIDL) is a program that supports the "Whole of Community" approach to disaster recovery. The EIDL 

affords business owners continuity of operations by giving them the opportunity to meet their obligations 

as they mature and to pay ordinary and necessary operating expenses. These loans are aimed at providing 

working capital to small businesses to keep them afloat until nonnal operations can resume. EIDL 

assistance is available only to small businesses determined unable to obtain credit elsewhere. The SBA 

can provide up to $2 million to help meet financial obligations and operating expenses which could have 

been met had the disaster not occurred. An applicant's loan amount is based on the actual economic 

injury and the company's financial needs, regardless of whether the business suffered any property 

damage. Businesses may apply directly to the SBA for possible assistance. The SBA will send an 

inspector to estimate the cost of the damages damage once the loan application has been completed and 

returned. 

TIle pictures of homes and businesses affected by flooding and wind damage following Hurricane Irene 

and Tropical Stonn Lee painted a devastating picture in September 2011. In New York State alone, the 

SBA approved over $100 million in loans for citizens affected by the stonns. 

In May 2010, a landslide on US Highway 129 in the western part of North Carolina impeded traffic and 

prevented the day-to-day operations of business owners between North Carolina and Tennessee. The 

ElDL declaration made it possible for the businesses in the counties of Graham and the contiguous 

counties of Cherokee, Macon, and Swain to continue their trade and accessibility to the counties of Blount 

and Monroe in the State of Tennessee. 

While FEMA is often thought of as the primary agency for disaster assistance, there are many unique 

situations where SBA loans can be utilized in creative ways to assist citizens in need. During a federally 

declared disaster in 2008, an Arkansas couple was initially denied FEMA assistance. They were insured 

but the insurance was not enough to cover the repairs to the home, the husband's shop, and thousands of 

dollars' wOlth of tools and equipment. The couple contacted state officials who helped the family get in 

contact with SBA. They put her in contact with a caseworker in a DRC who assisted with the application 

process and any questions and or bumps they had along the way. TIle insurance payoff and SBA loan 

Page 3 of 6 
26 


jbell on DSK7SPTVN1PROD with Insert offset folio 64 here 76463A.004

were enough to start putting their home back together and once again provide an economic benefit to the 

community. 

SBA Role in Governor Declared Disaster Recovery 

While many SBA programs are aimed at supplementing FEMA assistance following a major disaster 

declaration, the Administration can continue to playa part in disasters that do not reach the highest 

declaration standard. In the event a joint damage assessment shows that the evaluation fell short of 

FEMA's requirements; an SBA Agency only declaration is pursued by the Governor. This can occur 

when at least 25 homes and or business have sustained 40 percent uninsured losses. 

A Governor's Declaration allows an affected citizen to be ciigible for benefits similar to those available 

by FEMA. This includes housing repair and/or replacement funds in addition to Other Needs Assistance 

which includes personal property, medical, and funeral. In any declared disaster, an SBA loan is the first 

step in the recovery process based on the infonnation provided when the survivor registers with SBA. At 

the close of the application intake period, SBA informs the State of the status of any loans and the award 

amounts of applicants who registered online or through the toll free number. The State in tum keeps SBA 

abreast ofthe State grant awards to SBA registrants. 

During a gubernatorial declaration, the SBA Disaster Loan Outreach Center (DLOC) acts as a DRC to 

ensure that the eligible applicants receive due process. Much like FEMA's fndividual Household 

Programs (IHP), the State awards up to $25,000 for Housing Assistance for repair andlor replacement and 

Other Needs Assistance including personal property, medical, and vehicle repairs. The qualif'ying home 

is inspected for veritied loss and estimates. Disaster assistance includes money or direct assistance to 

individuals, families, and businesses in an area whose property has been damaged or destroyed and whose 

losses are not covered by insurance. It is meant to help eligible citizens with critical expenses which 

cannot be covered in other ways. This assistance is not intended to restore damaged property to its 

condition before the disaster. 

SBA Outreach to Stakeholders 

Recovering from a disaster is usually a gradual process. Safety is a primary issue, as are mental and 

physical well-being. Knowing how to access available assistance makes the process faster and less 

stressful. SBA does a considerable amount of work in communities around the country, making personal 

Page 4 of 6 
27 


jbell on DSK7SPTVN1PROD with Insert offset folio 65 here 76463A.005

contacts with Chambers of Commerce, Congressional Offices, State and Local elected officials, SBA 

resource partners and SBA District and Regional officcs, business organizations and community groups. 

Town halls are just one example of the personal outreach done in many communities to make sure 

citizens are aware of the many disaster assistance options that may be available. 

SBA and State agency Public Infom1ation Officers (PIO) develop press releases announcing availability 

of disaster loans in the affected area. The County agrees to provide tree space to be used at a Disaster 

Loan Outreach Center (DLOC) to conduct application intake. The days and hours of operation are 

determined jointly. SBA and State IA employees conduct community relations and outreach activities to 

disseminate information about the Center's opening, the hours of operation, and applicant registration in 

the affected areas. 

Media outlets are also informed of the declaration and the process to help in the process of alerting the 

affected citizens to every opportunity to seek and receive assistance for their disaster recovery. SBA 

partners with the State during the intake process. A potential applicant signs-in upon arrival and is 

interviewed by SBA. They are asked to register with the State when they fail the income test, do not meet 

SBAs criteria, or when oilier unmet needs still exist even though all resources have been utilized. 

In testimony given by the Government Accountability Office (GAO) before this Committee back in 

November 20 11, William Shear referenced steps SBA continues to take to improve marketing and 

outreach efforts iliat inform stakeholders across ilie country. We look forward to continued dialogue with 

SBA and are encouraged by their increased attention to the needs of individuals and communities in 

disaster affected areas. 

Conclusion 

As a profession, emergency management stakeholders have focused a great deal on the partnerships 

existing at the State and local level which help us achieve a resilient and sustainable nation. FEMA 

Administrator Craig Fugate has stressed the importance of the "Whole of Community" and FEMA's 

position as a member of a much larger team in place to support the response and recovery to all-hazards. 

There is no doubt the SBA Oftlce of Disaster Assistance is a vital member of the emergency management 

team and we value their contributions to our communities. 

Page 5 of 6 
28 


jbell on DSK7SPTVN1PROD with Insert offset folio 66 here 76463A.006

Last year was a record-breaking year for di,saster expenditures, The continued challenge of protecting the 

nation from a variety of hazards within the reality of fiscal uncertainty elevates the importance of 

cooperation throughout the emergency management community, Leveraging resources from across the 

federal family is critical following a disaster and the communication and outreach by the essential 

agencies is just the first step to community recovery. Positive relationships between Federal, State, and 

local government stakeholders are the lynchpin to coordinated recovery efforts supporting resilient 

individuals, prosperous businesses, and thriving economies. 

Thank you for the opportunity to testilY today and your continued attention to disaster assistance matters 

under your purview. Your attention and leadership in this matter are greatly appreciated and NEMA 

remains a ready resource for the Committee as you tackle the tough issue of recovery from disasters. 

Page 6 of 6 
29 


jbell on DSK7SPTVN1PROD with Insert offset folio 67 here 76463A.007

My family, friends, and some of our employees were outside waiting for me to tell them the news, Alii 

could say was "It's bad, but we'll bounce back," but they had no idea. I pulled my father aside to warn 

him that we have a lot of work ahead of us if we want to stay in business, I could see defeat in his eyes, 

The business he had built from the ground up was wiped out just like that. 

The next day, we immediately ordered three 40-yard trash hoppers, a three-phase generator, power 

washers, brooms, etc, We spent tens of thousands of dollars to start the clean up process, We had to 

dry, gut, and clean both buildings, Almost everything was destroyed. 

At the exact same time, we also had to do damage control with our customers. We had to outsource all 

of our work to finish our pending orders, We set our customers up with other vendors, our competitors, 

until GT Fabrication could get back up on its feet. 

I entered disaster mode, We desperately needed financial help because we weren't conducting any 

business and draining the company's funds on the clean-up effort, I attended meetings at our local 

Chamber of Commerce. Here, I spoke to a Small Business Administration (SBA) disaster representative, 

who told me to quickly complete the application. As soon as I could fill out the documents, I brought 

the paperwork to the Wilkes-Barre SBA disaster site, They looked everything over and told me I was 

missing a couple of minor documents. I immediately brought the missing documents to the SBA disaster 

site. SBA reviewed my complete application, which included tax form 8821. The SBA official even 

complimented me on my thorough completion of the application. 

We went home to keep cleaning, We throwaway almost one million dollars of supplies, and 

demolished the inside lobby and office. After two to three weeks of this back-breaking cleaning, an SBA 

field inspector, Mr. James Heller visited GT Fabrication to assess the damages and take pictures. A few 

days after the inspector's visit, we received an SBA disaster assistance packet, which stating they wanted 

us to provide monthly sales figures for past three years. Additionally, SBA needed tax form 8821 which 

requires tax information from both GT Fabrications 2009-2010 business taxes and my father's 2009-

2010 personal taxes and financial statements. My father, who owns 100 percent of GT Fabrication, 

signed tax form 8821 along with the signature of GT Fabrication Incorporated and provided a schedule 

of liabilities for the second time, 

More than a month after filing our original application, we received an SBA request to complete tax 

form 8821, for the third time, to include both of my parents' signatures, GT Fabrication INC., signature 

and the same schedule of liabilities. This time we included a letter stating that we had completed this 

document three times already. 

Approximately seven days after we completed tax from 8821, for the third time, my mother Debbie 

Tighe received a phone call from an SBA official named Randi Anderson. Ms. Anderson told my mother 

that GT Fabrication's application was being withdrawn because we did not return the requested forms 

within the seven days. My mother tried to explain to Ms. Anderson that we received the forms four 

days after the letter was dated. She also explained that we returned the forms five days after receiving 

the documents, Additionally, she suggested that if it took four days for the SBA letter to arrive in 

Pittston, Pennsylvania, it would probably take four day for the letter to get back to Texas. Finally, I 
30 


jbell on DSK7SPTVN1PROD with Insert offset folio 68 here 76463A.008

couldn't believe that the SBA was counting a Sunday, when the postal service doesn't deliver mail, as 

our deadline. We felt that the time frame was unfair, but Ms. Anderson just said "that's the way it is." 

I couldn't believe that this is the way it is. When you're in disaster mode, working 15 hours a day, seven 

days a week, to save your family business, you don't have time to do all of this paperwork, especially 

after many of GT Fabrication's old records were destroyed by fifteen feet of water during the flood. 

Regardless, we provided the SBA with all of the information they needed as quickly as , could. We 

thought that maybe the SBA was trying to purposefully discourage us from applying for an SBA loan. 

Later, we received a phone call from the National Flood Insurance Program, stating that the SBA had 

contacted them requesting information about the types and amount of insurance coverage GT 

Fabrication has. Unfortunately, we had previously cancelled GT Fabrication's business interruption 

insurance because we knew, from four previous flood experiences, that our flood insurance would 

cancel out any business interruption insurance benefits. I was frustrated that SBA contacted my 

insurance company without telling me or getting my permission. 

Despite Ms. Anderson's decision to withdraw our application, we received another call from her. Her 

information showed that we only had $79,000 in damages. We tried to explain that our equipment 

alone was valued in excess of two million dollars, and we wanted to know where she was getting the 

$79,000 figure. However, she could not tell us. She requested a copy of what was destroyed and a 

copy of our flood insurance payout. 

We provided the SBA the exact same documents we provided the Federal Emergency Management 

Agency (FEMA), detailing all of the equipment we lost. She again asked for the monthly sales figures for 

the past three years to qualify for the Economic Injury Disaster Loan. We explained that we were not 

applying for the Economic Injury Disaster Loan, but a loan for purchasing equipment and machinery for 

our business. Ms. Anderson explained that the type of loan didn't matter; she still need the monthly 

sales numbers. I tried to explain that our business office and all of our records were destroyed by the 

flood. 

On November 25, for the fourth time, we received a letter requesting tax form 8821 and the monthly 

sales figures. I felt like we were pawns in some kind of game. We were going through all of this trouble 

and aggravation for a 6 percent loan. 

We had to find something else in the meantime. GT Fabrication still was not regular business and we 

had not yet received a SBA loan. The company bank account was running dry. 

Then, Pennyslvania State Senator John Yudichak, called to tell us about the Luzerne County Flood 

Recovery Loan Program. This is a $4 million low-interest loan program that has a borrowing limit of 

$100,000. The Program applies a 1 percent interest rate with no borrower's fee. This quick and easy 

loan saved GT Fabrications by providing us an infUSion of cash needed to get back on our feet. 

Today, GT Fabrication is back in business though we are only operating at 70 percent. I have been able 

to get almost two-thirds of my employees back to work. We need to return to 100 percent and grow 
31 


jbell on DSK7SPTVN1PROD with Insert offset folio 69 here 76463A.009

our business so that we can turn this economy around. Its small businesses like my families that will add 

jobs to the U.S. economy, but the U.S. government wouldn't help GT Fabrication. 

The City of Pittston has been very helpful, retaining Cowbell Consultants to help us try to relocate to 

larger facility that is a safe distance from the Susquehanna River. The County of Luzerne provided us 

the loan that saved our business, but the federal government failed. I hope that my story can shed 

some light on the problems that my family's small business faced working with federal government 

agencies. 
32 


jbell on DSK7SPTVN1PROD with Insert offset folio 70 here 76463A.010

Testimony of Howard Kunreuther 

James G. Dinan Professor of Decision Sciences and Public Policy 

and co-director of the Wharton Risk Management and Decision Processes Center 

The Wharton School, University of Pennsylvania 

before 

The Subcommittee on Economic Growth, Tax and Capital Access of 

the House Small Business Committee on 

"Oversight of the SBA's Disaster Assistance Program and Examining Changes Proposed 

by H.R. 3042 - The Disaster Loan Faimess Act of2011." 

February 16,2012 

Chairman Walsh, Ranking Member Schrader, and Members of the Subcommittee, I 

appreciate your inviting me to testity on "Oversight of the SBA's Disaster Assistance 

Program and Examining Changes Proposed by H.R. 3042 - The Disaster Loan Faimess 

Act of2011." My name is Howard Kunreuther and I am the James G. Dinan Professor of 

Decision Sciences and Public Policy at the Wharton School, University of Pennsylvania 

and co-director of the Wharton Risk Management and Decision Processes Center. The 

Wharton Risk Center was founded in 1984 and its mission is to examine altemative 

strategies for dealing with low-probability, high-consequence events (i.e. extreme events) 

based on an understanding of the decision processes of consumers, firms and public 

sector agencies. 

Since Hurricane Katrina, the Wharton Risk Center has focused on the roles of the 

public and private sectors in reducing losses from natural disasters and aiding the 

recovery process following a catastrophic flood, hurricane or earthquake. The Center 

studied the hurricane and flood risk extensively in a book At War with the Weather (MIT 

Press, 2009, paperback 2011). The Center has also produced a number of papers 

published in professional joumals most recently in Science and the National Academy of 

Sciences' joumal Issues in Science and Technology. Over the past several years my 

colleague Erwann Michel-Kerjan and I have interacted closely with Congressional staff 

on the future of the National Flood Insurance Program which will form the basis for 

much of my testimony today. I am submitting for the record the following two papers 

written with my colleague, Erwann Michel-Kerjan: 

Kunreuther, H. and E. Michel-Keljan (2011). "People Get Ready: Disaster 

Preparedness" Issues in Science and TechnologY September 

Michel-Ke~ian, E. and H. Kunreuther (2011). "Redcsigning Flood Insurance" 

Science 333(6041):408-409, July 22 
33 


jbell on DSK7SPTVN1PROD with Insert offset folio 71 here 76463A.011

Mr. Chairman and Ranking Member Schrader, thank you for inviting me to tell my story about the flood 

caused by Tropical Storm Lee. 

My name is Gino Tighe and I manage sales for our family business GT Fabrication Inc, a precision metal 

fabricating and powder business. My parents Gene and Debbie Tighe started the company more than 

twenty years ago, and my sister Tracy and I have joined the family operation. Our company has had its 

ups and downs. We have supplied large clients such as PRIDE Mobility and Golden Technologies. 

However, with competition from countries like China, we lost many of our main consumers. We had to 

adapt, so we widened our customer base to produce more products in new industries such as food and 

drug, material handling, trucking, military, packaging equipment, construction, architecture, foundry, 

parks and recreation, and even highway transportation. Our family business has survived many hurdles, 

but, most recently, a natural disaster threatened to close our doors. 

My story begins on September 7,2011 at 2:00 p.m. The National Oceanic and Atmospheric Association 

(NOAA) projected that the Susquehanna River would rise to 35 feet by 3:00 pm the next day, Thursday, 

September 8. Two and half hours later, on September 7, at 4:30pm, NOAA changed their prediction, 

bumping it up to 38 feet by 3:00 pm. 

On September 7, my family and I knew that our company would face heavy damages because our 

building is located about 100 yards from the Susquehanna River in Pittston, Pennsylvania. We knew that 

we couldn't move some of our equipment. We had six machines in excess of 25,000 pounds. So, we 

started moving the smaller equipment: materials, computers, etc. We worked through the night 

moving pallets and pallets of materials to our back building, which was built four feet higher because of 

past floods. We stored materials on pallet racking to try to keep them out of harm's way. 

After working through the night, by September 8th at 8:00 am, the water crept into our parking lot. By 

9:00 am, we had 12 inches of water in our downstairs building. We did all we could and exited the 

facility. Water levels were rising at break neck speeds. The river hadn't ever risen so quickly and we had 

survived four previous floods. With millions of dollars of equipment still left in the building. After 

paying $15,000 for flood insurance, we only could receive $500,000 in contents and $500,000 on 

building FEMA insurance. We knew we were in trouble. 

By the time the Susquehanna River crested at 1:00am on Saturday, September 9t", alii could see of GT 

Fabrication was the very top of our building. My family and I were devastated. Our 30 employees were 

devastated. We didn't know if our family business could survive this. The watermark on the GT 

Fabrication lower building was recorded at 15 feet. Our back building, which we raised 4 feet to serve as 

a precaution against future floods, had a watermark recorded at 9 feeL 

On September 10, almost two days after the flooding began; the water finally receded to twelve inches. 

I entered the building to see the damage. As soon as I got into the building my heart sank, the 

destruction and devastation that this flood caused was by far the worst it's ever been. I really couldn't 

believe what I was seeing. It looked like a bomb was off. The lobby and office were completely 

collapsed. 
34 


jbell on DSK7SPTVN1PROD with Insert offset folio 72 here 76463A.012

My testimony today will focus on the following three qucstions: 

I. Why is the proposed legislation to extend SBA disaster loans at 1 percent to cover 

both disaster losses and other outstanding debts likely to increase future losses 

from natural disasters? 

2. How can insurance coupled with other policy tools reduce future losses so that the 

SBA plays a secondary role in providing funds for disaster recovery? 

3. How can the National Flood Insurance Program be modified so as to set a tone as 

to ways that the private and public sector can work together to reduce losses from 

floods and other natural disasters? 

Evaluation of H.R. 3042-the Disaster Loan Fairness Act of2012 

The proposed legislation provides that in any major disaster declared under Section 401 

of the Stafford Act, the interest rates for any SBA loan programs will be I percent for 

eligible applicants in the disaster area, with or without credit available elsewhere. The 

provision appears to cover all SBA loans, not just loans for repairing or replacing losses 

from disasters. 

There are several points to note about this provision. It creates a moral hazard 

problem by encouraging people to locate their homes and business in hazard-prone areas 

while at the same time reducing their economic incentive to purchase insurance and 

invest in mitigation measures prior to a disaster. These residcnts now know that they will 

be bailed out should they suffer losses from the next flood or hurricane, so therefore have 

much less incentive to take protective actions. 

The proposed program has the potential of creating a situation in which 

homeowners and businesses in hazard-prone areas are financially better off after a 

disaster than they were before the event occurred, by being able to obtain a 1 percent loan 

to cover their uninsured losses as well as existing debt financed by SBA loans. A 

hypothetical but illuminating example illustrates this point. Suppose an uninsured 

business has an existing 20-year $300,000 SBA loan at a 5 percent annual interest rate 

and then suffers a loss of $100,000 to its property and contents from a disaster. Prior to 

the disaster, the business's annual payment for its SBA loan is $23,759. Under the 

proposed legislation, the SBA would provide this business with a $400,000 loan at an 

annual rate of 1 percent to cover its damages and existing SBA loans. The total monthly 

payment for this loan would be $22,075, which amounts to $1,684 less per year than what 

it is currently paying. 

Role of Insurance and Other Policy Tools to Reduce Future Losses 

Rather than broadening the SBA loan provision in the way the current legislation is 

proposing, it is more important to design programs that reduce future disaster losses. 

Insurance can playa central role in this regard by doing three things. First, if 

priced correctly, insurance provides a signal of the risk individuals and firms face in their 

current location. Second, insurance can encourage property owners in hazard-prone areas 

2 
35 


jbell on DSK7SPTVN1PROD with Insert offset folio 73 here 76463A.013

to invest in mitigation measures by providing them with premium reductions to reflect 

the expected reduction in losses from future disasters. Third, insurance supports 

economic resiliency: following a disaster, insured individuals and firms can make a claim 

to obtain funds to help pay for the loss caused by the catastrophe rather than being forced 

to rely on their own resources or federal disaster assistance. 

For insurance to play this role in combination with other programs involving the 

public and private sectors, it is important that the following two guiding principles1 be 

adhered to: 

Principle 1: Premiums should reflect risk. Insurance premiums should be based on risk 

in order to provide signals to individuals about the hazards they face and to encourage 

them to engage in cost-effective mitigation measures that reduce their vulnerability to 

catastrophes. Risk-based premiums should also reflect the cost of capital that insurers 

must integrate into their pricing in order to meet solvency requirement from rating 

agencies and insurance regulators, and to also assure adequate return to their investors. 

Risk-based premiums will provide a clear signal of likely damage to those 

currently residing in hazard-prone areas as well as those considering locating there. Riskbased premiums also enable insurers to provide discounts to homeowners and businesses 

that invest in cost-effective mitigation measures. If insurance premiums are not riskbased, insurers are unlikely to offer any premium discounts for those who adopt 

mitigation measures. In fact, they often prefer not to offer coverage to these property 

owners because it will be a losing proposition in the long run. 

Principle 2: Equity and affordability issues should be addressed. This principle reflects 

a concern for some residents in high-hazard areas who will be faced with large premium 

increases based on Principle I. However, any special treatment given to homeowners 

currently residing in hazard-prone areas (e.g., low-income uninsured or inadequately 

insured homeowners) should be funded through an insurance voucher, not through 

premium subsidies (as is often done today). 

The provision of insurance vouchers applies only to needy individuals who 

currently reside in a hazard-prone area. Those deciding to move into the area in the future 

should be charged premiums that reflect the risk. Providing individuals with financial 

assistance to purchase insurance would serve to encourage development in hazard-prone 

areas and exacerbate the potential for catastrophic losses from future disasters. 

I Kunreuther, H., and E. Michel-Kerjun (20 II), At War with the Wealher: .'.4anaging Large-Scale Risks in a 

New Fro arCalaslraphes. MIT Press. Paperback edition. 

3 
36 


jbell on DSK7SPTVN1PROD with Insert offset folio 74 here 76463A.014

Modify the National Flood Insurance Program (NFIP) 

The tendency of individuals to invest only in measures that payoff quickly, coupled with 

budgetary constraints, deters those residing in hazard-prone areas from investing in 

protective measures. To address this issue in the context of flood damage, my colleague 

Erwann Michel Kerjan and I have recommended that the NFIP be modified in the 

following five ways when it comes up for rciorm between now and May 30, 2012.2 

1. Multi-year insurance tied to property. When individuals or businesses purchase a 

piece of property, they should have an opportunity to purchase a multi-year insurance 

contract (for example, 5 years) at a fixed annual premium that reflects the risk. At the end 

of the multi-year contract, the premium could be revised to reflect changes in the risk 

(higher or lower). 

2. Insurance vouchers for tho~'e needing special treatment. We recommend a new 

program to address issues of equity and affordability to complement the strategy of riskbased premiums for all. Property owners currently residing in a risky area who require 

special treatment (such as low-income residents, and those whose premiums increase 

significantly as a result of updated more accurate flood maps) would receive an insurance 

voucher from the Federal Emergency Management Agency (FEMA) or the U.S. 

Department of Housing and Urban Development (HUD) as part of its budget or through 

special appropriation. 

This program would be similar to the Supplemental Nutrition Assistance Program 

("food stamps") and the Low Income Home Energy Assistance Program, which in the 

United States enables millions of low-income households to meet their food and home 

heating needs every year. The size of the insurance voucher will be determined through a 

means-test in much the way that distribution of food stamps is determined today. 

3. Required insurance. Sincc individuals tend to treat insurance as an "investment" 

(where they expect some return) rather than as protective mechanism, and in light of the 

large number of individuals who do not have coverage today, we sec wisdom in making 

insurance coverage a requirement for all property located in hazard-prone areas. 

Currently, it is a requirement only for homeowners with a federally-backed mortgage, but 

even in these instances, several years after purchasing a policy, many homeowners let 

their flood insurance lapse, and the banks never forced them to renew their coverage. 

Data from the Department of Housing and Urban Development (HUD) reveal that 

41 percent of damaged homes from the 2005 hurricanes were uninsured or underinsured. 

Of the 60,196 owner-occupied homes with severe wind damage from these hurricanes, 

23,000 did not have insurance against wind loss.3 We recently undeliook an analysis of 

2Kunreuther. H. and E. Michcl-Kerjan (2011). "Congressional Testimony A Proposal to Make America 

More Resilient to Natural Disasters and Reduce the Federal Government's Financial Liability" Hearing 

before the Senate Appropriations Subcommittee on Financial Services and General Government on: 

"Federal Disaster Assistance Budgeting: Are We Weather-ReadyT July 28. 

3 U.S. Government Accountability Office (GAO) (2007). Natuml Disasters: Public Policy Options fiw 

Changing the Fedeml Role in Nalum/ Calastrophe Insurance, Washington, DC: GAO, November. GAO-08-7. 

4 
37 


jbell on DSK7SPTVN1PROD with Insert offset folio 75 here 76463A.015

all new flood insurance policies issued by the National Flood Insurance Program (NFIP) 

over the period January 1,2001 to 31 December 2009 and found that the median length 

of time bcfore these new policies lapsed is three to four years. On average, only 74 

percent of new policies wcre still in force one year after they were purchased; after five 

years, only 36 perccnt were still in place. The lapse rate is still high after correcting for 

migration and does not vary much across flood zones.4 

4. Multi-year loans for mitigation. To encourage adoption of loss reduction measures, 

state or federal government or commercial banks could issue property improvement loans 

so as to spread the costs over time. For instance, a property owner may be reluctant to 

incur an upfront cost of $1 ,500 for making his home more disaster resistant but would be 

willing to pay the $145 annual cost of a 20-year loan (calculated here at a high 10% 

annual interest rate). Those who undertake these mitigation measures would receive a 

premium reduction to reflect lower losses even if one has an insurance voucher. In many 

cases, the reduction in the insurance premium will be greater than the loan cost, making 

this investment financially attractive. 

5. Well-enforced building codes. Given the reluctance of property owners to invest in 

mitigation measures voluntarily, building codes should be designed to reduce future 

disaster losses and be well-enforced through third party inspections or audits. 

Lessons from an Energy Efficiency Program 

The Property Assessed Clean Energy (PACE) program5that has been adopted by 27 states 

for promoting energy efficiency has the following features that can provide insights into 

designing the voucher program as discussed above. 

1. Multi-year financing. Interested property owners opt-in to receive financing for 

improvements that is repaid through an assessment on their property taxes for up to 20 

years. PACE financing spreads the cost of energy improvements over the expected life 

of these measures and allows for the repayment obligation to transfer automatically to the 

next property owner if the property is sold. 

2. Annual savings. Because basic energy efficiency measures can cut energy costs by up 

to 35 percent, annual energy savings will typically exceed the cost of PACE assessments. 

Ine upfront cost barrier actually turns into improved cash flow for owners in much the 

same way that the reduction of annual insurance premiums could exceed the annual loan 

costs. 

3. Transfer to new property owner. Like all property-based assessments, PACE assessments 

stay with a property upon sale, until they are fully repaid by future owners who continue 

to benefit from the improvement measures. 

4 Michel-Kerjan, E. S. Lemoyne de Forges and H. Kunreuther (in press). "Policy Tenure under the National 

Flood Insurance Program:· Risk Analvsis: An InlernalionalJournai. 

5 Pilot PACE Financing Programs. http://wwwl.eere.energv.gov/wip/pace.html 

5 
38 


jbell on DSK7SPTVN1PROD with Insert offset folio 76 here 76463A.016

We Need to Act Now 

Our country has entcred a new era of catastrophes. Our exposure is growing and the 

damage from disasters over the next few years is likely to be more devastating than what 

we have experienced during this past decade. When the next catastrophe occurs, the 

federal government will very likely come to the rescue, again. If the public sector's 

response to recent disasters is an indicator of their future behavior, new spending records 

will be set with respect to federal assistance. 

In order to avoid this outcome we recommend that the appropriate government 

bodies undertake an economic analysis of the benefits and costs of the proposed multiyear insurance-risk reduction loan program in relation to the current system of private 

and public insurance and federal disaster assistance. 

6 
39 


jbell on DSK7SPTVN1PROD with Insert offset folio 77 here 76463A.017

~~ • 

214 Massachusetts Ave. N.E. Washington, D.C 20002 (202) 546-4400 www.heritage.org 

CONGRESSIONAL TESTIMONY 

Statement of 

David B. Muhlhausen, Ph.D. 

Researeh Fellow in Empirical Policy Analysis 

Center for Data Analysis 

The Heritage Foundation 

Before the Committee on Small Business, Subcommittee on Economie Growth, Tax 

and Capital Access of the United States House of Representatives 

Delivered February 16,2012 

"The Disaster Loan Fairness Act of 2011: Neither Fair nor Effective" 

Introduction 

My name is David Muhlhausen. I am Research Fellow in Empirical Policy Analysis in 

the Center for Data Analysis at The Heritage Foundation. I thank Chairman Joe Walsh, 

Ranking Member Kurt Schrader, and the rest of the committee for the opportunity to 

testifY today on the Disaster Loan Fairness Act of2011 (H.R. 3042). The views I express 

in this testimony are my own and should not be construed as representing any official 

position of The Heritage Foundation. 

After the President declares a major disa~ter, the Disaster Loan Fairness Act of2011 

(H.R. 3042) would set the interest rates for the Small Business Administration's (SBA) 

Disaster Loan Program (DLP), including home disaster loans, business physical disaster 

loans, and economic injury disaster loans, at I percent for eligible applicants in declared 

disaster areas, regardless of whether applicants have access to credit. Under current law, 

for DLP applicants who are unable to obtain credit elsewhere, the interest rate shall not 

exceed 4 percent. For those applicants who have access to credit elsewhere, the interest 

rate shall not exceed 8 percent. 

In fiscal year (FY) 2010, the SBA approved $574 million in disaster loans for 15,356 

applicants. l The doJIar amount of disaster loans increased to $739 million for 13,643 

applicants in FY 2011. 2 As of January 31, 2007, according to the Government 

Accountability Office, the SBA approved over $5 billion in disaster loans for 
40 


jbell on DSK7SPTVN1PROD with Insert offset folio 78 here 76463A.018

homeowners and renters affected by the hurricanes of2005.3 The interest rate subsidy of 

these 2005 hurricane SBA-backed loans cost almost $800 million to the federal 

government.4 If enacted in law, the Disaster Loan Fairness Act will increase costs of 

interest rate subsidies incurred by the federal government. 

UnfOItunately, as my testimony will illustrate, the Disaster Loan Fairness Act does not 

provide the necessary reform to our nation's disaster prevention and recovery programs. 

My testimony focuses on the following deficiencies of the Disaster Loan Fairness Act: 

• The Act fails to address the increasing nationalization of disaster responses; 

• The Act continues the federal government's out-of-control spending; and 

• The Act unnecessarily increases the moral hazard and other unintended 

consequences of providing disaster loans. 

Instead of considering legislation like the Disaster Loan Fairness Act, Congress should 

focus on reforms that make America more resilient to catastrophes and reduce recovery 

costs imposed on the federal taxpayer.5 

Increasing Nationalization of Disaster Responses 

By providing more generous benefits, the Disaster Loan Fairness Act does nothing to 

reduce the overreliance of state and local governments on the federal government for the 

provision of recovery assistance. Far too frequently, the federal government has been the 

primary source of recovery efforts for natural disasters that are inherently localized in 

small geographic areas and do not rise to the level that should require action by the 

fedcral government. 

Increasingly, Americans are becoming overly dependent on federal assistance after 

natural disasters occur. [n fact, thcre is evidence that with each new catastrophe, disaster 

victims have come to expect more federal relief than was previously offered.6 Further, 

disaster assistance appears to have become a political tool because the number of disaster 

declarations is significantly higher in election years compared to non-election years. 7 For 

example, one study of Federal Emergency Management Agency (FEMA) disaster 

payments not only found that states having higher political importance to presidents 

receive higher payments, but states having greater congressional representation on 

subcommittees with FEMA oversight responsibilities receive more in disaster payments 

than states with less representation. 8 

Since the 1996, the year President Clinton sought reelection, the number of disaster 

declarations issued by FEMA dramatically increased. 9 Chart 1 demonstrates this trend. 

As my Heritage Foundation colleague Matt A. Mayer has previollsly showed, "the yearly 

average ofFEMA declarations tripled from 43 under President George H. W. Bush, to 89 

under President Clinton, to 130 under President George W. Bush.,,10 The record of the 

most declarations in a year was set by President Clinton in 1996 with 158 declarations. 

However, President Obama smashed this record with 242 declarations in 2011. Given 

that 2012 is a presidential election year, this record may not last long. 

2 
41 


jbell on DSK7SPTVN1PROD with Insert offset folio 79 here 76463A.019

FEMA Declarations, by Year and by Presidential Administration 

Eisenhower 

Kennedy 

Kennedyl}ohnson 

Johnson 

Nixon 

Nixon/Ford 

Ford 

Car(f::r 

Reagan 

GHw'&sh 

Clinton 

G.w'llush 

Obama 

Annual FEMA Declarations 

155 

'* Based on data through January 19,2012 H hgures are prorate<:! for Kennedy, Johnson. NIXon, and Ford AdministratIOns 

Note! Annual totals may not add up to pr~dent!a! tota!~ dunng the <,arne. M"!e period due 10 the january 20 mauguration date 

Source: fEMA Disaster Search databar.e, at tmrj/wwwJem()'ROviiemt7News/(fwJstf:fSeor(h.do!aatOfJ;;;;Re~t (january 20. 20 t 2). 

3 

Chal1: ! • WM 3466 if l;erlUlge.or; 
42 


jbell on DSK7SPTVN1PROD with Insert offset folio 80 here 76463A.020

Since 1953, there have been 3,367 disaster declarations.! 1 During the past 19 years, from 

Presidents Bush to Obama, presidential declarations number 2,213-66 percent of all 

declarations. 12 Essentially, this trend is the result of disaster responses that were once 

entirely local in nature and handled by state and local governments becoming 

"nationalized" and thus the responsibility of the federal government. 

This nationalization has led to an ever growing share of the total cost of natural disasters 

being dumped on an already strained federal budget. 13 According to my co-panelist, 

Professor Howard Kunreuther of the Wharton School's Risk Management and Decision 

Processes Center, the amount for aid provided by the federal government as a percentage 

of total damage caused by a major disaster is steadily increasing. 14 For example, federal 

aid comprised 50 percent of the total damage caused by Hurricane Katrina (2005).15 Just 

three years later, federal aid increased to 69 percent of total damage caused by Hurricane 

Ike (2008).16 

The Robert T. Stafford Disaster Relief and Emergency Assistance Act of 1998 (Stafford 

Act) established that for a disaster to be eligible for federal assistance, the disaster must 

be "of such severity and magnitude that effective response is beyond the capabilities of 

the State and the affected local governments and that Federal assistance is necessary."] 7 

Regardless of this apparent requirement, FEMA "has approved disaster declarations for 

many natural disasters that historically and factually were not beyond the capabilities of 

states and localities.,,]8 Returning to the original understanding of what necessitates the 

federal government's involvement does not mean that local natural disasters are not 

"catastrophic" for a particular community. Rather, "It simply means that most natural 

disasters occur within confined geographic areas and that states and localities can handle 

them without federal involvement.,,19 

The majority of states do not benefit from federal assistance, because only a minority of 

states receives the benefit ofFEMA disaster declarations.2o Thus, the majority of states 

send their disaster-response tax dollars to Washington, D.C., so FEMA can subsidize 

disaster response for the minority of states. 

Out-of-Control Spending 

On December 31, 2011, the gross debt racked up by the federal government reached 

$15.2 trillion-the legal limit as authorized by Congress.2

! In response, on January 12, 

2012, President Barack Obama formally notified Congress of his intent to raise the 

nation's debt ceiling by $1.2 trillion-from $15.2 to $16.4 trillion?2 

The Congressional Budget Office (CBO) recently reported that the federal budget for 

fiscal year (FY) 2012 will be nearly $1.1 trillion?3 "Measured as a share of gross 

domestic product (GDP)," the CEO reports, "that shortfall will be 7.0 percent, which is 

nearly 2 percentage points below the deficit recorded last year but still higher than any 

deficit between 1947 and 2008. ,,24 

4 
43 


jbell on DSK7SPTVN1PROD with Insert offset folio 81 here 76463A.021

For the end of FY 2012 on September 30, 2012, the federal government's gross debt is 

estimated to reach 104.8% of Gross Domestic Product or $16.4 trillion?5 $16.4 trillion is 

a staggering sum that is difficult for Americans to behold. If we did we would be truly 

frightened at the prospect of paying it off. How did we accumulate this massive debt? 

While the deficit and debt is driven largely by entitlement spending-Medicare, 

Medicaid, and Social Security-the Disaster Loan Fairness Act, and all the other new 

spending programs being advocated in Congress only move the nation closer to fiscal 

insolvency. While the cost of the Disaster Loan Fairness Act has not been fonnally 

estimated by the CBO, the annual cost of the legislation will greatly expand as the 

number of disaster declarations declared each year continues to rapidly grow. Further, the 

Disaster Loan Fairness Act does not provide any spending offsets. In addition, the Act 

does nothing to reduce the cost of future disaster recoveries. Given the increasing 

financial stress facing the federal government, reform should be focused on preventative 

measures that limit the costs of disaster recovery. 

Moral Hazard and Other Unintended Consequences 

Generous federal disaster relief creates a "moral hazard" by discouraging individuals and 

businesses from purchasing natural catastrophe insurance. Currently, SBA disaster loans 

are awarded regardless of whether the beneficiaries previously took steps to reduce their 

exposure to losses from natural disasters. Increasing the generosity ofSBA disaster loans 

will only provide greater encouragement for homeowners, renters, and businesses to 

avoid purchasing adequate disaster insurance because natural disasters are low 

probability events. The Disaster Loan Fairness Act does nothing to reduce the exposure 

of Americans to property losses and the need lor disaster assistance for future 

catastrophes. 

While SBA disaster loans are intended to help applieants return their property to the same 

condition as before the disaster, the unintended consequence of this requirement is that 

applicants are forced to rebuild in disaster-prone locations. For example, instead of 

relocating out of a town sitting in a major flood zone, applieants are required to rebuild in 

the exact same location. Thus, applicants are still located in a high-risk area. In many 

cases, the loans fail to offer a long-term solution. While this dilemma exists with or 

without passage of the Disaster Loan fairness Act, the legislation only increases the 

incentive to rebuild in high-risk areas. 

Conclusion 

The Disaster Loan Fairness Act is neither fair to the federal taxpayer nor an effective 

rcfonn of our nation's disaster prevention and reeovery policies. The Act fails to address 

the increasing nationalization of disaster responses, while continuing the federal 

government's out-of-control spending. Last, the Act unnecessarily increases the moral 

hazard and other unintended consequences of providing disaster loans. 

Instead of considering legislation like the Disaster Loan Fairness Aet, Congress should 

focus on reforms that make America more resilient to catastrophes and reduee reeovery 

costs imposcd on the federal taxpayer. 

5 
44 


jbell on DSK7SPTVN1PROD with Insert offset folio 82 here 76463A.022

******* 

The Heritage Foundation is a public policy, research, and educational organization 

recognized as exempt under section 501(c)(3) of the Internal Revenue Code. It is 

privately supported and receives no funds from any government at any level, nor does it 

perform any government or other contract work. 

The Heritage Foundation is the most broadly supported think tank in the United States. 

During 20 I 0, it had 710,000 individual, foundation, and corporate supporters 

representing every state in the U.S. Its 2010 income came from the following sources: 

Individuals 78% 

Foundations 17% 

Corporations 5% 

The top five corporate givers provided The Heritage Foundation with 2% of its 2010 

income. The Heritage Foundation's books are audited annually by the national accounting 

firm of McGladrey & Pullen. A list of major donors is available from The Heritage 

Foundation upon request. 

Members of The Heritage Foundation stafftestify as individuals discussing their own 

independent research. The views expressed are their own and do not reflect an 

institutional position for The Heritage Foundation or its board of trustees. 

'u.S. Small Business Administration, Fl' 2012 Congressional Budget Just(fication and Fl' 2010 Annual 

Performance Report, p. 56. at 

hllp:!/www.sha.gov/siles/default/jiles/FINAL%20FY%2020 12%20CBJ%20FY%2020 1 O%20A P R O,pdf 

(February 13,2012). 

2U.S. Small Business Administration. FY 2013 Congressional Budget Justification and FY 20ll Annual 

Pelji)rmance Heport, p. 53, at 

http://www.sba.gov/sites/defaultlfiles/fi les/FY%202013%20CBJ%20FY%2020 11 %20APR.pdf (February 

]3,2012). 

'U.S. Government Accountability Office. Nalural Disasters: Public Policy Optionsji)r Changing the 

Federal Role in Natural (atastrophe Insurance. November 2007. p. 16, at 

http://www.gao.goV!(Jssets/270!269745,pdJ(February 13, 2012). 

4Ibid. 

sFor an example of proposed reforms, see Matt Mayer, David John, and James Jay Carafano, "Principles 

for Reform of Catastrophic Natural Disaster Insurance," Heritage Foundation Backgrounder No. 2256, 

April 8, 2009, at http://www.hel'itage.org/researchlreports/2009/04/principfes~for-I'eji)rm-()r-catastruphicnatural-disaster-insurance. 

6Erwann Michel-Kerjan and Jacqueline Volkman-Wise, "The Risk of Ever-growing Disaster Relief 

Expectations," Risk Management and Decision Processes Center, The Wharton School, University of 

Pennsylvania, Working Paper 32011-09, July 2011, at htlp://opim.whal'lon.upenn.edu/riskilibrary/W1'2011-

09ReliefExpectalions,pd{(February 13, 2011); Michele L. Landis. "Fate, Responsibility, and 'Natural' 

Disaster Relief: Narrating the American Welfare State," Law & Society Review, Vol. 33, No.2 (1999). pp. 

257-318: and Michele 1,. Landis, "Let Me Next Time Be Tried By Fire: Disaster Relief and the Origins of 

the American Welfare State 1789-1874," Northwestern UniverSity Law Review, Vol. 92, No.3 (1998). pp. 

967-1034. 

6 
45 


jbell on DSK7SPTVN1PROD with Insert offset folio 83 here 76463A.023

'Thomas R. Garrett and Russell S. Sobel. "The Political Economy of FEMA Disaster Payments," Economic 

Inquiry, Vol. 41, No.3 (2003), pp. 496-509, and Erwann Michel-Kerjan, "Catastrophe Economics: The 

U.S. National Flood Insurance Program," Journal o(Economic Perspectives, Vol. 24, No.4 (2010), pp. 

165-186. 

'Garret and Sobel, 'The Political Economy of FEMA Disaster Payments." 

9The data presented in Chart I are based on Matt A. Mayer, "Congress Should Limit the Presidential Abuse 

ofFEMA," Heritage Foundation WebMemo No. 3466, January 24,2012, at . 

http://www.heritage.org/researchlreporls!2012101icongress-should-limit-the-presidential-abuse-o(-fema. 

IOMatt Mayer, "States: Stop Subsidizing FEMA Waste and Manage Your Own Local Disaster." Heritage 

Foundation Backgrounder No. 2323. September 29,2009, p. I. at 

http://www.heritage.org/re.l'earchlreports/2009109I.1'tate.l'-.I't()p-subsidizing~(ema-waste-and-manage-yourown-local-disasters. 

II Mayer, "Congress Should Limit the Presidential Abuse of FEMA." p. 3. 

IlIbid. 

I3Some may argue that the reason for the growth of the federal government's role in disaster recovery is a 

result of the states not being able to afford financing their own disaster recoveries. The federal government 

is facing a severe financial crisis and can no longer bailout the states that avoid their responsibilities. Public 

safcty is a priority of state and local governmcnts. If state and local governments are not willing to adopt 

policies to mitigate the effects of natural disasters and recover from these incidents afterward, then they are 

not fulfilling their obligations to their citizens. 

"Howard Kunreuther and Erwann Michel.Kerjan, "People Get Ready: Disaster Preparedness," Issues in 

,)'cience and Technology, Vol. 28. No. ] (201 I), pp. 1--7, at 

hl/p:l/opim. wharlon.upenn.edu/riskl/ibrary,:J201 JIST PeopleGetReady.pdf(February 13, 201 I). 

15 Ibid., p. 3 

16Ihid. 

1742 U.S. Code § 5191(a). 

18Matt A. Mayer, David C. John, and James Jay Carafano, "Principles for Reform of Catastrophic Natural 

Disaster Insurance," Heritage Foundation Backgrounder No. 2256, April 8. 2009, p. 3, at 

http://www.heritage.org/researchireports/2009104lprinciples.jiJr-rejiJrm-Ci(-catastrophic-natural-disaslerinsurance. 

19Ibid. 

2"Mayer, "States: Stop Subsidizing FEMA Waste and Manage Your Own Local Disaster." p. 3. 

"U.S. Department of the Treasury, Bureau of the Public Debt, "Monthly Statement of the Public Debt of 

the United States. December 31. 2011," Table I-Summary of Treasury Securities Outstanding. December 

31. 20 I \, at http://www.lreasurydirect.gov/govt/reports/pd1m.l'pd/20!!lopdsI22011.pd[(February \3, 

2012). 

"David Nakamura, "Obama Asks Congress for Debt Limit Hike,",The Washington Post. 44 (blog). January 

12. 2012, at hup:I/.www.washingtonpost.com/biogsl44/post/ajier-delay-obama-asks-congress~fi)r-debtlimit-hike;20J 2/0liJ 21glQAA3ADuP ~ b/og.hlmi (February 13, 2012). 

"Congressional Budget Office, The Budget and EConomic Outlook: Fiscal l'elJrN 2012 to 2022, January 

2012, p. x, at http://www.cho.govljipdocs/126xx/docJ2699/0J-31-20I2 Outlook.pd[(February \3, 2012). 

24Jbid. 

250ffice of Management and Budget, Historical Tah/es, Budget of the United States, Fiscal Year 2012 

(Washington, D.C.: U.S. Government Printing Office. 2010), Table 7.1~-·-Federal Debt at the End of Year: 

1940-2017,pp. 139~140,at 

http://www. whitehouse.govlsitesldejilultljiles/omblbudget!fy20l3Iassetslhistpdf(February 13, 2012). 

7 
46 


jbell on DSK7SPTVN1PROD with Insert offset folio 84 here 76463A.024

408 

DISASTER MANAGEMENT 

Redesigning Flood Insurance Erwann Michel~Kerian* and Howard Kunreuther 

Emergency Management Agency 

(FEMA), which is responsible forthe NFIP, is 

reanalyzing the program. We argue that a new 

strategy for managing floods can increase 

personal responsibility, decrease risk, and 

lower govemment exposure. Improved sci~ 

entitle knowledge from a range of disciplines 

will be needed to price the proposed finaJ1~ 

cial products appropriately. Jf successful 

in the United States, the approach could be 

explored by other countries. 

Insuring Flood Risk 

Floods are one of the most destructive haz· 

(12). The 

erty today (mainly in coastal over 

three times what was covered 20 years ago 

(13,14). 

NFIP premiums are established by the 

federal government A homeowner can purchase building and contents coverage up to 

$250,000 and $100,000, respectively, but 

only if the community that he or she lives in 

participates in the program. This requires that 

a flood-risk map has been completed and that 

the appropriate public body has adopted adequate floodplain management regulations. 

Homeowners in high~risk areas (defined as 

"lOO-year" or "base" levels, expected to be 

flooded at least once every 100 

required to purchase coverage 

federally backed mortgage, 

Limits of the NFIP as Currently Designed 

The absence of a large reserve has forced the 

NFfP into debt, as it has borrowed over $19 

billion from the US. Treasury to cover losses 

caused by thc 2005 and 2008 hurricanes and 

floods (13). Subsidized insurance is part of 

the problem: Buildings that are near or below 

base flood elevation but that were in place 

before community flood-risk maps were 

completed are still charged rates that are con~ 

siderably below the actuarial risk. This was 

Improved knowledge from a range of 

disciplines wit! be needed to price the 

much~needed finandal products appropriately. 

done originally to maintain property values. 

About one~fourth of insured properties are 

still subsidized that way (15,16). And even 

properties constructed after flood mapping 

are charged premiums based only on an aver~ 

age histOlicalloss year (/7). 

The NFIP has not been able to enroll and 

retain many homeowners exposed to flood 

risk Recent studies show that insurance pen~ 

cttation in flood-prone areas remains only at 

about 50% (18, 19). This lack of coverage is 

likely to increase the need for disaster relief 

after major floods. This situation is not specific to the United States. In Germany, flood 

insurance penetration is only 10% for single~ 

family homes (20). After the major 2002 Elbe 

floods, the Getman govemment provided the 

largest amount of public funds ever paid in 

the country's history to compensate uninsured flood victims. In China, only 1 to 2% 

of the $50 billion losses of last year's floods 

were insured (1/). 

Do a large proportion of homeowners 

never buy coverage, or do many who once 

purchased insurance let their policies lapse? 

To answer this question, we analyzed all new 

policies issued by the NFIP over the period 

1 January 2001 to 31 December 2009 (n "'" 

8.9 million) (21). The median length of time 

before these new policies lapsed is 3 to 4 

years. On average, only 74% of new policies 

were still in force I year after they were purchased; after 5 years, only 36% were still in 

place. The lapse rate is high even after correcting for migration and does not vary much 

across flood zones (21). 

22 JULY 2011 VOl333 SCIENCE www.sclenceroag.org 

PubH$~dby MAS 
47 


jbell on DSK7SPTVN1PROD with Insert offset folio 85 here 76463A.025

ISStJIS National Academy of Sciences 

National Academy of Engineering 

Reprinted from ISSUES IN SCIENCE AND 

TECHNOLOGY, Volume XXVIII, Number L 

2011 © The University of Texas at Dallas 

Institute of Medicine 

IN SCIENCE AND TECHNOLOGY The University of Texas at Dallas 

HOWARD KUNREUTHER 

ERWANN MICHEl-KERJAN 

People Get Ready 

Disaster Preparedness 

Natural catastrophes are becoming more common and more expensive, 

but human and financial losses can be greatly reduced 

through incentives to purchase insurance and install protective measures. 

I

n recent years, we have witnessed a dramatic in~ 

crease in the economic cost and human impact 

from hurricanes, earthquakes, floods, and other 

natural disasters worldwide. Economic losses from 

these catastrophic events increased from $528 billion (1981-1990) to more than $1.2 trillion over 

the period 2001-2010. 

Although we are only halfway through 2011, an exceptional number of very severe natural catastrophes, notably 

the March 2011 Japan earthquake and tsunami, will make 

2011 a record year for economic losses. In the United States, 

the southern and midwestern states were hit by an extremely 

severe series of tornadoes in April and May, and at about 

the same time, heavy snowmelt, saturated soils, and over 20 

inches of rain in a month led to the worst flooding of the 

lower Mississippi River since 1927. Hurricane Irene in August caused significant flooding in the northeast and is responsible for at least 46 deaths in the United States. Global 

reinsurance broker Aon Benfield reports that U.S. losses 

from [rene could reach as high as $6.6 billion; Caribbean 

losses from Irene are estimated at nearly $1.5 billion. 

Given the increasing losses from natural disasters in recent years, it is surprising how few property owners in hazard-prone areas have purchased adequate disaster insurance. For example, although it is well known that California 

is highly exposed to seismic risk, 90% of Californians do 

not have earthquake insurance today. This is also true for 

floods. After the flood in August 1998 that damaged property in northern Vermont, the Federal Emergency Management Agency (FEMA) found that 84% of the homeowners 

in flood-prone areas did not have insurance, even though 

45% of these individuals were required to purchase this coverage because they had a federally backed mortgage. [n the 

Louisiana parishes affected by Hurricane Katrina in 2005, the 

percentage of homeowners with flood insurance ranged 

from 57.7% in St. Bernard Parish to 7.3% in Tangipahoa 

when the hurricane hit. Only 40% of the residents in Orleans Parish had flood insurance. 

FAll 2011 
48 


jbell on DSK7SPTVN1PROD with Insert offset folio 86 here 76463A.026

Similarly, relatively few homeowners invest in loss~reductian measures. Even after the series of devastating hurricanes that hit the Gulf Coast states in 2004 and 2005, a 

May 2006 survey of 1,100 adults living in areas subject to 

these storms revealed that 83% of the respondents had taken 

no steps to fortify their home and 68% had no hurricane 

survival kit. 

For reasons we will explain in this article, many homeowners are reluctant to undertake mitigation measures for 

reducing losses from future disasters. This lack of resiliency 

has made the United States not only very vulnerable to future large-scale disasters but also highly exposed financially. 

Given the current level of government financial stress, it is 

natural to wonder who will pay to repair the damage caused 

by the next major hurricane, flood, or earthquake. 

To alleviate this problem, we propose a comprehensive 

program that creates an incentive structure that will encourage property owners in high ¥ risk areas to purchase insurance to protect themselves financially should they suffer 

losses from these events and to undertake measures to reduce 

TABLE 1 

property damage and the accompanying injuries and fatalities from future disasters. 

Why are losses increasing? 

Two principal socioeconomic factors directly influence the 

level of economic losses due to catastrophic events: exposed 

population and value at risk. The economic development 

of Florida highlights this point. Florida's population has increased significantly over the past 50 years: from 2.8 million inhabitants in 1950to 6.8 million in 1970, 13 million in 

1990, and 18.8 million in 2010. A significant portion of that 

population lives in the high-hazard areas along the coast. 

Increased population and development in Florida and 

other hurricane-prone regions means an increased likelihood of severe economic and insured losses unless cost-effective mitigation measures are implemented. Due to new 

construction, the damage from Hurricane Andrew, which hit 

Miami in 1992, would have been more than twice as great if 

it had occurred in 2005. The hurricane that hit Mianli in 

1926 would have been almost twice as costly as Hurricane 

15 most costly catastrophe insurance losses, 1970-2010 (in 2011 U.S. dollars) 

2 ISSUES IN SCIENCE AND TECHNDLOGY 
49 


jbell on DSK7SPTVN1PROD with Insert offset folio 87 here 76463A.027

Katrina had it occurred in 2005, and the Galveston hurricane 

of 1900 would have had total direct economic costs as high 

as those from Katrina. This means that independent of any 

possible change in weather patterns, we are very likely to 

see even more devastating disasters in the coming years because of the growth in property values in risk-prone areas. 

In addition, recent climate studies indicate that the United 

States should expect more extreme weather-related events in 

the future. 

Table 1 depicts the 15 most costly catastrophes for the 

insurance industry between 1970 and 2010. Many of these 

truly devastating events occurred in recent years. Moreover, 

two-thirds of them affected the United States. 

Increasing role of federal disaster assistance 

Not surprisingly, the disasters that occurred in now much 

more populated areas of the United States have led to higher 

1evels of insurance claim payments as well as a surge in the 

number of presidential disaster decIarations. Wind coverage 

is typically included in U.S. homeowners' insurance policies; protection from floods and earthquakes is not. 

The questions that need to be addressed directly by Congress, the White House, and other interested parties are: 

• Who will pay for these massive losses? 

• What actions need to be taken now to make the country more resilient when these disasters occur, as they certainlywill? 

In an article published this summer in Science about reforming the federally run National Flood Insurance Program (NFIP), we showed that the number of major disaster 

declarations increased from 252 over the period 1981-1990, 

to 476 (1991-2000), to 597 (2001-2010). In 2010 alone there 

were 81 such major disaster declarations. 

This more pronounced role of the federal government in 

assisting disaster victims can also be seen by examining several major disasters that occurred during the past 60 years 

as shown in Table 2. Each new massive government disaster 

relief program creates a precedent for the future. When a disaster strikes, there is an expectation by those in the affected 

area that government assistance is on the way. To gain politically from their actions, members of Congress are likely to 

support bills that authorize more aid than for past disasters. 

If residents of hazard-prone areas expect more federal relief 

after future disasters, they then have less economic incentive 

to reduce their own exposure andior purchase insurance, 

Reducing exposure to losses from disasters 

Today, thanks to developments in science and technology, we 

can more accurately estimate the risks that different commuDISASTER PREPAREDNESS 

nities and regions face from natural hazards. We can also 

identjfy mitigation measures that should be undertaken to 

reduce losses, injuries, and deaths from future disasters, and 

can specify regions where property should be insured. Yet 

many residents in hazard-prone areas are still unprotected 

against earthquakes. floods. hurricanes, and tornados. 

We address the following question: How can we provide 

short-term incentives for those living in high-risk areas to 

invest in mitigation measures and purchase insurance? 

We first focus on why many residents in hazard-prone 

areas do not protect themselves against disasters (a behavioral perspective), We then propose a course of action that 

overcomes these challenges (a policy perspective). SpecificaUy, we believe that multiyear disaster insurance contracts 

tied to the property and combined with loans to encourage 

investment in risk-reduction measures will lead individuals in harm's way to invest in protection and therefore be in 

a much better financial position to recover on their own after the next disaster. The proposed program should thus reduce the need for disaster assistance and be a win-win situation for all the relevant stakeholders as compared to the 

status quo. 

Empirical evidence from psychology and behavioral 

economics reveals that many decisionmakers ignore the potential consequences oflarge-scale disasters for the following reasons: 

Misperceptions of the risk. We often underestimate the 

likelihood of nahu·a1 disasters by treating them as below our 

threshold level of concern. For many people, a 50-year or 

25-year storm is simply not worth thinking about. Because 

they do not perceive a plausible risk, they have no interest 

in undertaking protective actions such as purchasing insurTABLE 2 

Examples of federal aid as percentage 

of total disaster losses 

Source: Michel-Kerjan andVofkman-Wise (2011) 

FALL 2011 
50 


jbell on DSK7SPTVN1PROD with Insert offset folio 88 here 76463A.028

ance or investing in loss-reduction measures. 

Ambiguity of experts. Experts often differ in their estimates of the likelihood and consequences oflow-probability 

events because of limited historical data, scientific uncertainty, changing environmental conditions, and/or the use 

of different risk models. The variance in risk estimates leads 

to confusion by the general public, government entities, and 

businesses as to whether one needs to pay attention to this 

risk Often, decisionmakers simply use estimates from their 

favorite experts that provide justifications for their proposed 

actions. We recently conducted an empirical study of70 insurance companies and found that insurers are likely to charge 

higher premiums when faced with ambiguity than when the 

probability of a loss is wen specified. Furthermore, they tend 

to charge more when there is conflict among experts than 

when experts agree on the uncertainty associated with the 

risk of flood and hurricane hazards. 

Short horizons for valuing protective measures. Many 

households and small businesses project only a few years 

ahead (if not just months) when deciding whether to spend 

money on loss-reduction measures, such as well-anchored 

connections where the roof meets the walls and the walls 

meet the foundation to reduce hurricane damage. This myopic approach prevents homeowners from undertaking protective measures that can be justified from an economic perspective after 5 or 10 years. This short-sighted behavior can 

be partly explained by decisionmakers wanting to recoup 

their upfront costs in the next year or two even though they 

are aware that the benefits from investing in such measures 

will accrue over the life of the property. 

Procrastination. If given an option to postpone an investment for a month or a year, there will be a tendency to 

delay the outlay of funds. When viewed from a long time 

perspective the investment will always seem worthwhile, 

but when one approaches the designated date to undertake 

the work, a slight delay always seems more attractive. Moreover, the less certain one is about a correct course of action, 

the more likely one is to choose inaction. There is a tendency to favor the status quo. 

Mistakenly treating insurance as an investment. Individuals often do not buy insurance until after a disaster occurs and then cancel their policies several years later because they have not collected on their policy. They perceive 

insurance to be a bad investment by not appreciating the 

adage that the "best return on an insurance policy is no return at alI:' 

Failure to learn from past disasters. There is a tendency 

to discount past unpleasant experiences. Emotions run high 

when experiencing a catastrophic event or even viewing it 

4 ISSUES IN SCIENCE AND TECHNOLOGY 

on TV or the Internet. But those feelings fade rapidiy, making it difficult to recapture these concerns about the event as 

time passes. 

Mimetic blindness. Decisionmakers often imitate the 

behavior of others without analyzing whether the action 

is appropriate for them. By looking at what other firms in 

their industry do, or following the example of their friends 

and neighbors, decisionmakers can avoid having to think 

independently. 

In addition to these behavioral biases, there arc economically rational reasons why individuals and firms in hazardprone areas do not undertake risk-reduction measures voluntarily. Consider the hypothetical Safelee firm in an 

industry in which its competitors do not invest in loss-prevention measures. Safelee might understand that the investment can be justified when considering its ability to reduce 

the risks and consequences of a future disaster. But the firm 

might decide that it cannot now afford to be at a competitive disadvantage against others in the industry that do not 

invest in loss prevention. The behavior of many banks in 

the years preceding the financial crisis of 2008-2009 is illustrative of such a dynamic, 

Families considering whether to invest in disaster prevention may also find the outlay to be unattractive financially if they plan on moving in a few years and believe that 

potential buyers will not take into account the lower risk of 

a disaster loss when deciding how much they are willing to 

offer for the property. More generally, homeowners might 

have other rational reasons for not purchasing disaster coverage or investing in risk-reduction measures when this expense competes with immediate needs and living expenses 

within their limited budget. This aspect has more significance today given the current economic situation the country faces and the high level of unemployment. 

Reconciling the short and long term 

The above examples demonstrate that individuals and businesses focus on short-term incentives. Their reluctance to invest in loss-prevention measures can largely be explained 

by the upfront costs far exceeding the short-run benefits, 

even though the investment can be justified in the long run. 

Only after a catastrophe occurs do the decisionmakers express their regret at not undertaking the appropriate safety 

or protective measures. 

But it does not have to be that way. We need to reorient 

our thinking and actions so that future catastrophes are perceived as an issue that demands attention now. 

Knowing that myopia is a human tendency, we believe 

that leaders concerned with managing extreme events need 
51 


jbell on DSK7SPTVN1PROD with Insert offset folio 89 here 76463A.029

to recognize the importance of providing short-term economic incentives to encourage long-term planning. We offer the following two concepts that could change the abovementioned attitudes. 

Extend financial responsibility over a multiyear period. Decisionmakers need an economic incentive to undertake preventive measures today, knowing that their investments can be justified over the long term. The extended 

financial responsibility and reward could take the form of 

multiyear contracts, contingent or delayed bonuses, reduced taxes, or subsidies. 

The public sector should develop welt-enforced regulations and standards to create level playingfields. Government agencies and legislative bodies need to develop wellenforced regulations and standards, coupled with shortterm economic incentives to encourage individuals and the 

private sector to adopt cost -effective risk-management strategies. All firms in a given industry will then have good reasons to adopt sound risk-management practices without becoming less competitive in the short run. 

Insurance mechanisms can playa centra! role in encouraging more responsible behavior in three ways. First, if priced 

appropriately, insurance provides a signal of the risk that an 

individual or firm faces. Second, insurance can encourage 

property owners in hazard~prone areas to invest in mitigation measures by providing them with premium reductions 

to reflect the expected decrease in losses from fi.lture disasters. Third, insurance supports economic resiliency. After 

a disaster, insured individuals and firms can make a claim 

to obtain funds from their insurance company, rather than 

relying solely on federal relief, which comes at the expense 

of taxpayers. 

A multiyear approach 

We propose that insurance and other protective measures be 

tied to the property rather than the property owner as currently is the case. We recommend the following features of 

such a program: 

Required insurance. Since individuals tend to treat insurance as an investment rather than a protective mechanism, it may have to be a requirement for property located 

in hazard-prone areas, given the large number of individuals who do not have coverage today. 

Vouchers for those needing special treatment. We recommend a new disaster insurance voucher program that 

addresses issues of equity and affordability. This progranl 

would complement the strategy of risk-based premiums for 

all. Property owners currently residing in a risky area who 

require special treatment would receive a voucher from 

DISASTER PREPAREDNESS 

FEMA or the U.S. Department of Housing and Urban Development as part of its budget or through a special appropriation. This program would be similar to the Supplemental Nutrition Assistance Program (food stamps) and the Low 

Income Home Energy Assistance Program, which enable 

millions oflow-income households in the United States to 

meet their food and energy needs every year. The size of 

the voucher would be determined through a means test in 

much the same way that the distribution of food stamps is 

determined today. 

Multiyear insurance tied to property. Rather than the 

normal one-year insurance contract, individuals and husiness owners should have an opportunity to purchase a multiyear insurance contract (for example, five years) at a fixed 

annual premium that reflects the risk. At the end of the multiyear contract, the premium could be revised to reflect 

changes in the risk. 

Multiyear loans for mitigatio1l. To encourage adoption 

of loss-reduction measures, state or federal government or 

commercial banks could issue property improvement loans 

to spread the costs aver time. For instance, a property owner 

may be reluctant to incur an upfront cost of$I,500 to make 

his home more disaster-resistant but would be willing to pay 

the $145 annual cost of a 20-year loan (calculated here at a 

high 10% annual interest rate). In many cases, the reduction 

in the annual insurance premium due to reduced expected 

losses from future disasters for those property owners investing in mitigation measures will be greater than their annual 

loan costs, making this investment financially attractive. 

Welt-enforced buildi1lg codes. Given the reluctance of 

property owners to invest in mitigation measures voluntarily, building codes should be designed to reduce future disaster losses and be well enforced through third-party inspections or audits. 

Modifying the National Flood Insurance Program 

The National Flood Insurance Program (NFIP) was established in 1968 and covers more than $1.2 trillion in assets today. The federally run program is set to expire at the end of 

September 2011, and options for reforms are being discussed. We believe that revising the program offers an opportunity to take a positive step in implementing our abovementioned proposal. 

We recently undertook an analysis of all new flood insurance poliCies issued by the NFIP over the period january 

1,2001, to December 31, 2009. We found that the median 

length of time before these new policies lapsed was three to 

four years. On average, only 74% of new policies were still 

in force one year after they were purchased; after five years, 

FALL 2011 
52 


jbell on DSK7SPTVN1PROD with Insert offset folio 90 here 76463A.030

only 36% were still in force. The lapse rate is high even aftcr correcting for migration and does not vary much across 

different flood zones. We thus propose replacing standard 

one~year insurance policies with multiyear insurance contracts of 5 or 10 years attached to the property itself, not the 

individual. If the property is sold, then the multiyear flood 

insurance contract would be transferred to the new owner. 

Premiums for such multiyear insurance policies should 

accurately reflect risk and be lower for properties that have 

loss-reduction features. This would encourage owners to invest in cost~effective risk-reduction mea')ures, such as storm 

shutters to reduce hurricane damage, If financial institutions 

or the federal government provide home improvement loans 

to cover the upfront costs of these measures, the premium reduction earned by making the structure more resistant to 

damage is likely to exceed the annual payment on the loan. 

A bank would have a llnancial incentive to make such a 

horne improvement loan because it would have a lower risk 

of catastrophic loss to the property that could lead to a mortgage default. The NFlP would have lower claims payments 

due to the reduced damage from a major disaster. And the 

general public would be less likely to have large amounts of 

their tax dollars going for disaster relief, as was the case with 

the $89 billion paid in federal relief after the 2004 and 2005 

hurricane seasons and resulting floods. A win-win-win-win 

situation for all! 

A governmental program that has some similarities to 

our proposal is the Property Assessed Clean Energy (PACE) 

program, which has been adopted by 27 states for promoting energy efl1ciency. PACE provides short-term rewards 

to encourage investments in technologies that will have longterm beneHt. PACE provides long-term funding from private 

capital markets at low cost and needs no government subsidies or taxes. It increases property values by making heating and cooling less expensive, and it enjoys broad bipartisan support nationwide at state and local levels. Several features of the program that encourage property owners to take 

measures to make their home more energy-efficient mirror how property owners would want to make their homes 

more disaster-resistant: 

Multiyear financing. Interested property owners opt in to 

receive financing for improvements that is repaid through 

an assessment on their property taxes for up to 20 years. 

PACE financing spreads the cost of energy improvements 

such as weather sealing, energy-efl1cient boilers and cooling 

systems, and solar installations over the expected life of these 

measures and allows for the repayment obligation to transfer automatically to the next property owner if the property 

is sold. PACE solves two key barriers to increased adoption 

6 ISSUES IN SCIENCE AND TECHNOLOGY 

of energy efi1ciency and small-scale renewable energy: high 

upfront costs and fear that project costs won't be recovered 

before a future sale of the property. 

Annual savings. Because bask energy~effidcncy measures 

can cut energy costs by up to 35%, annual energy savings 

will typically exceed the cost ofpACE assessments. The upfront cost barrier actually turns into improved cash flow for 

owners in much the same way that the reduction of annual 

insurance premiums could exceed the annual loan costs. 

Transfer to new property owner. Like all property-based 

assessments, PACE assessments stay with a property after 

sale until they are fully repaid by future owners, who continue to benellt from the improvement measures. The multiyear insurance and mitigation contracts we propose would 

operate in the same way. 

Now is the time 

The nation has entered a new era of catastrophes. Exposure 

is growing, and the damage from disasters over the next few 

years is likely to exceed what we have experienced during this 

past decade. When the next catastrophe occurs, the federal 

government will very likely come to the rescue-again. If 

the public sector's response to recent disasters is an indicator of its future behavior, new records will be set with respect to federal assistance. 

In order to avoid this outcome, we recommend that the 

appropriate governmental bodies undertake an economic 

analysis of the benellts and costs of the proposed multiyear 

insurance and risk~reduction loan programs compared to 

the current system of private and public insurance and federal disaster assistance. 

We need bold leadership for developing long-term strategies for dealing with low-probability, high-consequence 

events. If Congress authorizes a study that examines these 

and other proposals when the NFIP comes up for renewal 

in September, it will be major step forward in setting a tone 

for addressing the challenges of managing catastrophic risks. 

The United States is at war against natural hazards and other 

extreme events. Winning this war will be possible only if 

puhlic policy integrates behavioral factors much more systematically into efforts to find sustainable solutions. As we 

have indicated, taking these steps will be dil1kult because of 

human reluctance to change. But we know what steps need 

to be taken. All it takes is the courage for us to act and the 

initiative to do so now. 

Recommended reading 

jeffrey Brown, ed., Public Insurance and Private Markets 

(Washington, DC: American Enterprise Institute, 2010). 
53 


jbell on DSK7SPTVN1PROD with Insert offset folio 91 here 76463A.031

Erwann Michel-Kerjan and Howard Kunreuther, "Redesigning Flood Insurance;' Science 333 (July 22, 2011): 

408-409. 

Howard Kunreuther and Erwann Michel-Kerjan, At War 

with the Weather: Managing Large-Scale Risks in a New 

Era of Catastrophes (Cambridge, MA: MIT Press, 2011). 

Howard Kunreuther and Erwann Michel-Kerjan, testimony 

before the U.S. Senate Committee on Appropriations: 

Financial Services and General Government Subcom~ 

mittee on July 28, 20ll, Federal Disaster Assistance 

Budgeting: "Are We Weather Ready?" http://appro 

priations.senate.govlhtfinancia1.cfm?method~hearings. 

view&id~ 158635 33-bd4 7 -4e77 -81 df-8acf693e73bO. 

Deborah Lucas, ed., Measuring arid Marlaging Federal Financial Risk (Chicago: University of Chicago Press, 

DISASTER PREPAREDNESS 

2010). 

National Research Council, Adapting to the Impacts of Climate Change (Washington, DC: National Academies 

Press, 2010). 

Howard Kunreuther (kunreuther@wharton.upenn.edu)isthe 

lames G. Dinan Professor and professor of decision sciences and 

business and public policy at the Wharton School and codirector of the Risk Management and Decision Processes Center. 

Rrwarm Michel-Ker)an (erwannmk@wharton.upenn.edu)is 

managing director of the Wharton Risk Management and 

Decision Processes Center and teaches value creation in the 

Wharton MBA program. They ure coauthors of At War with 

the Weather (MIT Press, available in paperback September 

2011; www.AtWarwithTheWeather.com). 

FALL 2011 7 

o