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23–729 PDF 2005

S. HRG. 108–861

NATIONAL FLOOD INSURANCE REPETITIVE LOSSES

HEARING

BEFORE THE

SUBCOMMITTEE ON ECONOMIC POLICY

OF THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

ON

CERTAIN MEASURES TO ADDRESS REPETITIVE LOSS PROPERTIES

MARCH 25, 2004

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.access.gpo.gov/senate/senate05sh.html

2

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN E. SUNUNU, New Hampshire

ELIZABETH DOLE, North Carolina

LINCOLN D. CHAFEE, Rhode Island

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

KATHLEEN L. CASEY, Staff Director and Counsel

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel

MARK A. CALABRIA, Senior Professional Staff

JENNIFER FOGEL-BUBLICK, Democratic Counsel

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

SUBCOMMITTEE ON ECONOMIC POLICY

JIM BUNNING, Kentucky, Chairman

CHARLES E. SCHUMER, New York, Ranking Member

ELIZABETH DOLE, North Carolina

RICHARD C. SHELBY, Alabama

ZELL MILLER, Georgia

STEVEN PATTERSON, Staff Director

CARMENCITA WHONDER, Democratic Legislative Assistant

(II)

(III)

CONTENTS

THURSDAY, MARCH 25, 2004

Page

Opening statement of Senator Bunning ................................................................ 1

Opening statements, comments, or prepared statements of:

Senator Sarbanes .............................................................................................. 2

Senator statement ..................................................................................... 34

Senator Hagel ................................................................................................... 3

Senator Dole ...................................................................................................... 4

Senator Corzine ................................................................................................ 34

WITNESSES

Barbara A. Mikulski, A U.S. Senator from the State of Maryland ..................... 6

Prepared statement .......................................................................................... 35

Doug Bereuter, A U.S. Representative in Congress from the State of

Nebraska ............................................................................................................... 9

Prepared statement .......................................................................................... 54

Earl Blumenauer, A U.S. Representative in Congress from the State of

Oregon ................................................................................................................... 12

Prepared statement .......................................................................................... 59

Anthony S. Lowe, Administrator, Federal Insurance and Director, Mitigation

Division, Federal Emergency Management Agency, U.S. Department of

Homeland Security ............................................................................................... 14

Prepared statement .......................................................................................... 60

William O. Jenkins, Jr., Director, Homeland Security and Justice Issues,

U.S. General Accounting Office .......................................................................... 16

Chad Berginnis, Chair, Association of State Floodplain Managers, Inc. ............ 26

Prepared statement .......................................................................................... 64

William Stiglitz, III, Independent Insurance Agent, Hyland, Block, Hyland

Insurance, Louisville, Kentucky on Behalf of the Independent Insurance

Agents of America and the National Association of Professional Insurance

Agents ................................................................................................................... 28

Prepared statement .......................................................................................... 71

Greg Kosse, Associate General Counsel, Kentucky Farm Bureau Mutual Insurance Company on Behalf of the Property Casualty Insurers Association

of America ............................................................................................................. 30

Prepared statement .......................................................................................... 75

Steven M. Feldmann, Director of Community Affairs, The Fischer Group,

Crestview Hills, Kentucky on Behalf of the National Association of Home

Builders ................................................................................................................. 31

Prepared statement .......................................................................................... 78

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter to Senator Hagel from Fredric H. Alley, Director of Development,

City of North Platte, Nebraska dated March 3, 2004 ....................................... 82

Letter to Senator Hagel from James D. Whitaker, Mayor, City of North

Platte, Nebraska dated March 3, 2004 ............................................................... 83

Letter to Senator Dole from Jeffrey K. Aiken dated November 26, 2003 ........... 84

Letter to Senator Dole from Beth Midgett, Property Manager, Midgett Realty

dated March 12, 2004 .......................................................................................... 88

Letter to Senator Dole from F. Douglas Salvia dated March 19, 2004 ............... 90

Letter to Committee from Christopher C. Swenson dated March 5, 2004 ......... 93

Statement of the National Association of REALTOR® dated March 25, 2004 ... 94

(1)

NATIONAL FLOOD INSURANCE

REPETITIVE LOSSES

THURSDAY, MARCH 25, 2004

U.S. SENATE, SUBCOMMITTEE ON ECONOMIC POLICY, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC.

The Subcommittee met at 10:03 a.m., in room SD–538, Dirksen

Senate Office Building, Senator Jim Bunning (Chairman of the

Subcommittee) presiding.

OPENING STATEMENT OF SENATOR JIM BUNNING

Senator BUNNING. I would like to welcome all of our witnesses

to the hearing of the Economic Policy Subcommittee. I am very

happy that we have a distinguished U.S. Senator and two of my

former House colleagues. Three of my fellow Kentuckians and three

very distinguished witnesses here for today.

For the last few years, we have continually passed one year reauthorizations of the National Flood Insurance Program. One year we

were not able to pass the reauthorization until after it had expired.

This situation has created an uneasiness in our housing markets.

Our House colleagues have gone a long way toward eliminating

that uneasiness. We hope to finish the job very soon.

We hope to hear from all of our witnesses on what they think

about the House Bill 253. Specifically, do you think any improvements can be made and what those improvements would be? I

think our House colleagues did a very good job and created a very

good product. But we can make it a little better. I think we can

tweak it here and there. I have been working with Chairman Shelby, Senator Sarbanes, Senator Hagel, Senator Dole, and other Senators to try to put a bill together, working off the House draft. I

know they have been in touch with the staff of the House Financial

Services Committee. I am hopeful that we will be introducing a bipartisan bill in the very near future. Hopefully, your testimony

today will help us see what we are missing with our bill so we can

continue to move this process forward.

It is very important that we both renew and reform this program. Renewal will bring stability but we should not waste the opportunity to reform. We have the opportunity to help a great deal

of homeowners by giving them mitigation assistance, which will

help save the taxpayers money by getting those homeowners off the

repetitive loss list. This bill can be a great win-win for our country.

For too long we have repeatedly paid out claims at subsidized

rates without helping homeowners shore up their properties to proVerDate 11-MAY-2000 16:55 Oct 06, 2005 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 23729.TXT SBANK4 PsN: SBANK4
2

tect against future floods. This bill creates a program to do just

that. If homeowners refuse the mitigation assistance, their rates

will increase to reflect the greater risk that they are to the program. I believe this is a common sense approach to that problem.

I know my colleagues from Maryland are going to talk about

their State’s experience with Hurricane Isabel. I hope to work with

you to see if we can fix some of the concerns you will raise. I think

we can. We have had some major flooding problems also in Kentucky. A few years ago, one of my old towns in my old Congressional district, Falmouth, Kentucky, was almost completely wiped

off the map. So, I am very sympathetic to the plight of victims or

Hurricane Isabel.

Thank you all for coming and I look forward to your testimony.

Senator Sarbanes, would you like to make a statement?

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. Thank you very much, Mr. Chairman. First,

I want to thank you for scheduling this important and timely hearing. I want to welcome Congressmen Bereuter and Blumenauer before us today, and also commend them for moving a flood insurance

reform bill through the House of Representatives.

I am also delighted that my colleague from Maryland, Senator

Mikulski, is here with us this morning testifying. I appreciate the

strong leadership and interest that she has shown on this issue.

Actually, Senator Mikulski and I toured some of the areas affected

by Hurricane Isabel, and that gave us obviously a very deep appreciation for the losses suffered by our constituents and the impact

upon their lives.

The National Flood Insurance Program provides flood insurance

to over 4.3 million properties throughout the country. It is an extremely important program helping to ensure that families

devasted by floods can rebuild, replace, or relocate. Congressmen

Bereuter and Blumenauer have addressed the important issue of

repetitive loss properties, which every statistic shows is a matter

of major concern, and I am pleased to hear you say how we look

forward to taking the House bill and building upon it in order I

think to add some additional dimensions which I would anticipate

the Congressmen would be supportive of, and we are very appreciative to you for the very forthcoming way in which we have been

able to work together to address some of the problems.

We had a devastating flood in Maryland last year. Many of the

properties which were damaged by the floods were covered by the

National Flood Insurance Program, which was established in 1967,

in order to, and I quote now from the House and Senate Reports,

‘‘provide the necessary funds promptly to assure rehabilitation or

restoration of damaged property to pre-flood status or to permit

comparable investment elsewhere.’’ That was the Congressional

statement of what the flood insurance program was meant to accomplish.

Unfortunately, many flood victims in our State have been offered

settlements that come nowhere near close to restoring pre-flood

conditions or meeting contractor estimates for repair and rehabilitation. Furthermore, many flood victims have found the process of

3

trying to recover on their flood insurance policies to be time consuming, confusing, and frustrating.

I am very greatly concerned about how the flood insurance program is being administered and the adequacy of the coverage.

We have heard from numerous flood victims that they are not

being adequately reimbursed. There are inaccurate guidelines for

the price of repairs. FEMA rules or adjuster practices consistently

lead to flood insurance payments significantly lower than what is

needed to restore families to their pre-flood conditions.

People covered do not realize the limitations contained in their

flood insurance policies, the exclusions that exist, which result in

a significant gap between the coverage and their damages. These

are not made clear to policyholders in FEMA publications or in the

flood insurance policy itself. I know Chairman Bunning has been

working closely with your staff to include provisions in the legislation to address toward these problems.

We have had a careful study done in one jurisdiction in our

State, Baltimore County, by the former Maryland Insurance Commissioner, Steve Larsen, that goes through detailing the range of

problems that exist in this area. It is not clear how to file claims.

It is not clear what kind of training the adjusters have. Flood victims are under the pressure of a time limitation, so they sign off

on claim forms when they do not really think that they should but

they are afraid they are going to go beyond the deadline, and similar problems of that sort.

I am very frank to tell you I think FEMA needs to start down

the path of comprehensive review of the adequacy of coverage provided under the standard flood insurance policy. That would address the future problems.

I think they should go back with the flood victims to make sure

they have been treated fairly. FEMA should review their claims to

determine whether they were based on inaccurate FEMA price

guidelines or software that does not correspond with the real world

in terms of the cost of repairs.

And I urge them to readjust the claims just as a matter of fairness. They should be able to go back and review the problems. We

are going to have Director Lowe testify following this panel. I think

he is scheduled next, and we intend to question him very closely

about this matter. If it was all done properly, then there is no need

to readjust the claims, but in many instances we are convinced that

people have suffered an injustice, and I intend to press the Federal

Insurance Administrator, Mr. Lowe, in the next panel.

I appreciate our witnesses being here before us. I certainly appreciate the leadership which Senator Mikulski has taken on this

very important matter to our constituents. Again thank you, Mr.

Chairman, for moving ahead on this matter.

Senator BUNNING. Senator Hagel, would you like to make your

opening statement?

STATEMENT OF SENATOR CHUCK HAGEL

Senator HAGEL. I do not have an official statement, Mr. Chairman, other than to say thank you, Senator Sarbanes for your leadership on this issue. I am particularly pleased this morning to be

on the panel to listen to our distinguished list of leaders on this

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issue, and in particular, my distinguished colleague from Nebraska,

who is wrapping up his 26th year in the House of Representatives

and has said it is just about time I go get a real job.

[Laughter.]

He has announced his retirement and we are very proud of Doug

Bereuter. This is just but one of many examples, as you know, Mr.

Chairman, because you served with Doug in the House, of his leadership on so many issues in the House. I am very proud to be with

you this morning, and with my colleagues, in particular Doug Bereuter, to move this further down the road to get to a resolution,

as you have suggested. That is important for our country and every

State represented here this morning. This is a critical issue for all

of us. Thank you again for your leadership, and Senator Sarbanes,

thank you.

Senator BUNNING. Thank you.

Senator Dole.

STATEMENT OF SENATOR ELIZABETH DOLE

Senator DOLE. Thank you, Mr. Chairman.

Each year, hundreds of thousands of families lose cherished possessions and oftentimes even their homes in flooding. Our Government stepped in to help these families several years ago with the

founding of the National Flood Insurance Program. Today, this

much needed program covers approximately 4.4 million homes in

the United States, totalling $637 billion in coverage. Before the

program was started in 1973, flood insurance was far more expensive than the average family could afford. In fact, most insurance

companies did not even offer the coverage since families with a

high risk of flooding were the ones most likely to purchase the coverage, and the companies found the risk to be unacceptable.

In the years since 1973, the National Flood Insurance Program

has grown and provided security and relief to countless families

across the Nation. This is particularly important in my home State

of North Carolina, where flood losses are far too frequent. In the

past 7 years, North Carolina has been hit by three different hurricanes, Fran in 1996, Floyd in 1999, and Isabel just a few months

ago in 2003. In fact, Mr. Chairman, I was able to visit in Harlowe

and Sealevel, North Carolina with victims of Hurricane Isabel. One

man, Kurt Michel, told me how a wall of his home literally fell out

as the water just came rushing and pouring in. He and his wife

Jeannette swam out of the home with his daughter, Hannah, on his

back. I met Brooke Stalnecker, whose home had been totally flattened. It looked like a war zone, and whose living room wall lay

on the ground with the family photographs still attached.

The National Flood Insurance Program serves a critical role in

North Carolina covering families like these, more than 100,000

families in fact, and it is designed to respond as soon as disaster

strikes. It is a program we desperately need to retain and improve.

While we can point to countless positive stories about the program, in the last 6 months, since Hurricane Isabel hit North Carolina, like we have already heard, I have heard some real problems.

I am told that 28 families just on Hatteras Island in North Carolina still have not received compensation for the damage 6 months

ago. I have received a number of letters from people who complain

5

they believe they were low-balled on the repair estimates and made

to feel that if they appealed they would get less. These reports are

distressing. These letters mention that when previous hurricanes

hit the coast homeowners reported they had been treated much

better by the National Flood Insurance Program. It is my hope we

can address these problems which have caused some North Carolinians very great distress.

In addition, I believe we can continue to make improvements to

our mitigation efforts. In my time as the President of the American

Red Cross, we took a leadership role and worked as a full partner

in FEMA’s efforts to develop and implement a National Mitigation

Strategy. We co-sponsored FEMA’s biennial National Mitigation

Conferences. Mitigation not only prevents or greatly minimizes

damage, but mitigation also saves lives.

This year, Congress has the responsibility to reauthorize and improve the National Flood Insurance Program. In this process, it is

my hope that additional steps can be taken to reduce exposure to

repetitive losses in a responsible way that will not harm the families who depend on the program. I want to thank all the witnesses

who have taken time to join us here today to share their considerable knowledge with us. All have been leaders in efforts to reform

the National Flood Insurance Program next year.

Let me just say, Congressman Bereuter, that we appreciate your

service and we are certainly going to miss you when you leave the

Congress. I have had the pleasure of working with you and traveling with you in the past when my husband was in the Congress.

Congressman Bereuter and Congressman Blumenauer, you have

both put forward a thoughtful approach to reduce exposure to repetitive loss properties, which drain money and resources from the

program. This proposal emphasizes the involvement of State and

local agencies in mitigation efforts, and it has my full support.

I certainly want to recognize my good friend, Barbara Mikulski,

for her strong interest in this issue. Both North Carolina and

Maryland were hit hard, and you have been a tireless advocate,

and we are so pleased that you are here today.

One issue which has been missing from the National Flood Insurance Program has been predictability. Folks in North Carolina

have asked me to support a longer reauthorization than the current one year reauthorizations Congress has approved in recent

years. This legislation contains a 5-year reauthorization, and this

too has my strong support.

Mr. Chairman, I ask unanimous consent that four letters representing the kinds of complaints my office has been receiving be

included in the record.

Senator BUNNING. Without objection.

Senator DOLE. Thank you.

Senator SARBANES. Mr. Chairman.

Senator BUNNING. Senator Sarbanes, go right ahead.

Senator SARBANES. I do not think I should allow the respect to

pass that has been expressed for Congressman Bereuter’s contributions. I want to make it bipartisan. I want to make it very clear

that that respect exists on both sides of the aisle, and it has been

a very distinguished record of service to our country, and we want

to thank him and we want to wish him the very best.

6

Senator BUNNING. On our first panel today we have our good

friend, Senator Barbara Mikulski from Maryland, the Ranking

Member of the VA/HUD Subcommittee of the Appropriations Committee; and two of my former House colleagues, Congressman Doug

Bereuter of Nebraska, who is moving on to bigger and better things

next year.

Thank you for your service, Doug. You have done a great job, and

I know when I first came to the Congress, we served together on

the House Banking Committee, and I think you are still on the

House Banking Committee.

Representative BEREUTER. I am.

[Laughter.]

Senator BUNNING. God bless you for 24 years at least of service

on the House Banking Committee.

And of course, Congressman Earl Blumenauer of Oregon, thank

you also for testifying.

When Senator Mikulski asked me to testify, I remember the old

adage I learned when I first came to Congress, never, never say no

to an appropriator.

[Laughter.]

Senator Mikulski is a good friend of all of us here, and we are

glad to have you before this Subcommittee. Senator Mikulski, the

floor is yours.

STATEMENT OF BARBARA A. MIKULSKI

A U.S. SENATOR FROM THE STATE OF MARYLAND

Senator MIKULSKI. Thank you very much, Mr. Chairman, and of

course to my colleagues, Senator Dole, who I worked with handson together when she was the head of the American Red Cross, to

do an initial FEMA reform and now look forward to working together. I also look forward to working with Senator Hagel and Senator Sarbanes. He and I are working together to really bring to the

Congress’s attention the lessons that we in Maryland learned during Hurricane Isabel.

The National Flood Insurance Program does need to be reauthorized, and yes, for a longer time to provide predictability. But we not

only have to reauthorize it, we not only have to review it, but we

also really need to reform it because it is not working for the intent

that it was provided, which is a safety net for those people who

have been hit by terrible natural disasters.

On September 18, 2003, Maryland and other East Coast States

were devastated by Hurricane Isabel. It was the worst natural disaster in Maryland’s history. For the people who live along the

Chesapeake Bay and the rivers leading into the Bay, it was a catastrophic event. People lost their homes and their possessions. They

lost their livelihoods, whether it was in the crab houses or the oyster shucking houses. They had community names like Bowley’s

Quarters or Miller’s Island, Bayside or North Beach, Kent Island,

or Hooper’s Island. This was not Gucci waterfront. This was blue

collar waterfront. This was hard-scrabble, hard-working waterfront

people who had worked and scrimped to save to buy these homes.

Some people I had gone to school with, people who had worked

along the water to earn a living for their communities. Now they

are struggling with the legacy of Isabel. Wells continue to be polVerDate 11-MAY-2000 16:55 Oct 06, 2005 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 23729.TXT SBANK4 PsN: SBANK4
7

luted. Some are living in trailers, but if you looked at those trailers, they are really temporary campers, and they are living with

inadequate heat.

They are still trying to struggle to recover, and they feel that

they were victimized by not only the disaster of the hurricane, but

then they also feel that they have been undone by the National

Flood Insurance Program that offered inadequate payments, no

clear right of knowing how to appeal, and great disappointment.

We worked on a bipartisan basis in Maryland. Governor Ehrlich

responded. Secretary Tom Ridge was on the job, touring with Senator Sarbanes and I to see the damage, to talk to the people, really

work on a Federal-State bipartisan effort. When we looked at the

damage, we said, ‘‘Your Government will be here to help you.’’ We

saw houses moved off of their foundations in North Beach. Walking

the streets of Bayside and Bowley’s Quarters, children’s toys and

personal items pushed into yards, a 78-year-old widow clinging to

both me and Secretary Ridge, saying, ‘‘What am I going to do?

What can we do?’’ Mud more than a foot deep. Business owners

that have lost their businesses there.

We saw not only devastation, but we also saw the good ways that

people do pull together. We were proud of the way the rescue workers came and rescued people. One senior citizen trying to rescue

her possessions, fell, hit her head, and had to be carried out in a

rowboat, brave acts, and FEMA did respond. But when the flood

was over and they tried to get to their flood insurance, it really was

not there the way it should have been.

Today, 6 months after Isabel has hit, my constituents are still

trying to rebuild both their homes and rebuild their lives. They are

struggling to get the money that they feel is owed to them. They

are frustrated. They are confused, and quite frankly, Mr. Chairman

and colleagues, they are fed up. They feel like the insurance that

they paid for is not there when they need it the most. That is why

I am here today, to tell their stories to this community. Thousands

of Marylanders could be at this hearing to tell it.

I want to just encourage in the most heartfelt way, the way that

we need to do, move on the lessons learned. What we learned from

what the people are telling me is this. They do not understand

what their flood insurance paid for. They thought that they were

totally covered. They believed that between their homeowner’s insurance and their flood insurance, they would be covered. Now they

are finding out that it is not true. They found out that the compensation really does not deal with total repair or total rebuilding.

They did not know that it did not cover the contents of their home.

They did not know that it did not cover the basement belongings

that were in their home. Then when they put in their claim, they

find out that they are only going to get a portion of what it will

cost to repair or rebuild.

When they ask their insurance agent to explain things to them,

they cannot get a straight answer. That is because the insurance

agents do not know what the policy covers. In Southern Maryland,

some homeowners were able to get emergency advances, but in

other parts of the State they could not do it. Different agents gave

different answers. In some cases the same agent gave different answers on the same day.

8

I sat in a diner meeting with community leaders to hear what

their experiences were. One of these was a Baltimore City detective. This wonderful woman’s job is to get information and also get

information from people who do not want to talk to her, and that

is what she felt like when she was trying to get information from

the National Flood Insurance. I asked them if they knew if they

could appeal. They did not know that they had the right to appeal.

No one told them. There was no fact sheet on the right of appeal.

Nobody told them what they could do.

My office became the instigator of the appeal in cooperation with

Senator Sarbanes. We became the clearinghouse on the appeal

process. I was honored to do it. We organized community meetings.

We organized the appeal hearings. We brought FEMA and the

Flood Insurance Program right to the communities to hear those

appeals. We do not think you can appeal on a 1–800 number or on

the Internet. You need to know the context.

Mr. Chairman, what we really saw was that the appeals process

did work when it finally worked, but we had to be the instigator

of that. A criminal knows their right to appeal in court, but a flood

insurance victim does not. We have to really get this straight.

Once Marylanders figured out their policies and finally figured

out their paperwork, they saw that the payments that they were

not getting were not adequate. The flood insurance adjusters do not

use real-world estimates. In Bowley’s Quarters, the adjuster gave

such low estimates that the people went to an engineering firm in

order to be able to get advice on how to file their paperwork. Once

they did it, they were able to get a better deal.

Is that what we are supposed to do, where a whole community

has to pool money to get an engineering firm in to get it? I do not

think so. The people should not have to go through all this to get

a fair appraisal or a fair reimbursement for the insurance that they

paid for.

Mr. Chairman, part of the problem is with the adjusters. And

this is no fault about these adjusters. They come in at a catastrophic time. They go into a hotel room, and the way we pay them

is in a way that actually works against getting fair and adequate

adjustments. They have to put out all of their expenses up front,

and until a claimant signs a particular form, they will not get reimbursed. They put pressure on signing a form, rather than getting

an adequate and fair appraisal. What we do is have drive-by assessments rather than real assessments.

I really want to urge in the very strongest way that, we move

this reform package quickly. I want to have this done before tornado season comes again to some of our communities. I want to do

it before flooding starts in our great midwestern areas when the

waters start to rise, and I want reform done before hurricane season comes to Maryland and comes to our company again, and I believe we can do it.

Senator Sarbanes has taken the lead and we have been working

together. We have four recommendations. One, full information and

disclosure of flood insurance polices. Flood insurance must provide

a clear understanding of what is covered. Second, better training

for insurance agents who sell flood insurance, so they understand

what they are selling and how to process claims. Number three, a

9

straightforward formal appeals process that must be clearly presented to policyholders. Number four, adequacy of payments and a

reform of the adjustment system. Consumers need to know that the

insurance they pay for will pay for real-world cost of repairing the

damage, and at the same time we need to reform the adjusters’ system so that they are adequately paid in a timely way, so that the

emphasis then is on an adequate assessment to minimize the appeals process. Those are four straightforward reforms that I believe

can be implemented very quickly.

I am going to submit to the Committee two reports, one at the

request of the Baltimore County Executive. We went to Maryland’s

former Insurance Commissioner, Steve Larsen, to take a look at

what had happened in Baltimore County. And the second, the

Maryland Insurance Commissioner’s review of this process, so you

could have the benefit of their expertise.

Mr. Chairman, I really want to conclude by just saying that

thousands of people who suffered so much in Maryland and other

communities, would feel that in some way that what happened to

them would be somewhat mitigated if out of all of our misery and

all of the things that we had to live through, that there was a true

reform of the National Flood Insurance Program, so the next time

a natural disaster happens and somebody knocks on the door and

says, ‘‘We are from the Government and we are here to help you,’’

we really mean it.

Thank you very much, Mr. Chairman.

Senator BUNNING. Thank you, Senator.

Now we have my former colleague from the House of Representatives, and we are proud to have him here testifying.

Congressman Bereuter, the floor is yours.

STATEMENT OF DOUG BEREUTER

A U.S. REPRESENTATIVE IN CONGRESS FROM

THE STATE OF NEBRASKA

Representive BEREUTER. Thank you very much, Chairman

Bunning, Senator Sarbanes, Senator Dole, and Senator Hagel, for

your insightful and very positive remarks about the need for flood

insurance and especially, I might say, your personal and very generous remarks to this Member.

I have been involved in introducing legislation I think each of the

last six Congresses on flood insurance reform. The last several, I

have had the benefit of working with Congressman Blumenauer,

who has added dramatically to the expertise, the interest, and the

energy related to reform.

And I might say that my seat-mate, the person I have sat next

to for the last 10 years in the House, Richard Baker, has had a

major role since Louisiana has the most repetitive law structures

and the largest amount of area below sea level. And we worked in

considerable detail with him to make sure that what we have attempted to accomplish is well-tuned to not only reduce repetitive

losses and to increase the prospects for mitigation, but also to take

into account those States that have the largest number of repetitive loss structures and the financial implications.

Now, I would say that what we heard from Senator Sarbanes,

and particularly just now from Senator Mikulski and Senator Dole,

10

relates to the lack of clarity about the flood insurance policies, the

procedural difficulties, the claims filing, and the timeliness of response to the claim filing. We did not attempt to address those

issues. What we have done is focus on the structural reforms for

the program, and I could well envision that you could have a separate title or two that you could add to deal with the issues that

have been brought up here, and we could depend upon you, as far

as the House is concerned, to take that approach and add it to a

legislative effort that we have initiated here.

I would like to tell you, of course, that we have actually a very

unusually broad, diverse group of organizations that support this

flood insurance legislation, and you perhaps have had distributed

to your desk a copy of the list, and that is not even, in fact, a complete list. I would briefly like to speak about three areas today, and

then turn to my colleague, Mr. Blumenauer.

First, is the background on repetitive losses; second, the contents, including the new pilot program that we establish; and,

third, as I mentioned, the diverse support.

On background. Repetitive loss properties cost the NFIP about $200 million annually. The properties, while comprising, we have

approximately 1 percent of the currently insured properties are expected to account for 25 to 30 percent of claims paid. For example,

I will cite one of many egregious examples, among a great many

such examples, of costly abuses which could be discussed. One home, valued at $114,000, has received $806,000 in flood insurance payments over 18 years. Furthermore, 25 percent of all

current NFIP policies do not pay actuarial rates for their coverage

and, thus, they are subsidized by the other 75 percent of people

who do have flood insurance, and they are paying more than their

fair share, in an actuarial sense.

Today, the vast majority of repetitive loss structures eligible for

subsidized flood insurance are far below the actuarial risk rate

they should be paying. This bill would at last move the NFIP toward a more free-market insurance model by requiring people living in flood-prone areas to reduce their risk of flooding, mitigation,

with help from the Government—Federal, and in many cases State

and local—or pay something closer to actuarial rates.

Now, as far as the contents are concerned, I will just hit the high

points. The bill uses FEMA’s existing FMA program to mitigate repetitive loss properties. The bill authorizes up to an additional $40

million a year to be transferred from the National Flood Insurance

Fund into the FMA funds through 2008.

The pilot program—and this is the one that focuses on the repetitive loss structures—authorizes up to $40 million a year to be

transferred from that same fund for mitigation assistance to reduce

the problems of severe repetitive loss properties. This trial program, which I think cannot effectively be less than 5 years, will not

have a fair examination of the process unless we have a significant

length of time.

This trial program would address those properties in a simple,

straightforward manner. The owner of severe repetitive loss structure properties will be charged a rate closer to the actuarial riskbased rate for their National Flood Insurance Program if two conditions prevail.

11

The first is that it is, indeed, by definition, a severe repetitive

loss property. We had a long and difficult, but I think successful,

process to revise what, in fact, is a severe repetitive loss, and it has

to meet one of the following three definitions:

One, this is a property in which four or more separate flood insurance claims payments have been made prior to the date of enactment of this act, with the amount of each claim exceeding

$5,000, and the cumulative amount of such claims payment exceeding $20,000 or, two, this is real property in which four or more separate claims payments have been made after the date of enactment

of this act, with the amount of each claim exceeding $3,000, and

with the cumulative amount of such payments exceeding $15,000

or, three, this is real property in which two or more separate NFIP

claims payments have been made which cumulatively exceed the

value of the insured property.

The second condition which would cause the applicability of the

closer to actuarial rates to be applied is that the owner of the real

property must have refused a mitigation measure from a State or

locality such as the elevation of the structure or a buyout of the

property, and it is important to note that the bill preserves State

and local decisionmaking.

If both of these conditions have been met, rates for severe repetitive loss properties will be increased by 50 percent. Properties

would be subject to an additional 50 percent for each subsequent

flood event which claims payments exceed $1,500.

The repetitive loss structures are heavily concentrated in 6

States. Louisiana, Texas, New Jersey, Florida, North Carolina, and

New York have more than 5 percent of the total repetitive loss

structures. In order to provide some assistance to them, if they

have done proper planning to reduce the number and severity of

repetitive loss properties, the Federal share of reimbursement for

mitigation or buyout could be increased from the standard 75 percent all the way up to 90 percent. That is meant to deal with the

problems that some States have in this area. So this will also be

helpful, of course, to the property owners themselves for the repetitive loss structures.

I think the definitions we have used with respect to reimbursement are fair. Those definitions will apply, if there is a buyout required and mitigation is impossible and the owner is not willing to

participate in mitigation, we have tried to cover all bases so that,

in fact, this property owner is going to be treated quite fairly, if it

comes to that.

I would like to stop my testimony at this point, Mr. Chairman,

and with your approval just let Mr. Blumenauer supplement my remarks, and then I will be happy, of course, to listen to questions

from you.

Senator BUNNING. Congressman Blumenauer, go right ahead.

STATEMENT OF EARL BLUMENAUER

A U.S. REPRESENTATIVE IN CONGRESS FROM

THE STATE OF OREGON

Representative BLUMENAUER. Thank you. One of the pleasures of

working on this legislation, Mr. Chairman and Members of the

Committee, for the last 6 years, is being associated with Mr. BereuVerDate 11-MAY-2000 16:55 Oct 06, 2005 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 23729.TXT SBANK4 PsN: SBANK4
12

ter. As usual, his statement was comprehensive, and it makes my

job a lot easier.

With your permission, I would like to focus on three points to

supplement testimony that I have submitted for the record, and I

too would be happy to answer questions if there are any. We really

appreciate what has already occurred with your staff, I think, in

terms of making real progress toward the goal that you mentioned,

Mr. Chairman, not just to reauthorize, but really reform the program and make a substantive difference.

I think that it is critical that we go beyond simply the narrow

dealings of flood insurance. The philosophy here is that the Federal

Government can be a partner to help keep people out of harm’s

way and save money. I am thinking of Senator Dole’s picture of little Hannah on her father’s back as they are swimming away from

this terrible flood experience.

We do no one a favor with an inefficient and poorly thought-out

process of flood insurance if we continue to encourage them to live

in harm’s way, if we subsidize it, and if we make it hard for them

to protect their families.

And I think with the work of Mr. Bereuter, he mentioned Mr.

Baker and a number of people, we have made real progress toward

this being a template for what we can do in other areas of disaster.

Certainly, Senator Dole knows from her past experience with the

Red Cross that we have, because of changing demographics and development patterns, we have put more and more Americans in

harm’s way.

And it looks like in the not-too-distant future, 75 percent of

American households will be at direct risk for a natural disaster,

whether it is flooding, which we are talking about here today, fire,

earthquake, or mud slides. This is significant. And we have done

a great job of starting to deal with people after the fact. Our response, both public and private, is really doing a pretty good job

these days.

The problem is that we have not put enough attention to the

front end to keep people out of harm’s way in the first instance.

This legislation is important because it will help move people out

of harm’s way, help protect them, and I think it can help set the

tone for what the Federal Government can do in a noncoercive,

very thoughtful approach.

I will not repeat what my colleague said about the substance of

the legislation we brought forward, but I think you can help us, in

with this Committee, deal with a couple of misconceptions.

Somehow that this is in any way punitive toward States that

have high repetitive flood losses. It is not. In fact, the National

Flood Insurance Program started with Representative Hale Boggs,

from Louisiana, and then followed up with his widow who took his

place, to help States like Louisiana. And, in fact, a number of

States like Louisiana actually pay a high premium because they

have a lot of repetitive flood loss, but they have far more property

that pays higher premiums than are necessary if we eliminated the

10,000 or so repetitive flood cases. So they pay in far more to this

process than they get back, even though they have lots of repetitive

flood properties.

13

And your helping us advance this in a comprehensive way, we

can make sure that these people understand that they are not

being disadvantaged, that they are, in fact, being protected.

This is something that is also going to save huge sums of taxpayer money because it is not just the National Flood Insurance

Program, which is basically actuarially sound, although we have to

advance money every now and then because these premium increases do not always keep pace with the dramatically escalating

costs of natural disasters.

But the other side of not moving people out of harm’s way is that

there are billions of dollars that are spent to deal with all of the

other responses the Federal Government needs to make in terms

of infrastructure, the civil defense response, the whole range of

these. So it is a very expensive proposition that goes beyond the

scope of the National Flood Insurance Program.

I deeply appreciate the experience that is being detailed here

about the day-to-day administration. As Mr. Bereuter mentioned,

we did not get into that. We were busy dealing with some of the

other elements there. You can richly strengthen the program, but

I would hope that it is also part of your Committee report, part of

the message that you carry forward, that this is a theme we need

to weave throughout Federal policy, generally, and you are in a

perfect position to do this.

I deeply appreciate the opportunity to appear briefly. I have a

full statement that I would like to put in the record.

Senator BUNNING. Without objection.

Representive BEREUTER. As I do, Mr. Chairman.

Senator BUNNING. Without objection.

Representative BLUMENAUER. I look forward to working with you

to make a big difference for the 75 percent of American households

that will be in harm’s way for some disaster in the future.

Senator BUNNING. Unless there are any questions, I would thank

you both for testifying. We appreciate all of the hard work you

have done in getting your bill where it is, and we hope to be able

to make it a little better.

Thank you very much.

Representative BLUMENAUER. Thank you, Mr. Chairman.

Senator SARBANES. Mr. Chairman.

Senator BUNNING. Go right ahead, Paul.

Senator SARBANES. I just want to make sure I am clear on one

thing. The 1 percent that represent repetitive loss properties, that

is 1 percent of all of the properties covered by flood insurance?

Representive BEREUTER. That is correct.

Senator SARBANES. They account for 25 to 30 percent of all of the

payout; is that correct?

Representive BEREUTER. All of the claims by dollar amount.

Senator SARBANES. Yes, that is quite a staggering figure when

you think about it, and it really I think dramatizes the problem.

Actually, we had a program working with FEMA in the Western

part of my State. We had a river valley that was constantly being

flooded, in the end, they did primarily buyouts, and we were able

to work out terms for the buyouts that were I think quite fair. It

is always a wrenching experience to move, but they were able to

relocate in comparable or, indeed, in some instances, maybe even

14

better circumstances and then be freed of the apprehension of the

constant flooding and so forth.

But of course in many areas you can mitigate. People can stay,

but you can take precautionary measures that either avoid or significantly reduce the flood damage.

So thank you very much.

Representive BEREUTER. Senator, if I could put a point on your

statement, it does mean that the overwhelming majority of policyholders—somewhere over 75 to 99 percent, theoretically—would

have a relative and, in most cases, an absolute reduction in their

premium as this mitigation and buyout takes place.

Representative BLUMENAUER. The number on that, just if I may,

if we avoid one 10-percent rate increase, it saves ratepayers $175

million a year, every year, compounded forward.

Senator BUNNING. Thank you both. We appreciate it.

Representative BLUMENAUER. Thank you.

Representive BEREUTER. Thank you very much.

Senator BUNNING. Our second panel today, we have Anthony

Lowe of FEMA and William Jenkins of the GAO. I thank you both

for testifying. I would especially like to thank Mr. Lowe, who I

knew had another commitment, but made time to be here today.

Thank you both for testifying.

Because of the large number of witnesses we have today, I am

strictly going to enforce the 5-minute rule. You may submit all your

written testimony for the record, and it will be accepted, but when

the 5 minutes are up, so are you.

[Laughter.]

Mr. Lowe, you may begin.

STATEMENT OF ANTHONY S. LOWE

ADMINISTRATOR, FEDERAL INSURANCE AND

DIRECTOR, MITIGATION DIVISION

FEDERAL EMERGENCY MANAGEMENT AGENCY

U.S. DEPARTMENT OF HOMELAND SECURITY

Mr. LOWE. Thank you very much, Chairman Bunning, Ranking

Member, in his absence, Senator Dole.

My name is Anthony Lowe, Federal Insurance Administrator and

Director of the Mitigation Division, Federal Emergency Management Agency, Department of Homeland Security.

We are here to report to the Subcommittee that while the NFIP

faces many challenges, and faced many challenges in 2003, the

state of the NFIP is sound. Today, I will speak to you about the

NFIP’s response to Hurricane Isabel, our strategic plan to reduce

the number of repetitive loss properties, and perhaps in my questioning, something about our Flood Map Modernization Program

and the importance of reauthorization of this program.

Since its inception in 1968, the NFIP has met, and continues to

meet, a vital need—the provision of flood insurance to those exposed to flood hazards across the country, coverage that is virtually

unavailable from the private insurance market.

With Congress’s guidance over the past 35 years, the program

has grown to become the largest single-line property insurer in the

Nation. We have over 4.4 million insurance policies, and we have

over $663 billion in insurance coverage. While planning for the

15

years to come, the NFIP has also faced recent challenges, as Senator Mikulski raised. I would like to address some of those issues

raised by Senator Mikulski in regard to Hurricane Isabel, which

tested the NFIP when it caused extensive flood damage in six MidAtlantic States and the District of Columbia.

Our report card was mixed and we believe the lessons we learned from Isabel will, in fact, improve the NFIP. We paid over $385 million in claims. We expect to pay $450 million overall when all

claims are paid, on a total of over 25,000 claims from Hurricane

Isabel—known.

In comparison with other States hit by Hurricane Isabel, such as

North Carolina, South Carolina, Virginia, West Virginia, Delaware,

and the District of Columbia, the NFIP received a particularly

large volume of complaints from Maryland policyholders. While

these complaints may be partially explained by the fact that Maryland has not suffered a major flooding event since Hurricane Agnes

in 1972, the number of complaints from Maryland demands that

we initiate truly comprehensive review from top to bottom, so we

can improve the program.

I am not here to defend the program. I am here to effect change

because it is quite clear that there are some problems. There were

far too many issues raised, there have been far too many recommendations brought up, there has been far too much suffering

for anyone to think that there is not a problem.

From our initial review from Maryland Insurance Commissioner

Redmer’s report, the complaints point to three main problems.

Those are similar to the problems Senator Mikulski also raise: Customer not understanding the policy provisions, lack of coordination

in providing customer service, and agents and companies giving erroneous advice.

To address these concerns, on the front end, we are stepping up

our outreach efforts to explain NFIP policy provisions and simplifying claims procedures. We are looking at ways to provide understandable, easy-to-read information to our customers. This is a risk

communication issue for us, and we understand the key role that

outreach plays in the success of our program, as the NFIP does not

exist to simply react to disasters and pay claims. For example,

after the recent California wildfires, we supplemented our outreach

efforts in California to make certain that residents understood the

increased flood risk and benefits of flood insurance that might arise

from mud slides after the fires occurred there.

In addition, we are looking at technology to help through in our

NextGen project, which is a total reformation of our processes

around a paperless system that allows us to, in real time, connect

to our insurance companies. We have 92 insurance companies,

thousands of insurance agents working for those companies, and

hundreds of adjusters who work under them. We have a very complex system of delivery for the National Flood Insurance Program.

NextGen offers the technology to allow us to adjust our metrics,

see where problems are, and to very quickly adjust and confront

problems very directly in the field.

Let me now address a little bit on repetitive flood loss.

Senator BUNNING. Your 5 minutes are up.

Mr. LOWE. All right.

16

* Held in Committee files.

Senator BUNNING. We will get you in questions.

Mr. Jenkins.

STATEMENT OF WILLIAM O. JENKINS, JR.

DIRECTOR, HOMELAND SECURITY AND JUSTICE ISSUES

U.S. GENERAL ACCOUNTING OFFICE

Mr. JENKINS. I appreciate the opportunity today to discuss the

National Flood Insurance Program. My statement focuses on repetitive loss properties and actions that FEMA and legislation have

proposed to address those properties.*

Floods inflict more damage and economic losses on the Nation

than any other natural disaster. Floods affect all 50 States and

cause about $1 billion in property damage annually. During the 10

fiscal years from 1992 through 2001, floods resulted in about $55

billion in damages and 900 deaths. During that period, the Federal

Government paid about $7.7 billion in Federal flood insurance

claims financed primarily through the premiums policyholders paid

for National Flood Insurance.

FEMA has taken a multifaceted approach to reducing flood-related losses. This includes a variety of grants for State and local

flood mitigation planning and projects, before and after floods

occur. The cornerstone of these efforts is the National Flood Insurance Program, in which FEMA identifies and maps those areas

within participating communities that are the most flood prone,

called ‘‘Special Flood Hazard Areas,’’ the areas with at least a 1-

percent chance of flooding in any given year.

In these areas, flood insurance purchase requirements and enhanced building standards apply. According to FEMA, buildings

constructed in compliance with these standards suffer about 80

percent less damage annually than those who do not meet these

standards. We plan to report soon on FEMA’s ongoing effort to update the Nation’s flood maps.

Repetitive loss properties represent a significant portion of annual flood insurance claims. FEMA defines repetitive loss properties as those that have flooded at least twice in a 10-year period

and resulted in flood insurance payments of $1,000 or more for

each claim. These properties represent about 1 percent of the 4.4

million properties insured by the National Flood Insurance Program, account for about $200 million annually in claims, and have

accounted for about $4.6 billion or 38 percent of all flood insurance

claim costs since 1978. About half of all repetitive loss property

payments since 1978 have been in three States—Louisiana, Florida, and Texas—and almost 90 percent are in 15 States.

FEMA has developed a strategy to reduce the number of repetitive loss properties that target properties with the greatest losses.

As of the end of November 2003, FEMA had identified about 11,000

currently insured properties for which at least four claims have

been made since 1978, costing a total of about $1 billion. States or

communities may sponsor projects to reduce flood losses to these

properties, and FEMA encourages them to give these properties

priority in their mitigation efforts.

17

FEMA has also initiated a pilot program to allow States and

communities with these properties to use a simplified methodology

to more easily demonstrate the cost-effectiveness of projects designed to reduce future losses from these properties.

Members of Congress have also recognized the financial burden

repetitive loss properties place on the program. Under H.R. 253, as

passed by the House, owners of repetitive loss properties, as defined in the bill, could be charged full actuarial rates for flood insurance, rates that reflected the property’s true risk of flooding and

damage. These higher rates would be charged if, one, the owner refused a buyout, elevation, or other flood mitigation measures from

FEMA or the Flood Insurance Program and, two, the owner subsequently made an insurance claim of more than $1,500.

In our prior work, we have noted that increasing policyholder

premiums could cause some policyholders, particularly those with

subsidized policies, to cancel their flood insurance. H.R. 253 includes a provision that provides FEMA the flexibility to increase

the policyholder’s deductible, rather than increase the premium

rate. This may provide policyholders who refuse FEMA’s mitigation

offer a means of maintaining their flood insurance without a significant increase in their premium rate.

According to FEMA, about 49,000 currently insured properties

have accounted for about $2.6 billion in losses since 1978. About

6,000—or 12 percent—of these properties accounted for about $792

million in total losses and would qualify for the pilot program

under the criteria specified in H.R. 253.

Of the remaining 43,000 properties, 26,000 had cumulative

claims greater than $20,000 and accounted for $1.6 billion in flood

insurance claims, but these properties do not meet H.R. 253’s criteria either because less than four claims had been filed or each

claim did not exceed $5,000. My written statement includes more

detailed State-by-State data on repetitive loss properties.

We have not fully analyzed the potential results of FEMA’s repetitive loss strategy and the mitigation actions encompassed in

H.R. 253. However, our preliminary assessments suggest that both

have the potential to reduce the number and/or vulnerability of repetitive loss properties and, thus, reduce the Flood Insurance Program’s cost in the long-run.

That concludes my statement, and I would be happy to answer

any questions.

Senator BUNNING. That is marvelous. You had 3 seconds left.

Thank you.

[Laughter.]

I will start the first round, and we will do a 7-minute round of

questioning, if it is all right with my colleagues.

Mr. Lowe, what improvements would you make in the House

bill?

Mr. LOWE. We think H.R. 253 is a good start in addressing the

repetitive flood loss problem. I do believe that there are some improvements that can be made.

In short, we have provided the Subcommittee with some of those

changes. But, for example, in funding, the bill addresses three different programs—two mitigation programs and of course the NaVerDate 11-MAY-2000 16:55 Oct 06, 2005 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 23729.TXT SBANK4 PsN: SBANK4
18

tional Flood Insurance Program itself. And so there needs to be

consistency in terms of the way these programs are funded.

For example, we have no-year funding, as addressed in the bill,

and for the Flood Mitigation Program, for example, we have funding on a 2-year cycle. So we probably need to standardize those cycles. We would prefer no-year funding to give more flexibility.

Also, the cost shares are different for each of the programs. An

‘‘in-kind’’ contribution is appropriate, and I think that needs to be

also synchronized by one definition for what ‘‘in-kind’’ means. For

one of our programs FMA requires that of the ‘‘in-kind’’ be cash.

This may or may not be the best approach, if the priority is to give

more flexibility.

Another piece of the bill that can be improved deals with administrative costs. There are no administrative costs that are covered

for FMA or the other mitigation programs in any significant way

for the effort that we are trying to undertake, and so some support

in that regard would also be helpful.

I think the last thing that I would mention is, for some reason,

commercial properties are not covered under H.R. 253. About 25

percent of the repetitive flood loss properties that are in our target

list are, in fact, commercial properties, and so that is another area

that I think the Committee should consider. Our staff is available

to provide any technical assistance that you might require.

Senator BUNNING. Do you have a preference on the monetary

level at which a homeowner would be eligible for mitigation assistance—in other words, a level in dollars?

Mr. LOWE. Well, I am not quite sure I understand your question

but what you may be getting at is that it takes an average of about

$59,000 to take a mitigation action, based on our figures from 1997

to 2003 for acquisitions, relocations, and elevations. Those are the

figures that we are dealing with when we look at the costs of mitigating these structures.

I think you can multiply that out over 10,000 and figure out

where that leads. Now, we in total have 48,000 properties that we

call repetitive flood losses. It is just the most serious, the 10,000

that we are really talking about today, which are the costliest.

Senator BUNNING. I am concerned by one part of a proposed

FEMA rule that directly affects the relationship between an insurance agent and a ‘‘Write Your Own’’ flood company. Currently, the

private sector companies, agents, and brokers make the decision on

what type of arrangements they want to solicit, sell, and service

flood insurance. ‘‘Write Your Own’’ companies can use either agents

or brokers.

Under a section of the FEMA proposal, the Federal Government

would dictate that ‘‘Write Your Own’’ companies can only use a

broker arrangement, not agents. Why does FEMA want to change

the status quo?

Mr. LOWE. I understand that there was some discussion about

that, and a rule is under consideration currently and the comment

period has closed. But the idea, as I understood it, is to try to improve the quality of agents’ education and the quality of their

training that exists by having someone who is really looking over

the agents. If there is a question in the field and you do not know

the answer, you know you can call the broker to answer that quesVerDate 11-MAY-2000 16:55 Oct 06, 2005 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 23729.TXT SBANK4 PsN: SBANK4
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tion. And so this may, in fact, not be the best approach to do that,

but that is the idea here.

I think what we have heard today is that we have victims, who

are out in the field and their agents cannot answer their question,

and that is the first person they are probably going to call when

they get their policy. And if the agent cannot answer the question,

where does it go? In this case, what we saw is it went to the adjusters and then that did not particularly work out well in too

many instances.

So again, what we are trying to do is improve the quality of the

delivery of service. We have 92 insurance companies, and so we are

trying to figure out what do we need to do to make sure that when

people sign up for flood insurance, they really understand what it

is, what is covered, and they can call somebody and get a straight

answer. And so that is what it is designed to do.

Senator BUNNING. Mr. Jenkins, what, in your opinion, would do

the most to get properties off the repetitive loss list?

Mr. JENKINS. I think the problem that you face with repetitive

loss properties is that a lot of them are subsidized, that is, low-income people and they have some difficulties finding comparable

housing. In other words, if you buy them, they have some difficulty

finding comparable housing nearby that is comparable to what they

have and this is one of the biggest single challenges. How do you

deal with people of low income in terms of trying to get them out

of harm’s way? For many of them, they just do not have the wherewithal to move. I think that is the biggest single challenge in terms

of trying to deal with repetitive loss properties for individuals.

Senator BUNNING. I move on. Senator Sarbanes, you may begin.

Senator SARBANES. Thank you very much, Mr. Chairman.

Administrator Lowe, I do not think it is an overstatement to say

that the stress that was brought to bear on the FEMA system indicated it just wasn’t up to the task, and we have a lot of problems

as a consequence. I am very concerned about people who have either not had their claims yet resolved or have settled their claims

but have done so under circumstances in which they feel very

strongly that they have not been dealt with fairly.

There is a prevailing view that there were inaccurate price

guidelines given to the adjusters, and I am going to pursue that

issue with you in greater detail in a moment. There were partial

denials of claims if homeowners had not taken remedial actions,

even though they might have been told by their agents not to do

so. They were in this situation of, well, do not do anything so adjusters can see all the damage in its full glory, and yet there is a

requirement to try to ameliorate the consequences. That in particular deals with the issue of mold. Another problem is the significant lack of information given to flood victims.

The report that was done in Baltimore County by the former

State Insurance Commissioner said,

In all, the process utilized to settle claims of Isabel victims has resulted in many

homeowners feeling that they were forced into settling claims under duress and

against their best judgment.

It goes on to say,

Most homeowners were not able to get bids from contractors that could restore

the house to its pre-flood condition for the amount the adjuster was offering. Yet,

20

if the homeowner continued to fight or argue, it seemed to delay payment, and looming over them was the filing deadline.

It is my view that FEMA should go back and review the claims

of the flood victims and readjust them in those instances in which

they were inadequate, inaccurate price guidelines or software used

to estimate the losses, people felt under some duress or coercion to

settle the claim because they thought they were up against a filing

deadline.

I mean, the Government’s responsibility here is to do right by

people and to be fair and just. No one should profit out of it. I do

not think people are seeking to profit out of it. In fact, I have been

tremendously impressed by the type of resilience and the decency

of the people who have come under these difficulties. They want to

get back on their feet. They want to restore their lives. They want

to get equitable treatment. They are not looking to get some bonanza out of the flood, that is very clear.

Is there any inhibition to keep you from going back and in effect

saying to people, well, look, the system was overloaded. We think

we were using some inadequate guidelines and that is reflected in

some of these cost estimates. We know there was a lot of pressure.

We did not have a full program for training flood insurance adjusters. It is a particular segment out of the general insurance field.

So we are going to come back in and we are prepared to work with

people to review the claims and to make adjustments where that

is called for. Would the agency undertake to do that?

Mr. LOWE. We have already begun that process. I personally

went down to the Insurance Commissioner’s office in Maryland and

I asked him, prior to going, of course, for all of the complaints he

had as well as all the inquiries he had that had anything to do

with the National Flood Insurance Program. At that time, he gave

me 80 complaints. We have had a preliminary review of all of these

80 complaints. The issues break down really across the board, but

the commitment was made by me and all of my staff that we are

going to fix it. If something is wrong, we are going to fix it. We

have the ability to do that and are charged with doing that.

To be perfectly honest with you, I went Wednesday night to

Maryland and we were actually in the capital in Maryland and I

told the Insurance Commissioner, what I would like to do is meet

with 10 of the people who are least satisfied with how the National

Flood Insurance Program either handled or is handling their

claims. And I wrote down on a list what I heard from them, and

it really wasn’t just what I heard, it was what I felt from listening

to their stories.

There was a theme, and the first thing I wrote after I heard

about the first person, and we literally went around the room and

I just listened, is I thought to myself, this is not the way this program is supposed to work, and I told them so.

The other thing I noticed is that everybody was fighting. They

were fighting the system. They were fighting with their agent.

They were fighting with their adjuster. They were fighting with the

company, and on down the line, trying to get some resolution after

6 or 3 months, however long it took them to get it done. Again, and

Senator Mikulski is correct, after they had already been through a

21

disaster. And again, I said to myself, this is not the way this program is supposed to work. Clearly, the process took too long.

I heard about low-balling of estimates. I heard about misinterpretation of eligibility of coverage, unequal treatment, incomplete

explanations of decisions on settlements, perceptions that they had,

in fact, been threatened because they were told they had to file

that proof of loss. All of those indicate to me that there are some

problems that we have to take a serious look at.

As you may already know, today and tomorrow we are holding

a Mid-Atlantic Flood Summit. The purpose of the Flood Summit is

to have the companies there, the agents there, the national software companies there, as well as insurance——

Senator SARBANES. No, no. I am getting at a different point.

Mr. LOWE. Please.

Senator SARBANES. The session you had, I think was highly relevant as you think of, well, how can we correct our operations so

we do not have these problems in the future. But I do not think

that the number of people with problems, whether their claims got

fairly adjusted in Maryland, is 80.

Mr. LOWE. Of course not, sir.

Senator SARBANES. I think it is very substantially in excess of

that, and I think FEMA should undertake, and has a responsibility

to go back to these communities and say, there have been problems. We are here now with an open door. It is going to make some

work for you, but that is the only way to get the fairness and justice in these instances and allow people to come back and revisit

with you and work back through the process.

A lot of these people have never gone to the State Insurance

Commissioner about their problems. You need to reach out and

give these people an opportunity to get equity.

If they have gotten equity, then that is the judgment you will

make and that is what should be said to people. They may differ

with you, they may not. As I indicated, I think people are pretty

reasonable in the circumstance. But it is very clear to me from

what we are hearing and what we are seeing that there has been

a breakdown in the workings of the system and I think FEMA has

a responsibility, or the Flood Insurance Program people have a responsibility, in effect, to go in and straighten this situation out. It

is not a situation that affects only Maryland. It is generally, I

think, characteristic of the problems in States hit by Isabel.

The dimensions of Isabel and the catastrophic impact of it were

sufficient, I think, to demonstrate that under great stress, the system that FEMA had was inadequate to the task. One conclusion

out of that is that we have to correct it for the future, but another,

it seems to me also reasonable conclusion, is that you need to redo

what has been done with respect to this natural catastrophe in

order to make sure that fairness and equity is prevailing. That

should be your prime objective.

Senator BUNNING. Thank you, Senator Sarbanes.

Senator SARBANES. Thank you, Mr. Chairman.

Senator BUNNING. Senator Dole, go right ahead.

Senator DOLE. Thank you, and I would just underscore what my

friend, Senator Sarbanes, has said, and I appreciate your response

to him on your work with the Maryland Insurance Commissioner.

22

I am wondering if you are doing the same thing with the North

Carolina Insurance Commissioner.

Mr. LOWE. They will be in attendance this afternoon, as well,

and so we will do the exact same thing. In fact, we are going

through all the claims and the question for us is trying to

prioritize. We need to accurately identify what the issue is. Is the

issue the difference between the adjuster and the contractor? Is

that what we need to be looking at? Is there, in fact, a fundamental

standard software issue that we need to be looking at? So we have

to look first at all those claims that were handled to get a good

sense of the problem.

We have gone through 24,000 claims as you know, a number of

them in North Carolina, so they are definitely something we are

looking at, as well.

Senator DOLE. I mentioned earlier all of the letters that I have

had, the significant number of people who have still not received

compensation for their damages and it is 6 months ago. Can you

tell me how long FEMA expects that it is going to take to settle

these claims?

Mr. LOWE. Yes. We understand that about 8 percent of the

claims are still open. I am told actually that it might be down to

6 percent as of today, of the claims that are outstanding from the

25,000 that we expected. We believe that we will be able to get

those closed within the next 60 days. Since these claims do not

come into FEMA, closing these files involves us reaching out to the

insurance companies and making sure that we push them along a

little bit and help resolve any issues that are out there.

Senator DOLE. I speak to people in North Carolina about improvement of the National Flood Insurance Program. Most note the

continued need for more mapping modernization. According to the

GAO, in 2001, approximately 63 percent of the Nation’s 100,000

flood maps were at least 10 years old. Can you update that statistic

for us now that the map modernization initiative is underway?

Mr. LOWE. Yes, I can.

Senator DOLE. How far along are we?

Mr. LOWE. Unfortunately, we actually have regressed a little bit.

Of course, as the years move forward, the age of the map goes the

opposite direction. About 70 percent of our maps are currently 10

years or older. We believe that 7 years of implementation, including 5 years of the program, we will be able to modernize and provide digital flood maps, new flood maps for the entire country. And

we are looking forward to that. We have a very aggressive, resultsoriented, performance-managed program that is very sophisticated,

and uses a significant amount of technology. We are very excited.

As you know, North Carolina is the model for the rest of the

country in the field of map modernization. They have done an outstanding job with geospatial information systems and this fits well

with the vision of what we are trying to do.

Senator DOLE. Mr. Lowe, in your testimony, you mentioned that

FEMA has targeted 10,000 repetitive loss properties as the highest

priority for mitigation in your repetitive loss strategy. You state

that the program has paid out close to $1 billion in flood insurance

claims over the last 21 years to these 10,000 extreme cases. Do you

23

have any cost estimates of what mitigation efforts to address these

10,000 properties might cost?

Mr. LOWE. Yes, I do have some estimates. I believe, again, we are looking back at the average cost figure of about $59,000 to mitigate each structure. Under the current program, the way it is

structured, we are talking about almost $800 million to mitigate all

those properties. If we look under the bill, H.R. 253, the cost is in

the neighborhood of about $400 million to mitigate those properties

using a variety of approaches. Some may be buy-outs, some may

be relocations, elevations, and other floodproofing measures.

Senator DOLE. In your testimony, you mentioned that FEMA has

set up a special direct facility for selling and servicing flood insurance on these repetitive loss properties to better coordinate claims

handling for them. Was claims handling a problem in the past for

them, and how does this address the problem of repetitive losses?

Does the facility provide better oversight?

Mr. LOWE. There were no problems, but we do believe that it is

better for oversight and it gives us the opportunity to track what

is occurring with those specific properties. As you know, those are

properties that are repeatedly flooding, and so claims are coming

in, almost to the extent that you can have one on top of the other

fairly quickly. So we want to be able to identify those properties,

understand where they are and always know what is occurring

with them.

Senator DOLE. Mr. Jenkins, in 2000, GAO testified that the National Flood Insurance Program standards for new construction

saves an estimated $1 billion annually in flood damage avoided. Is

that estimate still current, or does GAO believe that this estimated

savings may have changed?

Mr. JENKINS. That was an estimate that we got through FEMA,

as well, and since that estimate, we have not done any work since

then to see what the current status of that estimate is. I do not

know whether that estimate is lower or higher than it was a couple

years ago.

Senator DOLE. Thank you.

Thank you, Mr. Chairman.

Senator BUNNING. Senator Sarbanes, would you like to have a

second round? Go right ahead. I am finished.

Senator SARBANES. Mr. Lowe, I have here in front of me the

Maryland price guideline used by the adjusters to determine losses

after Hurricane Isabel. According to FEMA staff, these guidelines

are taken from the National Construction Estimator and distributed to adjusters at FEMA-sponsored trainings and are used then

by the adjusters to estimate losses after a flood.

We got in touch with the publisher of the National Construction

Estimator with respect to these guidelines and we learned the following. He says,

costs in the labor column are for normal conditions, experienced craftsmen working on reasonably well-planned and managed new construction,

‘‘new’’ underlined, emphasis applied.

Add 30 to 50 percent on small jobs where fitting and matching of materials is required, adjacent surfaces have to be protected, and the job site is occupied during

construction. Add 25 to 50 percent for work done following a major flood, fire, earthquake, hurricane, or tornado when skilled tradesmen are not readily available. Material costs may also be higher after a major disaster.

24

And then he goes on to point out some of the higher costs that

apply when you are not doing new construction, access is often limited in repair work.

It is easy to solve and weld PVC pipe and fittings unless that pipe is installed

in an 18-inch crawl space under existing floor joints.

The problem of sequence of construction—in new construction,

you do it in a logical order. When you do repairs, you often cannot

do that. Repair work nearly always requires demolition, a task not

easy to estimate before work begins. It has to be done carefully to

avoid additional damage.

Now, it seems to me these guidelines you are giving the adjusters

do not come near to adequately reflecting real-life costs. What is

your response to this?

Mr. LOWE. I think two things. First, this is something we are

looking into very seriously, because we have heard a number of

complaints like that. We are going to make sure we identify where

we are going wrong and whether we have a systematic problem.

Clearly, when you look down the list of what is covered and we

look against the price guide, by and large, our figures are higher

across the board, but yet we still have people who are not able to

rebuild their houses with the claim settlements that they are receiving.

Senator SARBANES. Your figures are higher than what?

Mr. LOWE. Than the price guide. You quoted the National Construction Estimator.

Senator SARBANES. This is what you give the adjusters, as I understand it.

Mr. LOWE. Right, and what I am suggesting is that is higher

than the National Construction Estimator, which is one of the seminal systems out there, as well as the ‘‘Get-A-Quote,’’ which is, a

national system online.

I am not suggesting to you, frankly, that our figures are the best

figures or the right figures because it is something we are looking

at. What I am trying to suggest is they are not artificially low as

they stand now.

Nevertheless, I am particularly concerned about the point that

you raised that I think is a very, very serious issue whether or not

the adjuster realized and calculated that the cost of replacement is,

in fact, higher than the cost for new construction. As you well

know, many of the complaints we received are of pre-FIRM properties that were along the Chesapeake. Some are only 300 feet

from the shore and have been there for many years. That is preFIRM construction and so it is going to take a lot to be able to rebuild those.

So that is specifically one of the areas we are looking into to say,

okay, do we specifically need look at all pre-FIRM policies that

were settled or are outstanding of because maybe we do.

Senator SARBANES. No, no, wait a second. I mean, it seems very

clear to me that the briefing material that you were giving the adjusters that was to guide them in making their calculations were

inadequate. They did not really comport with the real-life problem,

which only underscores a point I was trying to make in our previous discussion of the necessity to go back and reexamine these

claims and the settlements that have been made. People have

25

closed on claims under pressure. I mean, what are they to do?

These are not wealthy people who can carry the problem until they

get it all worked out. Senator Mikulski made that point, I thought

very effectively, in her opening statement.

They are in an absolute quandary. How are they going to move

their life forward? So they end up, they think there is a time deadline to settle. This is what they are being offered, although the contractor is telling them, look, to get you back to where you were is

going to cost you a lot more than that. The statement in the flood

insurance legislative history is that we were intending to get them

back to where they were.

Mr. LOWE. And we will, sir.

Senator SARBANES. I think it just emphasizes the necessity to go

back and review this with people.

Mr. LOWE. I agree, sir.

Senator SARBANES. I have got a real problem. I appreciate your

focusing on changes for the future. You need to change the system.

That is quite obvious. But you also need to do something so those

who were caught in the system in this instance get fair treatment,

and we intend to follow that closely with you.

My time is going to run out. Let me ask you one other question.

There is a story in this morning’s Baltimore Sun paper about the

problem of how the adjusters are compensated and the fact that

the way they are compensated may result in the adjusters putting

pressure on flood victims in order to get these claims settled. They

say the adjusters come in. They are out of all of these out-of-pocket

expenses, but they do not start getting any payment until they

start settling claims.

If that is the case, the adjusters are going to be motivated to

push people pretty hard to sign the claim forms. Otherwise, they

are laying out all of this money out-of-pocket and are not getting

reimbursed. Is there not a different way to handle the compensation of the adjusters so they are not in the posture of pressuring

the people to sign the claims because that is the only way they can

get paid?

Mr. LOWE. Yes, sir, I agree with you. I believe that is correct. We

need to look at the incentive structure and to figure out, is it leading to low-balling? Is it leading to rushed decisions? Is it leading

to creating unnecessary, undue, and unreasonable pressure on people that just should not occur in this program. I agree with you.

Senator SARBANES. Well, that goes back again to my first point.

You have a situation here. I mean, we have now talked about that

the price guidelines being inadequate, and the way you compensate

the adjusters. You admit yourself you need to look at this and reexamine it, but in this instance, the consequence of the way they

were being compensated was that, in effect, they ended up putting

pressure on people to sign claim forms. Otherwise, they are laying

out all this money for room and board and all other expenses and

they are not getting recompensed for that.

Again, I urge you to go back, and we intend to continue to follow

up on this with the agency, but we need to be sure that the people

that were affected by Isabel are getting fair treatment.

Thank you.

Senator BUNNING. Thank you, Senator Sarbanes.

26

We will look into the additional things that we are going to put

into our legislation to make sure that this will not occur again in

the future, to make sure that there is a reasonableness by the adjusters and by those agents that are writing this type of insurance,

to make sure that they are adequately paid for and not only after

the fact that they get a paper signed, but they are also taken care

of in a normal way so that the pressure is not on the one who has

had the loss but it is on someone else.

I thank you for your testimony. We appreciate you being here.

We know you had other engagements, so thank you very much.

Senator BUNNING. The third panel consists of Chad Berginnis of

the Association of Floodplain Managers and three Kentuckians,

William Stiglitz, III, Hyland, Block, Hyland Insurance Company,

Louisville, Kentucky; Greg Kosse, Associate General Counsel, Kentucky Farm Bureau Mutual Insurance Company from Louisville;

and Steve Feldmann, Director of Community Affairs, the Fischer

Group, Crestview Hills, Kentucky.

Thank you all for testifying, but because of the large amount of

witnesses, I am going to strictly enforce the five-minute rule. So

please restrict your oral testimony to 5 minutes and we will accept

any written testimony for the record in its entirety.

Mr. Berginnis, you may begin.

STATEMENT OF CHAD BERGINNIS

CHAIR, ASSOCIATION OF STATE FLOODPLAIN MANAGERS, INC.

Mr. BERGINNIS. Thank you. Kentucky and Ohio have a common

border, the Ohio River, and its floodplain. In late 1997, we also

shared a common threat, flooding that in some areas was the historical flood of record. Mr. Chairman, as you well know, that particular flood resulted in a lot of devastation in Falmouth, Kentucky,

as well as a lot of areas in Southern Ohio.

Research conducted after the flood showed that one significant

reason that families did not mitigate against risk of flooding

through the purchase of flood insurance was the fact that the policy

cost too much. Likewise, in Ohio, we, too, encountered the same

issue.

Mr. Chairman, distinguished Members of the Subcommittee, I

am grateful for the opportunity to testify before you this morning.

My name is Chad Berginnis and I am supervisor in the Ohio State

Floodplain Management Office and Chair of the Association of

State Floodplain Managers. Our organization represents over 6,500

people, mostly State and local officials who work daily with the National Flood Insurance Program, mitigation planning, and flood recovery.

I will use the balance of my time and my experience as both a

local and State Floodplain Manager to discuss the issues pertaining

to repetitive flood losses, repetitive loss legislation, and a couple

comments and concerns about FEMA and the Department of

Homeland Security.

What, then, is the relationship between repetitive loss properties

and the cost of a flood insurance policy? Almost all of these properties were constructed before the creation of the National Flood

Insurance Program and consequently have not been required to be

built to flood safety standards of the community. Unlike most

27

forms of insurance, flood insurance under the NFIP, rates do not

change as a result of repetitive flood losses. Instead, all of the Nation’s 4.4 million policyholders must bear the cost of these repetitive loss properties, resulting in a cross-subsidy within the NFIP.

I would again just like to note that these are not taxpayer dollars,

as common misconceived.

Thus, solving the conundrum of repetitive loss properties will result in cost containment for the NFIP and benefit all of the Nation’s flood insurance policyholders. This is why ever State really

needs to pay attention to this important reform legislation.

A framework for addressing repetitive loss properties must include basic provisions to ensure that solutions are cost-effective

and in the best interests of the NFIP. Solutions must be technically

feasible and they must allow flexibility that address a variety of

communities’ mitigation and economic and development goals. Also,

we must ensure that low-income property owners are fairly addressed. We must then recognize that repetitive loss properties are

residential and nonresidential structures and include provisions to

address both of those types.

Representatives Bereuter and Blumenauer are to be congratulated for their hard work on the passage of H.R. 253, and this bill

contains a sensible framework for addressing repetitive loss properties. The ASFPM supports H.R. 253. However, we think that

there could be some improvements.

Specifically, we think that H.R. 253 could integrate existing mitigation insurance mechanism called ICC and also, we can make

some alterations to clarify definitions, procedures, and other provisions. The ASFPM proposes using the H.R. 253 framework that we

include such changes.

Integration of ICC, the existing mitigation insurance coverage,

into the repetitive loss program is key to its success. One concern

that all of us share, and it was expressed during the House debates

and the House hearings, is the cost to property owners that would

be participating in these programs.

If ICC can be integrated as the ASFPM would propose, in most

instances, the local cost share could be met, resulting in little or

no out-of-pocket expense, which is especially critical in some of the

other mitigation alternatives, such as elevation and floodproofing.

Also, despite, and it was brought up earlier and I think it was

a great point, despite the myth—there seems to be a bit of a myth

in terms of H.R. 253 that it solely focuses on acquisition. Again,

H.R. 253 really does portray a broad range of mitigation options.

I would like to close by simply saying that we would urge the

Committee to maintain regular contact with FEMA and DHS to ensure short-term and long-term benefits to the NFIP are realized in

the coming years. Thank you very much.

Senator BUNNING. Good timing. Very good.

Mr. Stiglitz.

28

STATEMENT OF WILLIAM STIGLITZ, III

INDEPENDENT INSURANCE AGENT, HYLAND, BLOCK,

AND HYLAND INSURANCE, LOUISVILLE, KENTUCKY

ON BEHALF OF

THE INDEPENDENT INSURANCE AGENTS AND

BROKERS OF AMERICA AND THE NATIONAL

ASSOCIATION OF PROFESSIONAL INSURANCE AGENTS

Mr. STIGLITZ. Good morning, Chairman Bunning. My name is

Bill Stiglitz and I am pleased to have the opportunity to give you

the views of the Independent Insurance Agents and Brokers of

America, IIABA, and the National Association of Professional Insurance Agents, PIA, on the National Flood Insurance Program. I

am an Independent Insurance Agent with Hyland, Block, and

Hyland Insurance of Louisville, Kentucky, and I am an elected officer of the IIABA.

Let me begin by stating clearly that IIABA supports the NFIP.

Our members, independent agents and brokers, play a vital role in

the delivery system for flood insurance. The majority of the $370

billion in flood policies are sold by the more than 110,000 insurance

agents participating in NFIP’s ‘‘Write Your Own’’ program. This

system operates well and does not need revision.

The NFIP provides an important service to people and places

that have been hit by a natural disaster. The private insurance industry has been and continues to be almost entirely unwilling to

underwrite flood insurance because of the catastrophic nature of

these disasters. Therefore, NFIP is virtually the only way for people to protect against the loss of their home or business.

While we support the NFIP, we recognize there is a need for reform to make the program actuarially sound. We believe that if reforms are made to the program, certain areas must be addressed.

I would like to briefly explain the five principles that we believe

should be followed to strengthen the program and avoid any unintended negative effects on the NFIP.

First, we need to strengthen NFIP building regulations. Building

regulations help communities better manage their floodplains.

These regulations require communities to ensure that any new construction or new improvements to existing buildings in floodplains

include safeguards against flood damage. It is clear that building

regulations work. In fact, only 4 percent of repetitive loss properties were built after 1974.

Second, increase compliance with the mandatory purchase requirement. Sanctions for, and enforcement of, the NFIP mandatory

purchase requirement need to be improved so that the program can

collect additional premium to enhance the financial position of the

program. IIABA also proposes that insurance companies be made

to inform their customers that flood insurance is not covered in

their standard homeowners’ policy, and if they are in a flood zone,

it is mandatory that they must purchase such coverage.

Third, NFIP should have additional resources for mitigation. The

NFIP should take action to prevent future losses. There are two

basic ways to do this. The first is to move people out of the floodplain through buying their homes or the businesses of property

owners in the most flood-prone areas.

29

The second way is through providing grant funds to owners of existing properties so that they can make improvements, such as

raising their structures, that decrease the risk of flood loss. These

preventative measures will decrease the number of repetitive

claims and save the program money. In fact, former FEMA Director James Lee Witt has estimated that there will be a $2 return

on every $1 spent on buy-outs of repetitive loss properties.

Fourth, we need to stop abuse of the program through multiple

claims, and I think that has pretty well been covered this morning.

Fifth, we require mandatory disclosures of flood information. One

of the best ways to avoid these future problems with the NFIP is

to give people information about the flood risk. Reform of the NFIP

needs to include mandatory disclosures of the flood history of the

property so that buyers can make an informed choice in their purchases and they can properly value the home.

As important as any reform, we also believe the Congress needs

to create certainty in the NFIP by reauthorizing the program for

5 years. In 2002, Congress adjourned without reauthorizing the

NFIP program. This put the program in limbo and left the industry, and more importantly consumers, not knowing when or if the

program would be reauthorized and wondering how they should

proceed in the meantime. We strongly recommend that Congress

change the reauthorization period to 5 years in order to create market stability.

Before I conclude, I would like to address a pressing issue that

greatly concerns agents who sell and service policies under the program. I am troubled by recent developments by FEMA which has

proposed a rule that would harm the position of insurance agents

participating in the ‘‘Write Your Own’’ program and ultimately be

detrimental to the NFIP. The proposed rule would change current

standard practice by designating producers as agents of insureds

for the purposes of selling and servicing NFIP policies. Currently,

the status of an insurance producer as an agent or broker is a contractual issue determined by the producer and insurer.

FEMA’s proposed rule, by dictating that an agent is essentially

a broker for purposes of NFIP, undermines the agent’s ability to establish such a contractual relationship and, therefore, alters the

rights and responsibilities provided for in such contracts. This will

increase the liability exposure of agents and exacerbate the already

difficult task of securing errors and omissions coverage for their

businesses.

To date, we are still unclear why FEMA is making these changes

and all the lines of insurance or producer status is always determined through contractual negotiations. I believe FEMA’s number

one job is to help administer this program and protect consumers.

I am still unclear how this move will in any way help this program

or the people it serves.

Thank you for giving me the opportunity to express the views of

the Nation’s insurance agents on this important program. IIABA

looks forward to working with the Committee on this issue, and I

will be happy to take any questions you may have.

Senator BUNNING. Thank you very much.

Mr. Kosse.

30

STATEMENT OF GREG KOSSE

ASSOCIATE GENERAL COUNSEL, KENTUCKY FARM

BUREAU MUTUAL INSURANCE COMPANY

ON BEHALF OF

THE PROPERTY CASUALTY INSURERS

ASSOCIATION OF AMERICA

Mr. KOSSE. Thank you. Mr. Chairman, my name is Greg Kosse.

I am Associate General Counsel and spokesperson of Kentucky

Farm Bureau Mutual Insurance Company, the largest property and

casualty insurance company in Kentucky. We very much appreciate

the opportunity to testify on the importance of a long-term reauthorization of the National Flood Insurance Program.

Kentucky Farm Bureau is a member of the Property Casualty Insurers Association of America, which represents nearly 40 percent

of the property and casualty market. As a Farm Bureau insurer,

we are reflective of much of PCI’s membership across the country

that offer insurance services to consumers in only one or a handful

of States. Kentucky Farm Bureau is a member service of the Kentucky Farm Bureau Federation, an organization of families across

Kentucky.

The Farm Bureau represents over 440,000 households in Kentucky, or nearly 25 percent. If you drive down a road in Kentucky,

any road in Kentucky, one out of four mailboxes that you see we

are touching. From our humble beginnings in the 1940’s of selling

insurance from a card table in a feed store, we are now the largest

property casualty insurer in Kentucky.

Why is the National Flood Insurance Program important to an

organization like Kentucky Farm Bureau Insurance? There are

three basic reasons.

One, it allows for available and affordable coverage for consumers for catastrophic and widespread flood losses. It partners

with the insurance industry to distribute and serve the program,

and by working with communities and lending institutions, the program encourages mitigation of future flood losses. Let me touch on

each of those just briefly.

The availability and affordability—the Federal Government realized after widespread and terrible flood losses in the 1960’s that

the private market could not sustain flood losses without it being

prohibitively expensive for insurers and for policyholders, and if it

is too expensive, people will not buy the product. As strong as Kentucky Farm Bureau is in the Kentucky market, a one-State operation could not adequately spread the risk of loss across the State.

We could not absorb the loss without one of two things happening,

premiums becoming excessively high or we simply would not write

the product, and therefore, that is where the Federal Government

stepped in as the underwriter.

That leads to the second reason, the second half of the partnership, which is the practical and effective distribution and servicing

network. Kentucky Farm Bureau has agents in every county in

Kentucky. We have adjusters that visit every county in Kentucky

every week. People like to buy a product from someone that they

have a relationship and with whom they trust. Therefore, we have

the distribution network to sell and service the product. This is

something that, quite frankly, the Federal Government does not

31

have. The NFIP in this partnership assures that families across

Kentucky and across America have available and affordable insurance coverage.

And finally, the after-loss mitigation efforts that have been discussed at great length today. The National Flood Insurance Program partners with communities and lending institutions to protect

investments. Local communities must adopt sound land use and

floodplain management ordinances. It also encourages policyholders

to buy flood insurance. If you have a federally backed loan and live

in a floodplain, you will need flood insurance. We support the mitigation efforts as they alleviate repetitive loss issues.

In closing, my primary purpose today is in support of a long-term

reauthorization of the National Flood Insurance Program. Simply,

it works. It allows for available and affordable coverage for a natural disaster through a unique partnership between the Federal

Government and private insurers.

On behalf of Kentucky Farm Bureau Mutual Insurance Company

and the Property Casualty Insurers Association of America, I appreciate the opportunity to comment on the importance of the NFIP

and encourage you to reauthorize the program. Thank you.

Senator BUNNING. Thank you very much.

Mr. Feldmann.

STATEMENT OF STEVEN M. FELDMANN

DIRECTOR OF COMMUNITY AFFAIRS,

THE FISCHER GROUP, CRESTVIEW HILLS, KENTUCKY

ON BEHALF OF

THE NATIONAL ASSOCIATION OF HOME BUILDERS

Mr. FELDMANN. Good morning, Senator Bunning. I am pleased to

appear before you today on behalf of the 215,000 member firms of

the National Association of Home Builders to share our views concerning the repetitive losses and the National Flood Insurance Program and the Congressional efforts to reauthorize that program.

I am Steve Feldmann. I am the Director of Community Affairs

for Fischer Homes, one of the largest home builders in the Nation.

We are focused exclusively in your home region, northern Kentucky, and greater Cincinnati.

Home builders believe that the Federal Emergency Management

Agency’s National Flood Insurance Program is vital because it enables its 4.4 million policyowners to protect their properties and investments against flood losses while living in a home of their choice

in a location of their choice. In order for our members to continue

to provide safe, decent, affordable housing to consumers, the home

building industry depends on a strong National Flood Insurance

Program that is annually predictable, universally available, and

fiscally viable.

Unfortunately, the solvency and stability of the NFIP is threatened by a small percentage of properties that have suffered multiple costly flood damages. Approximately 48,000 currently insured

properties have incurred two or more floods within a 10-year period. This makes up only 1 percent of the current policies and costs

the NFIP approximately $200 million annually and accounts for

approximately 25 to 30 percent of the claims paid by the program.

These repetitive loss properties significantly impact the National

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Flood Insurance Program, drives up the cost of premiums for all

policyholders, and allows the system to teeter on an unstable actuarial foundation.

With this said, I would like to turn to some of our thoughts on

the current legislation. First, although Congress recently extended

FEMA’s statutory authority to issue flood insurance policies until

June 3 of this year, a lapse in authority after that date will have

severe repercussions for a vast number of land owners. Allowing

FEMA’s authority to limp from one short-term authorization to the

next does not provide consistency for policyholders, future homebuyers, and industries that depend on a viable National Flood Insurance Program. Congress should reauthorize the NFIP for a full

5 years.

Second, the NAHB recognizes the need to address repetitive loss

properties in order to ensure the long-term viability of the NFIP.

However, these properties must be allowed to remain eligible for

flood insurance. Further, any reauthorization legislation must narrowly define repetitive loss properties to only include those properties that pose the most severe flooding risk.

Third, the NAHB has been a proponent of the House-passed reauthorization legislation. However, we believe that the thresholds

for severe repetitive loss properties proposed in the House bill are

too low and do not truly reflect the cost of flood damage in many

areas. In many instances, minor flooding can produce claims that

exceed the thresholds established by the House bill. The NAHB believes that only the most severe properties should be targeted.

Fourth, Congress should encourage FEMA, with the participation

of State and local governments, to facilitate the redevelopment of

properties according to FEMA standards. After FEMA purchases a

flood-damaged property, that property is ineligible for redevelopment. This means that for every home purchased via the NFIP, a

formerly buildable lot has been taken out of production. If these

properties are allowed to be redeveloped to current floodplain

standards, local governments can satisfy their local housing needs

while ensuring that the properties are less prone to floods.

Fifth, additionally, in cases where FEMA makes an offer to buy

a property, the property owner must be paid fair market value for

the land and the structure.

Sixth, FEMA should be granted the authority to charge a higher

premium for those repetitive loss properties for which reasonable

mitigation offers were refused. Through such a mechanism, property owners will be encouraged to accept an offer of mitigation and,

therefore, reduce the repetitive claims in the NFIP.

Finally, the NAHB believes that any reauthorization legislation

should include a provision to require FEMA to notify all policyholders of changes to the program. It would be unfair to the 4.4

million policyholders, especially the approximately 46,000 repetitive loss property owners, to be caught unaware by changes to the

NFIP without the opportunity to read and understand the policy

changes.

Mr. Chairman, thank you for this opportunity to share the views

of the National Association of Home Builders on this important

issue. We look forward to continuing to work with you and your

colleagues and we urge you to fully consider how the NFIP enables

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the home-building industry to deliver safe, decent, affordable housing to consumers.

Senator BUNNING. Thank you very much.

Senator BUNNING. Let me just try to bring you up to date on

where we are heading. We look to mark up a bill probably next

week or the following week. It is our intention to have no lapses,

and I know that is important, and that we do it for a 5-year period.

I think that those are some of the basic tenets of the bill that we

are approaching.

We are going to try to address some of the problems that occurred in Maryland and North Carolina with language that will

suit that, but I appreciate all your information, and if we need

more, we will call on you. Thank you very much for being here.

We are adjourned.

[Whereupon, at 11:52 a.m., the hearing was adjourned.]

[Prepared statements and additional material supplied for the

record follow:]

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PREPARED STATEMENT OF SENATOR PAUL S. SARBANES

I want to thank Senator Bunning for scheduling this important and timely hearing and want to welcome Congressmen Blumenauer and Bereuter before us today

and to commend them for moving a flood insurance reform bill through House.

I am also delighted that my colleague from Maryland, Senator Mikulski, is here

and for her leadership and interest on this issue. Senator Mikulski and I toured

some of the areas affected by Hurricane Isabel, and that gave us a deep appreciation

for the losses suffered by our constituents and the impact upon their lives.

The National Flood Insurance Program provides flood insurance to over 4.3 million properties throughout the country. It is an extremely important program, helping to ensure that families devastated by floods can rebuild, replace, or relocate. The

Federal Government plays a critical role in requiring and providing flood insurance

coverage and encouraging communities to adopt policies that decrease the chances

of flood losses.

Congressmen Blumenauer and Bereuter have addressed the important issues of

repetitive loss properties, which every statistic shows is a matter of major concern.

We had a devastating impact in Maryland from Hurricane Isabel. Many of the

properties which were damaged by the floods were covered by the National Flood

Insurance Program (NFIP), which was established in 1967 in order to ‘‘provide the

necessary funds promptly to assure rehabilitation or restoration of damaged property to pre-flood status or to permit comparable investment elsewhere.’’ (House and

Senate Reports)

Unfortunately, many flood victims in Maryland have been offered settlements that

come nowhere near close to restoring pre-flood conditions and meeting contractor estimates for repair and rehabilitation. Furthermore, many flood victims have found

the process of trying to recover on their flood insurance policies to be time-consuming, confusing, and frustrating.

I am very greatly concerned about how the Flood Insurance Program is being administered and the adequacy of the coverage. We have heard from numerous flood

victims that they are not being adequately reimbursed for flood losses; there are inaccurate guidelines for the price of repairs; FEMA rules, or adjuster practices, have

consistently lead to flood insurance payments significantly lower than what is needed to restore families to their pre-flood conditions.

People covered did not realize the limitations contained in their flood insurance

policy or that exclusions existed creating a significant gap between their coverage

and their damages. These exclusions are not made clear to policyholders in FEMA

publications or in the flood insurance policy itself.

We had a careful study done in one of our jurisdictions in the State—Baltimore

County by Steve Larsen, the former Maryland Insurance Commissioner that goes

through detailing a wide range of problems that exist in this area.

I am very frank to tell you that I believe that FEMA should start down the path

by conducting a comprehensive review of the adequacy of coverage provided under

the standard flood insurance policy. This would address the future problem.

But in the short-term, they should go back to the flood victims to make sure they

have been treated fairly. They should review their claims and determine whether

they were based on inaccurate FEMA price guidelines or software that does not correspond with the real world prices in terms of the costs of repairs.

And I then urge FEMA to readjust those claims just as a matter of fairness. They

should be able to go back and review those problems. I will explore this issue more

fully with Mr. Lowe, the Federal Insurance Administrator at FEMA, and hope that

he will agree to revisit these claims. If it was all done properly then there is no

need to adjust. But in many instances we are convinced that people have suffered

an injustice.

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PREPARED STATEMENT OF SENATOR JON S. CORZINE

Thank you, Mr. Chairman, for holding this hearing on the Flood Insurance Reform Act, and I would like to join you in welcoming our distinguished colleagues and

witnesses.

Mr. Chairman, floods are a serious threat to people in my State, and because of

that they are very concerned about flood insurance. The most recent data from

FEMA shows that New Jersey has over 180,000 people who have flood insurance,

and they pay more than $95 million a year in premiums. Both of these numbers

are in the Top 5 for the Nation. The National Flood Insurance Program has been

very important for people in my State, providing over $575 million in the past 25

years to help people rebound after a devastating flood. I am very pleased that we

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are taking a good hard look at this program, and I look forward to making sure we

get a full extension out of Committee as soon as possible.

Of course, one of the reasons we are here today is to hear about repetitive loss

properties, and this is also something that we are no strangers to in New Jersey.

We have roughly the 3rd highest number of repetitive loss properties in the country,

and I hope that we tackle this issue thoughtfully and carefully, taking into account

both the people who live in houses that are continually getting flooded, and those

people who are subsidizing them through higher premiums. The Association of State

Floodplain Managers estimates that New Jersey policyholders could save almost $10

million a year if we take steps to address repetitive loss properties, and I would certainly like to see them keep their money if at all possible.

I am pleased to see our distinguished colleagues from the House here this afternoon. This bill passed the House last year with an overwhelming bipartisan majority, and I hope we can continue in that spirit over on this side, and work together

to enact some necessary improvements to our flood insurance system.

Thank you for holding this hearing, and I look forward to hearing from our wit- nesses.

—————

PREPARED STATEMENT OF BARBARA A. MIKULSKI

A U.S. SENATOR FROM THE STATE OF MARYLAND

MARCH 25, 2004

Chairman Bunning, Ranking Member Schumer, Senator Sarbanes and my other

colleagues, I am pleased to have the opportunity this morning to testify before your

Committee on the experiences of my constituents with the National Flood Insurance

Program following Hurricane Isabel.

I appreciate the work you are doing to review and reauthorize the National Flood

Insurance Program. I especially want to thank Senator Sarbanes, my colleague from

Maryland, and a member of this committee. Senator Sarbanes and I are working

together on this issue to help the people of our state and to share lessons learned.

Hurricane Isabel

Today, I would like to share with you the experiences of my constituents in the

aftermath of Hurricane Isabel. In September 2003, my State of Maryland was devastated by Hurricane Isabel. This was the worst natural disaster in Maryland history. The people who live on the Chesapeake Bay and the many rivers leading into

the Bay lost their homes, their possessions, and many lost their livelihoods. Some

of the communities that were hit particularly hard were Bowley’s Quarters, Miller’s

Island, Bayside Beach, North Beach, Kent Island, and Hooper’s Island

The people who live in these communities are hard-working people. Many of those

affected are retirees who scrimped and saved to buy these homes. I went to school

with some of the people whose homes and businesses were devastated in the Hurricane. These communities are still struggling with the legacy of Hurricane Isabel.

Many people still have polluted wells. Too many of those affected spent the winter

living in trailers that are really campers with inadequate heat.

Partnership

Right after Isabel, Senator Sarbanes and I went with Governor Ehrlich and Secretary Ridge to see the damage, to talk to the people, and to find out how we could

work together to help Marylanders put their lives back together. When disaster

strikes, we are Team Maryland and Team America—Federal and State officials—

Democrat and Republican. I am so proud of how we worked together and how these

communities pulled together.

Impact of Hurricane Isabel

During our statewide tour of Maryland to see first-hand the devastation caused

by the storm, we saw houses moved off their foundations in North Beach. We

walked the streets of Bayside Beach and Bowley’s Quarters where children’s toys

and personal items were pushed into yards by 3 feet of flood waters. We saw mud

more than foot deep or more three blocks away from the water. We talked to a business owner on Kent Island who lost her restaurant only 6 months after she bought

it. I was incredibly moved by what I saw. Not only was I moved by the scope and

scale of the devastation, but also the way these people were pulling together.

We heard about daring rescues by our intrepid first responders. We heard how

churches opened their doors to provide food and shelter. All over Maryland, we saw

that neighbor was helping neighbor.

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I promised them, their Federal Government would help them. I am so proud of

FEMA and how they responded. FEMA quickly set up local offices and worked with

local officials to get help to those who needed it.

National Flood Insurance Program

Unfortunately, the National Flood Insurance Program did not respond as quickly

as FEMA. Today, nearly 5 months after Hurricane Isabel hit, my constituents are

still struggling to rebuild. They are struggling to get the money that is owed to

them. They are frustrated. They are confused. And frankly, many are fed up. They

feel like insurance they paid for did not provide coverage when they need it most.

Today, I want to share with you their experiences and tell their stories to this

Committee. I respectfully ask that you consider what is happening in Maryland as

you focus on reauthorization of the National Flood Insurance Program.

Experiences of Marylanders

LACK OF INFORMATION

One of comments I have heard consistently from my constituents is that they

were not provided with adequate information regarding their flood insurance policies. From the communities in Anne Arundel County to the Eastern Shore, people

are telling me that they do not understand what their flood insurance pays for. They

thought they were covered for damages related to flooding. They believed that because they often had both homeowners insurance and flood insurance, they thought

they had purchased adequate coverage.

Now, they are finding out that is not true. The limitations of their coverage were

not explained to them when they bought these policies. For example, many did not

know that the contents of their home are not covered without a separate policy.

They thought that if they had $200,000 worth of coverage on a home they bought

for $50,000 their flood insurance would pay to replace the home. Now, when they

put in their claim, they are finding out that they will get only a portion of what

it will cost to make repairs or rebuild.

INSURANCE AGENTS TRAINING

When my constituents asked their insurance agents to explain things to them,

they often could not get a straight answer. I want to know if this is because the

insurance agents do not know what these policies cover or how they really work.

In Southern Maryland, some homeowners were able to get emergency advances

in order to make urgent repairs so they could stay in their homes. Others were told

that there was no way to get advances on their claims. Different agents gave different answers. In some cases, the same agent would give a different answer depending on the day. That is unacceptable.

APPEALS

When I heard stories about claims denied or shortchanged, I asked my constituents if they could appeal. Many told me they did not know. When they filed their

claims, no one told them how to appeal or even if an appeal was possible.

My office became a clearinghouse for appeals. We asked the National Flood Insurance Program and FEMA for a fact sheet or instructions on filing an appeal that

we could give to constituents coming to our office for answers. There wasn’t one.

So, I organized community meetings and appeals hearings. I brought FEMA and

the National Flood Insurance Program to Baltimore, Anne Arundel, and Dorchester

Counties to explain to Marylanders what they needed to do to get a fair hearing.

ADEQUACY OF PAYMENTS

Once Marylanders figured out what their policy covered and filed their paperwork, the payments they are getting were not adequate to repair the damages. The

flood insurance adjusters were not using real world estimates for how much it would

cost to repair the damages or to replace what had been lost.

For example, in Bowley’s Quarters, one insurance adjuster was giving unrealistically low estimates for people’s repairs. So the community association asked a local

contractor to come in for a second opinion. The local contractor’s estimate provided

an accurate assessment of what it was going to cost to repair the damage. It was

also significantly higher than the estimate from the insurance adjuster. The community leaders then talked to the insurance adjusters working with NFIP and asked

them to provide more accurate assessments and to review prior claims.

In the end, Marylanders received more accurate cost estimates to repair the damages from Hurricane Isabel. Claims were paid and repairs are underway. Today, the

people of Bowley’s Quarters are getting what they need; but, no one should have

to go through all this to get a fair appraisal and a fair reimbursement from insurance that they paid for.

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Senators Sarbanes and Mikulski Recommendations

Based on these experiences, Senator Sarbanes and I have four recommendations

to improve the National Flood Insurance Program. Senator Sarbanes has been instrumental in developing these recommendations and is working with the Committee to develop legislation.

I want to commend the work of my senior Senator who shares with me such grave

concern for the plight of Marylanders affected by Hurricane Isabel.

FOUR RECOMMENDATIONS

Full Information and Disclosure of Flood Insurance Policies

The National Flood Insurance Program must provide a clear and understandable

outline of policies so policyholders understand what is covered and what is not.

Better Training for Insurance Agents

Agents who sell flood insurance must understand what they are selling and how

claims are processed so consumers do not get the run-around instead of answers.

A Straightforward Formal Appeals Process

There must be a clear way for policyholders to appeal their claims awards or appraisals of loss.

Adequacy of Payments

Consumers need assurance that the insurance they pay for will pay the real world

cost of repairing the damage and replacing their loss.

Reports Based on Maryland’s Experiences

Finally, I respectfully submit to this Committee 2 reports:

REPORT TO THE COUNTY EXECUTIVE OF BALTIMORE COUNTY MARYLAND ON THE

RESPONSE TO FLOOD VICTIMS OF HURRICANE ISABEL BY INSURANCE COMPANIES

AND AGENCIES OF THE STATE AND FEDERAL GOVERNMENT

This report was prepared at the request of the Baltimore County Executive, Jim

Smith. Following Isabel, he asked Maryland’s former Insurance Commissioner,

Steve Larsen to examine the experiences of Baltimore County residents and make

findings and recommendations.

A REPORT TO THE MARYLAND CONGRESSIONAL DELEGATION ON HURRICANE ISABEL

This report was report prepared by the Maryland Insurance Administration and

was lead by Alfred Redmer—the current Insurance Commissioner for Maryland.

I believe the Committee and your staff will find these report very useful as you

conduct your review of the National Flood Insurance Program. Many the findings

in these two reports are similar to what Senator Sarbanes and I have heard directly

from our constituents. I would also like to offer assistance if the Committee staff

would like to talk to any local Maryland representatives about these reports or our

experiences following Hurricane Isabel. My office would be happy to facilitate such

a meeting.

Again, I would like to thank Senator Bunning and Senator Schumer and the

Members of the Subcommittee for providing me the chance to discuss these important issues with you today. I know that you also have constituents who have been

hard hit by natural disasters like Hurricane Isabel. Every member has had experience with hurricanes, tornadoes, floods, or fires in their State. When disasters

strike, people need to know that their government is on their side. That is why the

work you are doing is so important. I hope that by working together, we can improve the National Flood Insurance Program so that no American is delayed in getting the help they need following a natural disaster. This concludes my prepared

remarks. Thank you.

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PREPARED STATEMENT OF DOUG BEREUTER

A U.S. REPRESENATIVE IN CONGRESS FROM THE STATE OF NEBRASKA

MARCH 25, 2004

Good morning. Thank you very much Chairman Bunning for holding this Subcommittee hearing on the subject of National Flood Insurance Program (NFIP) repetitive losses. As you undoubtedly know, on November 20, 2003, the House passed

the Flood Insurance Reform Act of 2003 (H.R. 253) by a vote of 352 to 67. This bill

both authorizes the NFIP through September 30, 2008, and makes essential

changes to the program as it relates to the mitigation of repetitive loss properties.

The authorization of the NFIP is set to expire on June 30, 2004. This legislation

represents a continuation of my long-term interest and my past efforts in the House

to reduce the extraordinary costs of repetitive losses from the NFIP as administered

by Federal Emergency Management Agency (FEMA).

First, this Member would like to thank Chairman Mike Oxley (R–OH) of the

House Financial Services Committee, and Ranking Member Barney Frank (D–MA)

for their support of this legislation. I would also like to thank Representative Earl

Blumenauer (D–OR), who is both an original cosponsor of this legislation and a tireless advocate for reform of the NFIP. Representative Richard Baker (R–LA) also deserves credit for his significant contributions to and support of this legislation. I

would also note that FEMA has been involved in both the drafting and revising of

this legislation.

Today, I would like to briefly speak about the following points:

• background on repetitive loss properties;

• contents of H.R. 253 including the existing Flood Mitigation Assistance (FMA) program and the new pilot program; and

• the diverse groups who are supporting H.R. 253.

Background on Repetitive Loss Properties

Repetitive loss properties cost the NFIP about $200 million annually. These properties while comprising approximately 1 percent of the currently insured properties,

are expected to account for 25 percent to 30 percent of claims paid. For example,

I will cite one of many egregious examples among a great many such examples of

costly abuse which could be discussed. One home, valued at $114,480, has received

$806,591 in flood insurance payments over 18 years.

Furthermore, 25 percent of all current NFIP policies do not pay actuarial rate for

their coverage and thus are subsidized by the 75 percent of other policyholders.

Today, the vast majority of repetitive loss properties are eligible for subsidized flood

insurance far below the actuarial risk rate they should be paying. This bill,

H.R. 253, would at last move the NFIP toward a more free-market insurance model

by requiring people living in flood prone areas to reduce their risk of flooding.

Contents of H.R. 253

This legislation, H.R. 253, authorizes funds for the existing FMA program and

then authorizes a new pilot program to address severe repetitive loss properties. At

the outset, it is important to note that no property owner under this bill is ever denied Federal flood insurance except for fraudulent claims.

FMA Program

This bill uses FEMA’s existing FMA program to mitigate repetitive loss properties. The bill authorizes an additional $40 million a year to be transferred from

the National Flood Insurance Fund into the FMA fund through fiscal year 2008.

Pilot Program

The pilot program authorizes up to $40 million a year to be transferred from the

National Flood Insurance Fund for mitigation assistance to reduce the problem of

severe repetitive loss properties. This trial pilot program, which would expire on

September 30, 2008, addresses these properties in a simple, straightforward manner; the owner of a severe repetitive loss property will be charged a rate closer to

the actuarial, risk-based rates for their national flood insurance policy if two conditions prevail.

The first condition is that it is indeed by definition a ‘‘severe repetitive loss property.’’ Under this legislation, a severe repetitive loss property must at least meet

one of the following three definitions:

(A) this is real property on which four or more separate flood insurance claims

payments have been made prior to the date of the enactment of this Act, with the

amount of each such claims exceeding $5,000 and with the cumulative amount of

such claims payments exceeding $20,000; or

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(B) this is real property on which four or more separate claims payments have

been made after the date of enactment of this Act, with the amount of each such

claims exceeding $3,000 and with the cumulative amount of such claims payments

exceeding $15,000; or

(C) this is real property on which 2 or more separate NFIP claims payments have

been made which cumulatively exceed the value of the insured property.

The second condition which would cause the applicability of closer to actuarial

rates to be applied is that the owner of the real property must have refused a mitigation measure from a State or locality, such as the elevation of the structure or

a buy-out of the property. (It is important to note that this bill preserves State and

local decisionmaking.)

If both of these conditions have been met, rates for severe repetitive loss properties will be increased by 50 percent. Properties will be subject to additional 50 percent increases for each subsequent flood event where claims payments exceed

$1,500; however, flood insurance rates applied cannot be higher than the actuarialbased NFIP rates.

Mr. Chairman, Members of the Subcommittee, it is also important to note that

this pilot program to be authorized in H.R. 253 would also reduce the non-Federal

cost share for mitigation offers in certain States which qualify in order to help those

States that have a high number of severe repetitive loss properties. Under current

law, FEMA pays for 75 percent of the cost of mitigation. There is a 25 percent nonFederal match which is composed of State, local, and homeowner contributions.

However, a provision in the pilot program would allow the Director of FEMA to reduce the non-Federal cost share under the pilot program from 25 percent to as low

as 10 percent for any State, and for the communities located in that State, with respect to that year, if the following two criteria are met:

(A) 5 percent or more of the total number of severe loss properties in the United

States are located in that State (For 2002, the following States would have qualified:

Louisiana, Texas, New Jersey, Florida, North Carolina, and New York); and

(B) the State submits a plan to FEMA as to how they would address the problem

by reducing the number and severity of severe repetitive loss properties.

The pilot program also creates an appeal process. Under H.R. 253, any owner of

a severe repetitive loss property may appeal an increase to an actuarial rate of insurance to an independent third party. One of the grounds for appeal is that the

owner of the property would not be able to purchase a replacement primary

residence of comparable value which is functionally equivalent to their current residence. Thus this provision helps to assure that the legislation is homeownershipfriendly and humanely judicious.

With respect to the legislation as a whole, a section-by-section of H.R. 253 has

been circulated to the desks of each of the Senators on the Subcommittee. A summary of the important provisions of the bill are found in this section-by-section.

Groups Which Support the Flood Insurance Reform Act of 2003

Last, Mr. Chairman and Members of this Subcommittee, it is important to note

that the unusually broad coalition of diverse groups which supported our legislation

when it passed the House: the National Association of REALTORS®; the American

Banker’s Association; America’s Community Bankers; American Planning Association; the National Association of Professional Insurance Agents; the Independent

Insurance Agents and Brokers of America; the Mortgage Banker’s Association; the

Association of Floodplain Managers; the National Wildlife Federation; the National

Association of Homebuilders; Taxpayer’s for Common Sense; U.S. Public Interest

Research Group; the National Taxpayer’s Union; Citizens Against Government

Waste; Heritage Foundation; Coast Alliance; Friends of the Earth; American Rivers;

and the Ocean Conservancy.

I believe that it is important that one final public policy point be made. Under

the NFIP, a very large regional cross-shifting of the cost of flood insurance is occurring among States and within States; the policyholders in nonrepetitive loss areas

of the country by their higher than appropriate premiums are subsidizing the policyholders in repetitive loss areas of the country. This bill will give FEMA the needed

tools to gradually reduce the number of repetitive loss properties and to substantially reduce the dramatic cases of this cost-shifting to other NFIP policyholders.

In conclusion, I would posit that Congress finally needs to act to stop the very

expensive treading through the water of repetitive loss after repetitive loss. I would

encourage the Senate to pass H.R. 253, the Flood Insurance Reform Act, as it is the

right thing to do at the right time. Congress has delayed far too long in making

the obvious reforms needed in the NFIP.

Thank you for your consideration of my remarks and this legislation.

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PREPARED STATEMENT OF EARL BLUMENAUER

A U.S. REPRESENTATIVE IN CONGRESS FROM THE STATE OF OREGON

MARCH 25, 2004

My goal in Congress is to make the Federal Government a better partner in the

livability of our communities—ensuring that our families are safe, healthy, and economically secure. The National Flood Insurance Program (NFIP) is crucial to the

lives of many people across the country, and is a good example of how the Federal

Government can work with local communities to lessen the impact that disasters

have on people’s lives and property. It provides benefits for the economy, the environment, and for individual property values.

The NFIP was started in 1968, after private insurance companies experienced

such high losses from floods in the first half of the century that they stopped offering coverage for flood damage. The NFIP has been successful in helping homeowners deal with flood losses as well as giving communities tools to prevent future

flood damage. It is estimated that the program has lowered flood damage by about

25 percent below the level that would have occurred without the program. However,

as we look toward reauthorization, it is time for the Federal Government to provide

better incentives for individuals, communities, and States to act responsibly.

Unfortunately, our national disaster policy—including the dominant structural

model for floodplain and flood management—has a number of problems. Flooding

has historically been the most expensive natural hazard—as well as the leading

cause of death from natural hazards. Between 1975 and 1998, flood losses averaged

more than $4.4 billion per year. This problem is going to get worse: As more retirees

and other Americans flock to coastal States, the number who live in hurricane alleys

is expected to double. It is estimated that by 2025, 75 percent of our Nation’s population will live in or near coastal communities. Natural forces will continue to confound our best engineering efforts.

In some cases, Federal flood control policy actually encourages floodplain development by financing the construction and repair of levees and underwriting the risk

of flooding. As both environmental and taxpayer watchdog organizations have argued for years, one major unintended impact of the NFIP has been to encourage

construction and reconstruction in high-risk floodplains and coastal areas. Development density in many high-risk coastal areas has increased by more than 60 percent

over the last 10 years, and studies have shown that some of this growth can be attributed to the NFIP. By reducing the economic risks of living near the water, the

Federal Government has stimulated development there.

The Federal Emergency Management Agency, under both the Clinton and Bush

Administrations, has recognized the problems of the NFIP. Representative Bereuter

and I worked with former FEMA Administrator James Lee Witt to develop our legislation, and FEMA has been a key partner in our efforts this year as well. The Office of Management and Budget has pointed out that in too many years the program

has expenses greater than its revenue from insurance premiums which prevents

building long-term reserves to handle the costs of flood insurance. About 25 percent

of the policyholders pay substantially subsidized premiums, with the Federal Treasury and other policyholders paying the difference. This inefficiency means that the

losers in the NFIP are the people who live in areas that require flood insurance,

even though they do not have their property flood often, nonetheless pay dramatically high rates. It also results in a premium shortfall of about $700 million annually. The program is currently self supporting from premium income. However, in

the 1980’s Federal taxpayers had to make up a shortfall of $1.2 billion when the

income from the low premiums was not enough to cover the flood claims. The

chances of this happening again are high.

Repetitively flooded properties are a significant strain on the NFIP. FEMA reports

that just 1 percent of the properties account for 25 percent of NFIP flood loss dollars. Many of these properties have received more in flood insurance claims payments than the building’s value.

Subsidizing people to live in repetitively flooded areas does not make sense. It is

bad for the Federal taxpayer, bad for the environment, and bad for the families that

are continually placed in harm’s way. The majority of these repetitively flooded

properties are primary residences. These property owners are often trapped in a

dangerous and expensive cycle. We do flood victims no favors by rebuilding their

homes in harm’s way.

To deal with these problems, Representative Doug Bereuter and I introduced legislation during the last three Congresses to reform the NFIP. The strategy was to

avoid many of the injuries, deaths, and damages before they occur, and give property owners the option of moving to a less hazardous area. The bill, H.R. 253, passed

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the House on November 20, 2003 under the title ‘‘The Flood Insurance Reform Act

of 2003.’’

Our approach helps build disaster resistant communities and safe homes by providing mitigation assistance to communities; there is currently more demand for

this type of mitigation than FEMA and local governments can provide. The bill authorizes a pilot program that provides funding for communities to help relocate or

elevate properties that have sustained repeated flood damage. A property owner is

eligible for a mitigation offer if he or she has received four or more separate flood

insurance claims payments each exceeding $5,000 with the cumulative amount of

such claims payments exceeding $20,000 or 2 or more separate NFIP claims payments that cumulatively exceed the value of the insured property. Those who refuse

mitigation funding could see their flood insurance rates increase to better reflect the

actuarial cost of continuing to live in harm’s way. This Act does not deny national

flood insurance coverage to any interested owner, renter, or occupant of a property.

This bill has a number of benefits:

• Most importantly, it will move people out of harm’s way and discourage newcomers from moving there. This bill will save lives by moving people to higher

ground. • Often overlooked is that the reforms in this bill will save the Federal Government

millions of dollars in avoided flood damages. FEMA reports that mitigation and

building standards already in place have resulted in over $1 billion annually in

reduced flood losses. Our bill will significantly increase these savings by increasing funding for the mitigation grant assistance program. • These reforms will also present significant potential savings to ratepayers in the

National Flood Insurance Program. Mitigating repetitively flooded properties will

reduce the pressure to raise flood insurance rates. The Association of State Floodplain Managers estimates that avoiding just one 10 percent rate increase could

save the 4.4 million policyholders $175 million each year. • Finally, this bill will significantly benefit the environment.

• If property-owners choose to relocate, the land will convert to open-space. • Non-structural approaches to flood control, such as voluntary buyouts and restoration of natural floodplains, are often much more effective in controlling

floods than structural approaches. • Natural floodplains also prevent pollution problems from flooding.

The change in title of this bill to the ‘‘National Flood Insurance Reform Act of

2003’’ represents a substantive change in the approach to dealing with repetitively

flooded properties. As the legislation went through the House Financial Services

Committee and to the Floor, we had the opportunity to work with Members from

coastal areas to make the reforms more sensitive to the plight of their constituents.

I especially appreciated the constructive work of Representative Baker from Louisiana and Representative Gene Green from Texas. As a result of input from these

and other stakeholders, more resources in the bill now go to the heavily flooded

States; more flexibility is given to FEMA and local governments in the mitigation

process; and the bill more sensitive to the problems of families who are continually

flood victims.

I respectfully urge the Senate to pass H.R. 253, the ‘‘Flood Insurance Reform Act

of 2003.’’ This is one of the best fiscal and environmental opportunities for Congress

this year.

—————

PREPARED STATEMENT OF ANTHONY S. LOWE

ADMINISTRATOR, FEDERAL INSURANCE AND DIRECTOR, MITIGATION DIVISION

FEDERAL EMERGENCY MANAGEMENT AGENCY

U.S. DEPARTMENT OF HOMELAND SECURITY

MARCH 25, 2004

Chairman Bunning, Ranking Member Schumer, and Members of the Subcommittee, I am Anthony S. Lowe, Federal Insurance Administrator and Director

of the Mitigation Division of the Federal Emergency Management Agency (FEMA)

of the Department of Homeland Security. On behalf of the National Flood Insurance

Program (NFIP), we welcome and appreciate the invitation to appear today before

the Economic Policy Subcommittee of the Senate Banking, Housing, and Urban Affairs Committee.

We are pleased to report to the Subcommittee that the state of the NFIP is sound.

The NFIP is implementing a number of results-oriented initiatives to build upon the

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program’s past successes and current strengths while making the necessary adjustments for the future.

It has now been over 35 years since Congress first authorized the NFIP.

Since 1968, the NFIP has met and continues to meet an important property insurance need: To offer flood insurance to those exposed to flood hazards across the

country—coverage that is virtually unavailable from the private insurance market.

The series of devastating hurricanes and storms in the early to mid-1960’s underscored the need for this coverage. However, two features of the original design significantly hindered the NFIP from becoming broadly successful. The program was

voluntary both for the local community and for the individual property owner.

Flood-prone communities faced no economic consequences for not joining the program. Property owners at risk were not required to buy flood insurance. As a result,

the NFIP remained underutilized, with 5,500 participating communities and only

273,000 flood insurance policies at the end of 1973.

When a series of severe floods in the early 1970’s revealed that very few of the

flood victims had flood insurance, Congress passed legislation to address these

shortcomings. The Flood Disaster Protection Act of 1973 placed requirements on

both the local community and the property owner. First, the Act encourages community participation by offering identified flood-prone communities with a clear choice:

Either join the NFIP or face the loss of Federal financial assistance in their highrisk flood areas. Second, the 1973 Act places requirements on individual owners of

property located in flood hazard areas. These individuals must purchase flood insurance to either be eligible for federally related mortgages or to receive other Federal

assistance, including Federal disaster assistance. As a result of these changes, participation in the NFIP greatly increased over the following 20 years. By 1994, there

were over 18,000 participating communities and 2.8 million policies.

But the Midwest Flood of 1993 revealed that participation in the NFIP still needed to be greater. It became clear that the program needed reforms to ensure compliance by lenders with the flood insurance purchase and retention requirements of the

1973 Act. Lenders were given those tools through the passage of The National Flood

Insurance Reform Act of 1994. This Act has enabled the program to grow, and today

there about 4.4 million policies totaling about $650 billion in coverage.

A major benefit is that claim payments for flood damage under the NFIP reduce

the burden on taxpayers for Federal disaster relief. These claims payments have exceeded $12 billion in the history of the NFIP.

The NFIP now stands as the largest, single-line property insurance writer in the

United States.

But the success of the NFIP is not measured only in the number of policies issued

and the flood damages that have been paid but also in losses avoided. Today, the

nearly 20,000 participating communities across America have adopted and are enforcing the program’s mitigation standards to protect new buildings from flood hazards. The floodplain management standards these communities are implementing

are part of an overall strategy. The strategy benefits the entire floodplain, and, in

a number of cases, holds the line altogether on new construction in the flood hazard

areas. The mitigation standards of the program to elevate or flood-proof new construction are reducing America’s flood damages by an estimated $1 billion each

year.

Mr. Chairman, besides the obvious successes the program is enjoying, I am also

happy to report that the NFIP is once again debt-free.

As you know, the program does not receive appropriations to pay for its operations. It is self-supporting through premium income from our policyholders enabling us to pay losses which are have averaged approximately $750 million per year.

However, flood losses for a specific year can vary significantly from this average.

When flood losses exceed NFIP reserves, we have the authority to borrow funds

from the U.S. Treasury to pay for those losses. Whenever we have to borrow from

the Treasury to pay for historically high losses, we must repay with interest what

we borrowed. Since 1986, when the program received its last appropriation, we have

borrowed and repaid approximately $2.7 billion.

In June 2001, for example, Tropical Storm Allison battered the Gulf Coast and

East Coast States. After final losses were tallied, Allison became, sadly, the program’s first billion-dollar storm. The NFIP had to borrow $660 million from the

Treasury. We repaid that debt—with interest—as of October 2002. So once again

the NFIP is operating debt-free, and the program continues to stand on solid financial ground.

More recently, in September 2003, Hurricane Isabel caused extensive flood damage in six Mid-Atlantic States and the District of Columbia. To date we have paid

$263 million on 16,776 flood insurance claims to insured victims of that event. We

expect to pay out approximately $450 million on the total 24,725 flood insurance

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claims from Hurricane Isabel. We will not need to borrow any funds from the U.S.

Treasury to pay Hurricane Isabel claims.

The NFIP however, does not just react to disasters and pay claims. In the past

year, the NFIP began major outreach campaigns to inform the public about the importance of flood insurance. For example, the NFIP recently entered into an agreement with a major advertising firm to build a flood insurance marketing strategy,

which will include a comprehensive multimedia campaign. After the California

wildfires, we also supplemented our flood insurance marketing in California to make

certain that residents understood the increased flood risk and benefits of flood insurance. The NFIP is also working to assure that our customers and industry partners understand flood insurance restrictions in Coastal Barrier Resource Systems,

and to this end we are collaborating with the Fish and Wildlife Service on a comprehensive CBRA outreach strategy. These outreach tools raise public awareness of

flood hazards and the role of flood insurance, and are designed to increase NFIP

policy growth by 5 percent annually.

I am also pleased to report that we are maximizing the program’s insurance

mechanism to achieve mitigation. We have increased the benefits under our Standard Flood Insurance Policy to help property owners pay for mitigation measures necessary to comply with State and local ordinances after substantial or repetitive flood

losses. These mitigation measures include assistance with elevations, buyouts, and

relocation of flood-prone properties. An increase in benefits from $20,000 to $30,000

became effective on May 1, 2003. We consider this coverage an important mitigation

tool that enables our policyholders to protect their properties after a substantial

flood loss and break the cycle of flood damage and repair. This is an example of how

FEMA is using flood insurance protection to reduce costs to taxpayers and provide

a bridge to mitigation that prevents future losses.

But the NFIP is not without challenges or issues of concern.

Before addressing the need for the reauthorization of the NFIP, I want to particularly thank the Banking Subcommittee for its leadership in reauthorizing the

program for 2003 and the first quarter of 2004. For the first 13 days of 2003 the

program’s authorization lapsed. Through the Committee’s efforts we were able to

maintain operations and service to the 4.4 million policyholders as well as to the

lending and real estate industries that rely on the program for protection against

flood losses. The temporary disruption to the NFIP underscored the importance of

flood insurance to the American economy.

The NFIP is currently reauthorized annually and has several distinct authorities

that must be changed during each reauthorization. We believe that it would be beneficial if the NFIP were reauthorized on a 5-year basis. Of course, it would be our

pleasure to work with the Subcommittee on appropriate changes.

Let me now address the issue of repetitive flood loss. It is a national problem,

and a problem with both a human impact and an economic impact. The majority

of the repetitive flood loss buildings are primary residences, meaning that many

families find themselves in a flood-rebuild-flood cycle. The 48,000 repetitive flood

loss buildings account for about 25 percent, or $200 million, of the flood claims payments each year. By itself, our Repetitive Loss Target Group, which is a subset of

the 10,000 worst repetitive loss properties, accounts for $80 million in annual losses.

These losses increase pressure each year to raise rates for other policyholders and,

when combined with a higher than average loss year, make it more likely that the

program will have to borrow from the U.S. Treasury.

Paying claims for the same properties time and again is not good public policy,

not sound business practice, and not prudent stewardship. We are spending far too

much money on just a handful of properties—a costly drain on the NFIP and its

policyholders. Reducing the number of repetitive loss properties is one of our top priorities.

The problem of repetitive flood losses is largely a vestige of the past. Congress

structured the NFIP as an agreement between the Federal Government and local

communities.

To participate in the NFIP, communities must adopt and enforce flood mitigation

standards for new construction in their high-risk flood areas. In return, flood insurance is made available to all properties built before the availability of detailed flood

maps at premium rates that do not fully reflect the true risk. Congress directed discounted premium rates for such existing properties so as not to penalize those who

bought or built in the floodplain without full knowledge of the flood hazard. As such,

these property owners are permitted to pay subsidized premiums for flood coverage.

We call these properties ‘‘Pre-Flood Insurance Rate Map’’ or ‘‘Pre-FIRM’’ properties. Repetitive flood loss properties are for the most part a subset of these PreFIRM structures, with Pre-FIRM properties accounting for close to 90 percent of all

repetitive loss properties nationwide.

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There were good public policy reasons for providing insurance to these older properties at less than full-risk premiums. However, properties that flood over and over

again lock their owners into a dismal cycle of damage and repair—with diminishing

property values.

Today, the Department of Homeland Security has mitigation programs that can,

and are, being used to reduce the Nation’s repetitive flood loss problem. However,

the participation in our mitigation programs is voluntary. We have not always had

the needed leverage or incentives for repetitive flood loss property owners to accept

grant offers intended to reduce or eliminate the flood risk.

FEMA is making strategic changes to focus on our repetitive loss problem. We

have targeted about 10,000 repetitive flood loss properties as the highest priority

for mitigation in our repetitive loss strategy. These 10,000 high-priority properties,

which are currently insured under the NFIP, have had four or more flood losses,

or two or three losses that cumulatively exceed the value of the building. These

10,000 are the ‘‘extreme cases,’’ ones that we have paid close to $1 billion in flood

insurance claims over the last 25 years. This small set of properties now cost the

NFIP about $80 million in claims each year. We are targeting these properties for

mitigation actions that will remove them altogether from the floodplains, elevate

them above the reach of floodwaters, or apply other mitigation measures to significantly reduce their exposure to flood risk.

We are now building a consensus on the best practices and latest technologies to

use to mitigate repetitive loss properties. For example, we recently gathered some

of the Nation’s leading experts in the repetitive loss problem for a 3-day workshop

to discuss their experiences in addressing this issue. The result of this workshop is

a Repetitive Loss Action Plan, which is being finalized. We will use this action plan

to guide our efforts in the coming months and years.

With this current grant cycle we are emphasizing the importance of addressing

repetitive loss properties to States and communities. For fiscal year 2004, we will

direct all funding for the Flood Mitigation Assistance program toward mitigating repetitive loss properties. We will place a national priority on the Pre-Disaster Mitigation applications addressing the mitigation of repetitive loss properties.

We are also undertaking additional steps to address the repetitive loss problem.

The policies on these properties are serviced separately to better coordinate claims

handling. We are reviewing all of our repetitive flood loss databases and making accurate flood loss data available to State and local governments for mitigation

projects. We are also offering incentives under our Community Rating System, or

CRS, program to communities to address this issue locally. CRS provides premium

discounts of up to 45 percent for local mitigation actions.

The steps we have taken to date have only partially addressed the repetitive loss

problem. Even with our proposed increased emphasis in the grant programs, we will

make limited progress in addressing this serious problem. To aggressively address

this problem, we will need additional tools.

We commend the House Committee on Financial Services on the passage of

H.R. 253, the Flood Insurance Reform Act of 2003, which reauthorizes the NFIP for

5 years and provides resources and a structure to reduce repetitive flood losses. We

would be pleased to work with this Committee on furthering these efforts.

Mitigation projects are most successful when State and local governments are involved in their development and execution. Certainly where there is a non-Federal

cost share requirement, State and local governments have a stake in the process

and outcome. However, there will be instances in the interest of protecting lives and

property, where we will need the authority to address individual properties that are

not part of any larger mitigation effort.

A broad effort that has the flexibility to recognize individual circumstances will

give us the means to address the repetitive loss problem in ways that can be refined

based on what we learn about these properties. We can achieve results that are

good for the community, the individual property owner, and the National Flood Insurance Program.

These measures I have described will strengthen our ability to remove the costliest risks from the NFIP and help people end the devastating cycle of damage-repair-damage.

Mitigating the highest risks, which include repetitive flood loss properties, also requires accurate risk assessment. This is why our Flood Map Modernization initiative is critical to our efforts to reduce the exposure of people and property to flood

hazards. Congress appropriated $150 million in fiscal year 2003, and $200 million

in 2004, for flood map modernization. This will be added to the approximately $50

million in funding from NFIP fees that contribute annually to the mapping program.

This combination of funds enables us to continue a multi-year effort that will cost

approximately $1 billion.

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We approach this multi-year effort with the certainty that to be successful we

must leverage all of our partnerships—State, local, and regional entities, as well as

other Federal agencies and the private sector.

Managing our flood map modernization and hazard mitigation efforts will also

help build a foundation for the Department of Homeland Security to safeguard the

Nation from the full range of hazards, natural and manmade, including repetitive

flood loss properties.

How we fully address the repetitive loss problem still needs to be resolved, but

we are all in agreement that we need to address the problem. This problem affects

both individual property owners and entire communities that flood time and again.

Again, we appreciate the help of this Committee in re-authorizing the NFIP

through the end of March. As you face the upcoming task of renewing our authorization, we strongly believe that a multi-year authorization—preferably 5 years—will

best serve the policyholders and the real estate and lending industries.

In closing, I appreciate the opportunity to represent the Department of Homeland

Security before the Economic Policy Subcommittee. I am pleased to answer any

questions you may have.

—————

PREPARED STATEMENT OF CHAD BERGINNIS

CHAIR, ASSOCIATION OF STATE FLOODPLAIN MANAGERS, INC.

MARCH 25, 2004

Introduction

The Association of State Floodplain Managers, Inc., and its 18 State chapters represent over 6,500 State and local officials and other professionals who are engaged

in all aspects of floodplain management and hazard mitigation, including management, engineering, planning, community development, hydrology, forecasting, emergency response, water resources, and insurance. All are concerned with working to

reduce our Nation’s flood-related losses. Our State and local officials are the Federal

Government’s partners in implementing programs and working to achieve effectiveness in meeting our shared objectives. Many of our members are designated by their

governors to coordinate the National Flood Insurance Program (NFIP). For more information on the Association, please visit http://www.floods.org.

The ASFPM is enthusiastic that the Committee has put consideration of NFIP reforms high on its agenda for the 108th Congress. We are appreciative of the time

and attention that Representatives Bereuter, Blumenauer, and Baker have collectively paid to the issue of repetitive claims against the NFIP and how measures to

reduce those claims can be put into place. We would also like to recognize the time

and resources that FEMA has dedicated to the issue of repetitive loss properties,

and commend their prioritization of repetitive loss properties as a significant issue.

Thank you for inviting us to offer our views on the repetitive loss property issue

and recent actions taken by the Congress and FEMA to mitigate repetitive losses.

The following testimony addresses:

• The Nation’s 4.4 Million Policyholders Benefit by Addressing Repetitive Loss

Properties;

• An Effective Approach to Mitigating Repetitive Losses in the Nation;

• Reform of Existing Mitigation Insurance Will Strengthen the Repetitive Loss Legislation;

• FEMA’s Repetitive Loss Strategy;

• Matters Related to Reauthorization of the NFIP;

• The NFIP and the Department of Homeland Security;

• FEMA’s Map Modernization Initiative;

• The Effectiveness and Value of the National Flood Insurance Program and

FEMA’s Flood Mitigation Programs.

The Nation’s 4.4 Million Policyholders Benefit by Addressing Repetitive

Loss Properties

It is important to put the repetitive loss problem in context. While the exact number is not known, it is estimated that between 9 and 11 million buildings are in

the areas we call special flood hazard areas that are shown on FEMA’s Flood Insurance Rate Maps. About 4.4 million buildings both in and out of the floodplain are

insured today (up from only 2 million just 9 years ago). Of those, about 40,000 are

on FEMA’s list of repetitively flooded properties. Nearly 10,000 have experienced

four or more losses, or two or more losses which combine to exceed the building’s

value as reported on the flood insurance policy (FEMA uses this definition for the

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‘‘Target Group). This means that initially we are focusing attention on one-quarter

of 1 percent of the insured buildings. But the impact is huge, since that small fraction accounts for over 25 percent of the NFIP’s losses since 1978.

Why, then should everybody be concerned? All current and future NFIP policyholders will benefit from addressing repetitive loss properties because the pressure

to raise the rates will be significantly diminished. FEMA reports that, as a larger

group, all properties that have received multiple insurance claim payments account

for an average of $200 million in claims each year. This contributes significantly to

the pressure to raise the rates on all types of policies and accounts for a significant

factor affecting the stability of the National Flood Insurance Fund.

Although it is a simplistic assessment, if just one rate increase can be avoided,

4.4 million policies holders throughout the Nation could be able to keep in their

pockets as much as $175 million (FEMA cannot raise rates more than 10 percent

at any time, although the typical increase is 4–8 percent). Estimated savings for the

10 States with largest number of priority repetitive loss properties are shown in the

following table. To estimate savings for other States, see the NFIP policy statistics

that are online at: http://www.fema.gov/nfip/pcstat.shtm.

A repetitive loss strategy should be viewed as a cost containment initiative for the

NFIP that will benefit every current and future policyholder. It makes sense for the

policyholders to invest in cost effective measures that will, in short order, reduce

the pressure to raise the rates.

An Effective Approach to Mitigating Repetitive Losses in the Nation

General Comments on Repetitive Loss Strategies

It must be clear that any repetitive loss strategy should fund only mitigation

measures for specific properties that achieve results that are cost effective and in

the best interests of the NFIP. For mitigation projects, benefits are defined as ‘‘damages avoided if the project is implemented.’’ Under this requirement, a building that

has sustained several low-dollar value claims will rarely have a cost-effective solution, and thus an offer of mitigation assistance will not be made. If there is a cost

effective mitigation measure, such as elevation-in-place, a property owner should be

encouraged to participate. If the owner declines an offer, the rest of the policyholders should not have to bear the continued claims against the Fund.

It must also be clear that only projects that are technically feasible will be funded.

There will be properties for which the typical approaches (acquisition or elevation)

will not be possible, in which case an offer for such measures will not be made. For

example there are many situations where low-cost measures can have significant

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benefits, such as relocating utilities out of a basement. For nonresidential structures, of which there are many near the top of FEMA’s list of repetitive loss properties, a range of retrofit floodproofing options may yield significant benefits.

When a specific property cannot be mitigated in a manner that is both technically

feasible and cost effective to the NFIP, then the best mitigation is continued subsidized insurance, as anticipated by Congress when the NFIP was created in 1968.

While the NFIP policy base as a whole would continue to subsidize the risk (which

is the fundamental premise of insurance), at least the owners will continue to purchase flood insurance and contributes their own recovery, thus not burdening the

U.S. taxpayer. The cross subsidy for these particular structures will be comparatively small.

FEMA’s other mitigation programs and tools can be brought to bear to support

mitigation of repetitive losses. Any new initiative can and should be designed to

work in concert with existing programs to maximize effectiveness. These existing

programs and tools include:

• Mitigation insurance (Increased Cost of Compliance) which is described below and

is ripe for revisions;

• The Flood Mitigation Assistance Program authorized by Congress as part of the

NFIP Reform Act of 1994 as Section 1366;

• The Nationwide Pre-Disaster Competitive Mitigation Program, authorized in 2000

and funded in fiscal year 2003 and fiscal year 2004 to create a nationwide competitive grant program; and

• The post-disaster Hazard Mitigation Grant Program authorized by the Robert T.

Stafford Disaster Relief and Emergency Assistance Act—but this vital funding

source was proposed to be zeroed in the fiscal year 2003 and fiscal year 2004

budget and we expect that pressure to continue (see Section H, below).

Objectives of a Repetitive Loss Strategy

In addition to cost containment for the NFIP and its policyholders, an effective

repetitive loss strategy will, without a doubt, reduce Federal disaster assistance, although it may take longer to see the effects. When we relieve the pressure to raise

the rates, more people will see that flood insurance is a ‘‘good buy’’ as the cost comes

more in line with their perceived risk. This is the single most significant way to reduce that part of the Federal disaster dollar that supports uninsured individuals,

families, and businesses after the President declares a flood disaster. For flood-related disasters declared between 1989 and 1998, FEMA paid over $3 billion for Individual and Family Grants (does not include SBA and other agencies, or the effects

of the casualty loss deduction on tax income). For this reason, ASFPM believes it

is appropriate for a repetitive loss strategy to increase funding for the basic Flood

Mitigation Assistance Program and to modify the insurance mechanism called Increased Cost of Compliance. ASFPM’s proposal has been submitted to the Subcommittee.

An effective repetitive loss strategy will not place an unnecessary burden on lowincome homeowners and renters that occupy houses in the Nation’s repetitive loss

areas. Often the low-income occupant simply does not have the financial ability to

move elsewhere or to pay for mitigation measures. It is far too simplistic to assume

that every owner is able to make a rational choice based on cost alone. In those instances where grants or offers are made to low-income homeowners and renters, we

are concerned that it be done in a carefully crafted manner that networks with existing housing programs. Further, we propose that ‘‘comparable housing’’ be included when communities extend buyout offers to these owners.

National Repetitive Flood Loss Mitigation Legislation

On November 20, 2003, the House of Representatives passed the Flood Insurance

Reform Act of 2003 (H.R. 253). We commend the House sponsors for their efforts,

and believe the bill contains a number of important provisions, including:

• A framework for mitigating repetitive loss properties through a community/Stateoriented program and a direct property owner program (when the State or community is unable to manage such a grant);

• A consequence that moves flood insurance policies toward actuarial rate in the

event a property owner rejects an offer of mitigation;

• The flexibility to use many different types of mitigation options; and

• An appeals process.

For these reasons, the ASFPM supported the passage of H.R. 253 in the House.

However, the ASFPM remains concerned with certain aspects of the bill and urge

your consideration of revisions to address these matters. We believe the bill:

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• Contains definitions, procedures, and provisions that are either too cumbersome

or inconsistent with existing mitigation programs which could result in delays,

confusion, and unintended consequences during implementation; • Does not adequately integrate into the existing mitigation insurance mechanism

(which could alleviate nearly all concerns about the cost share requirements for

communities and property owners); and • Modifies the basic Flood Mitigation Assistance Program which has had demonstrated success providing mitigation opportunities in many communities and

which must continue unchanged.

The ASFPM feels that certain adjustments must be in the House bill to ensure

that the resulting national repetitive loss mitigation legislation will be effectively

implemented by FEMA, States, and communities to address our goals and objectives

while also supporting community needs. The ASFPM offers the following suggestions.

• Preserve Basic Flood Mitigation Assistance Program (FMA), while making

some Modifications to Improve Effectiveness. It is important to maintain the existing FMA as the basis on which the focus on repetitive losses is built. The basic

program works well and needs to continue after expiration of any new authority.

However, there are some modifications that can be made to build on its effectiveness, such as: (1) Specifying that the valuation for acquisition should be based on

Fair Market Value (current FMV is usually selected when flooding occurred some

time in the past and homes have been repaired or appreciated in value). When

a flood has just occurred, we use pre-flood FMV, but then are required to subtract

certain disaster assistance payments and insurance claim payments (to avoid Duplication of Benefits). Many communities select post-flood FMV and then owners

are allowed retain any disaster assistance and their insurance payments (which

are determined as an estimate of cost to restore the home to pre-flood condition);

(2) Eliminate the limitations on amounts to States and communities for project

grants; and (3) Eliminate the requirement that in-kind contributions shall not exceed one-half the amount of the non-Federal funds.

• Define the Focus of New Programs for Priority Repetitive Loss Properties. We recommend that the bill define ‘‘priority properties’’ as a subset of

NFIP-insured properties that, based on available data, appear to represent opportunities to mitigate unreasonable burdens on the National Flood Insurance Fund

due to multiple insurance claim payments. It is this subset of properties that will

then be examined to determine whether there are reasonable, feasible, and costeffective mitigation measures. Any property that does not have such a measure

should be removed from the subset and should no longer be identified as a ‘‘priority property.’’

• Authorize the Repetitive Loss Priority Program as a grant program to be administered as an adjunct to the Basic FMA to achieve mitigation of ‘‘priority properties.’’ Eligible grantees and eligible activities should the same as those for Basic

FMA, provided they address ‘‘priority properties.’’ The ASFPM recommends that

this part of the new program be funded in the amount of $50 million per year

for 6 years, to be transferred to the National Flood Mitigation Fund from the National Flood Insurance Fund, and made available until expended; FEMA should

be specifically directed not adjust rates/fees for offsetting income (due to the rapid

cost savings expected by focusing on the top-tier of repetitive loss properties). For

acquisitions, valuation should be as defined for Basic FMA, and restrictions on

ownership and use of cleared land should be consistent with FEMA’s other grant

programs. Finally, the program should specify that mitigation offers are valid

until the State or community indicates closure of the grant (although individual

properties would continue to remain eligible under the Individual Priority Property Program (next item), so an owner who initially declines an offer may yet be

extended another offer).

• Authorize the Individual Priority Property Program to give FEMA the authority to make grants directly to property owners, but only if States and communities do not have the capacity to manage grants. Again, eligible activities should

be those defined for Basic FMA, although it is notable that FEMA is not able to

take title to land and thus acquisition is not a viable option under this program.

Authorized funding for the Individual Property Program should be in the amount

of $20 million per year for 6 years and $10 million per year thereafter, such

amounts to be available until expended; such amounts to be transferred to the

National Flood Mitigation Fund from the National Flood Insurance Fund; FEMA

should be directed specifically not adjust rates/fees for offsetting income.

• Authorize a consequence for owners of ‘‘priority properties’’ who decline mitigation offers under the Repetitive Loss Priority Program and the Individual PropVerDate 11-MAY-2000 16:55 Oct 06, 2005 Jkt 000000 PO 00000 Frm 00071 Fmt 6633 Sfmt 6621 23729.TXT SBANK4 PsN: SBANK4
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erty Program. The consequence should be the imposition of actuarial rates

(whether all at once or in a stepped process). Additionally, the consequence should

be attached to the property and FEMA should create a process to formally notify

owners of the consequence and their right to appeal the consequences of declining

an offer of financial assistance to implement a feasible and cost-effective mitigation measure.

• Allow Increased Cost of Compliance (ICC) to be used as part of the local

match for the Repetitive Loss Priority Program and the Individual Property Program (please see discussion in Section C, below).

• Require that Privately Owned Buildings on Leased Federal Lands be

charged full actuarial rates of flood insurance unless the Federal landowner agency preserves the quid pro quo of the NFIP by implementing a system to review

structural development and require it to be compliant with minimum NFIP standards, thereupon the structures would be charged flood insurance rates consistent

with those charged in communities in good standing with the NFIP.

Reform of Existing Mitigation Insurance will Strengthen the Repetitive

Loss Legislation

The 1994 NFIP Reform Act authorized mitigation coverage as part of the standard

flood insurance policy. Called ICC or ‘‘Increased Cost of Compliance,’’ it was touted

by FEMA—and expected by others—to be one of the best tools to bring about postflood mitigation, in part because it is funded by a surcharge on flood insurance policies. Although FEMA increased the benefit under ICC to $30,000 (effective May 1,

2003), in actuality, as currently administered this increase does very little to increase funding of eligible mitigation activities. The average ICC payment to support

an acquisition project is on the order of $7,000. For elevation projects the average

is around $16,000. While we appreciate that initially the agency had no experience

on which to base its interpretations, much has been learned in the last 5 years. Currently ICC collects over $80 million in premiums, yet not even 2 percent of that

money is spent annually to pay ICC claims.

Every flood insurance policy on property within a mapped floodplain—even postFIRM policies, pays something for ICC. The cost ranges from $6 to $75 per year

(capped by statute). The upper limit is paid on pre-FIRM buildings and V Zone

buildings (where open coast where wave energies and erosion are greatest). It is notable that post-FIRM buildings (built in compliance with the rules) pay for this coverage even though the chances of ever qualifying are slim. This is because Congress

recognized the long-term benefits: If ICC works correctly, then every policyholder

will enjoy the benefits of reduced pressure to raise the rates.

ICC is a claim, paid only if damage is triggered by a flood event and only if the

damage is sufficient to meet one of three triggers. Every community in the NFIP

administers what is commonly referred to as ‘‘the 50 percent rule’’ or substantial

damage. If the cost to repair a damaged building to its predamage condition exceeds

50 percent of its market value, then the community’s rules require the owner to

bring it into compliance. Most commonly, this means the existing building is lifted

off its foundation and raised on a new, higher foundation. This substantial damage

rule has been in place since early in the program; until ICC was authorized, the

owner had to bear the entire cost. The second trigger is a variation of substantial

damage called ‘‘cumulative substantial damage.’’ The statute defines this as two or

more claims in a 10-year period, each of which is at least 25 percent of the market

value of the building. However, because the statute specifically states that compliance is required, FEMA’s implementation requires the community to have an ordinance that mirrors that trigger. Very few communities have adopted that ordinance

language.

The third trigger is one that has not been implemented by FEMA. That trigger

explicitly authorizes the FEMA Director to pursue mitigation offers for properties

for which it is determined that it is cost-effective and in the best interests of the

NFIP to achieve compliance. It is our understanding that FEMA’s reluctance is

based, at least in part, on the statutory constraint that ‘‘compliance’’ is required.

FEMA does not impose compliance—that is the purview of the local regulatory authority.

The ASFPM believes that ICC must be integrated into the new repetitive flood

loss program, and has offered some recommended changes to Sec. 1304(b). These

changes will assure that it achieves the originally intended objectives. We also urge

the Committee to consider a fourth trigger to explicitly requiring that an ICC claim

be allowed and counted as local matching funds when an offer of mitigation is made

under the new Repetitive Priority Program, the new Individual Loss Property Program, and FEMA’s other mitigation assistance programs.

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This amendment is essential because it substantially decreases or, in many cases,

would likely eliminate the community’s (or property owner’s) burden of coming up

with the local cost share. It is important to note that ICC funds are collected from

policyholders and are not Federal funds. Because of the amount collected since ICC

was authorized (approximately $400 million of which less than $20 million has been

used), we believe that FEMA’s likely concerns about how our proposals would impact the pricing of the coverage should be blunted.

FEMA’s Repetitive Loss Strategy

FEMA has been looking at numerous ways to bring about mitigation of repetitive

loss properties and recently hosted a discussion session with stakeholders, including

the ASFPM. FEMA has made some adjustments to existing grant programs, but the

agency is limited in what it can do without changes to FMA and ICC that we are

recommending. We would like to commend FEMA for their utilization of resources

and an open, collaborative process involving stakeholders to create its repetitive loss

strategy.

Matters Related to the Reauthorization of the NFIP

The ASFPM does not consider the NFIP’s periodic sunset provision to be an explicit expression of Congressional intent that the program may actually be terminated. It is a convenient mechanism to require periodic attention to the needs of

the program. The consequences of short-term lapses have been outlined by others,

in particular, the insurance and lending industries that are especially sensitive to

this issue. We submit that it is reasonable to reauthorize the NFIP on a 3-year

basis, which will preserve the opportunity for oversight on a regular basis. This

timeframe is important for two reasons: (1) to allow for consideration of the success

and progress of the proposed new repetitive loss programs, and (2) because the results of the NFIP’s first objective and comprehensive evaluation will become available within the next year or so.

The NFIP and the Department of Homeland Security

The NFIP is only one of FEMA’s many responsibilities that are now transferred

into the Department of Homeland Security (DHS). The ASFPM is very concerned

that the NFIP’s mission—and FEMA as a whole—will get overwhelmed by the

forces driving DHS. Millions of homes and businesses are located within the Nation’s floodplains and development pressures continue. These people are located in

areas that, with reasonable scientific certainty, we can say are exposed to a 1 percent or greater chance of flooding in any given year. Every year, areas in nearly

every State are flooded, often damaging critical local infrastructure and forcing

thousands of people out of their homes. This is a risk that we cannot allow to fall

victim just because FEMA is in a new agency.

We appreciate Secretary Tom Ridge’s statement made before the House Appropriations Homeland Security Subcommittee last spring that FEMA’s mission ‘‘will

not be jeopardized in any way, shape or form.’’ We are particularly encouraged that

he specifically mentioned the importance of mitigation in that mission. However, we

are greatly concerned that the Initial Draft of the National Response Plan, which,

under Presidential Directive, is to be created by DHS, eliminates ‘‘mitigation’’ as a

term and concept. Since the National Response Plan is to supercede the Federal Response Plan (which has mitigation as a foundation of the Nation’s overall response

strategy), we question the true future of mitigation under DHS.

A major part of FEMA’s mission is disaster loss mitigation. Millions of people,

buildings, and public infrastructure facilities are at risk due to natural hazards. Development of mitigation policies and programs is absolutely essential to controlling

the huge costs of natural disasters and will contribute to saving lives and property.

Such policies are an important corollary to FEMA’s response and recovery capabilities. In fact, mitigation often is accomplished in the immediate aftermath and rebuilding phase following a natural disaster when people’s awareness of their risks

is high and local and State commitments leverage Federal dollars.

States and local jurisdictions know FEMA for its disaster response functions.

They also know FEMA for its role in establishing long-term policies that influence

new development and redevelopment in high risk areas. FEMA establishes minimum flood hazard area development regulations, provides Federal flood insurance,

prepares and issues flood hazard maps, and coordinates technical assistance

through the States to help communities and land owners manage flood hazards in

ways that minimize damage. FEMA works with building code organizations to incorporate reasonable and cost effective mitigation measures into building codes, and to

encourage States and local jurisdictions to adopt those codes in order to remain economically and socially viable by reducing flood losses. FEMA’s partnerships, and

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grams are important to the Nation’s efforts to prepare for, respond to, recover from,

and mitigate against the perils of natural hazards.

It is important for us to agree that a Federal flood insurance program is a vital

component in the economic well-being of the Nation. Without the NFIP, trying to

bear the rising costs of flood disasters would have catastrophic financial implications

for millions of families and businesses and about 19,600 counties, cities, towns, and

villages across the country. Once we agree on the NFIP’s importance, then we can

pursue what is needed to strengthen the program in a variety of ways.

We urge the Committee to maintain regular contact with DHS to ensure that the

short-term and long-term benefits of the NFIP are realized in the coming years. To

that end, we suggest that the Committee monitor FEMA’s budget to ensure that

adequate funds are requested and spent to accomplish the goals set forth in statutes

under the Committee’s jurisdiction, and to express your desire that the NFIP and

hazard mitigation remain high on DHS’s priorities.

FEMA’s Map Modernization Initiative

The importance of modernizing and updating flood hazard maps is now widely understood, and based on the fiscal year 2003 and fiscal year 2004 budgets, funding

is being provided. The initiative will span at least 5 years, and the end products

will be better quality, converted to modern technology that will facilitate administering programs to reduce flood losses in nearly 20,000 communities, and lower

long-term costs to maintain the maps.

The ASFPM is concerned that bureaucratic hurdles may adversely impact implementation of the flood map modernization program. For example, a new contract

with the ‘‘National Service Provider’’ contractor that will have significant responsibilities in the implementation of map modernization is not yet signed. There have

been delays created due to the extra layer of review and approval as a result of

FEMA being an entity within DHS.

The Effectiveness and Value of the National Flood Insurance Program and

FEMA’s Flood Mitigation Programs

The National Flood Insurance Program is the Nation’s oldest flood mitigation program. It is a unique arrangement with many stakeholders: (1) the Federal Government establishes regulatory standards, issues Flood Insurance Rate Maps, and

provides the insurance; (2) the private insurance sector sells insurance and the private engineering community performs engineering and planning studies; (3) the

States coordinate the program and provide technical assistance to communities;

local jurisdictions adopt, administer, and enforce floodplain regulations; and (4)

homeowners and business owners buy flood insurance. This arrangement contributes to the program’s effectiveness.

FEMA has estimated that over $1 billion in damages are avoided each year due

to the fact that States and communities administer floodplain regulations to recognize flood hazards in their development decisions. These savings accrue in part to

the U.S. taxpayer because compliant construction is much less likely to sustain

damage and because insured property owners are unlikely to qualify for disaster assistance.

FEMA’s mitigation grant programs require communities to plan in a systematic

way to reduce flood risk. The planning process leads to greater overall disaster resistance and sustainability. In addition to the obvious benefits to owners of structures that are mitigated, there are multiple benefits to the community. Although

often more difficult to quantify in strict benefit:cost models, these multiple benefits

are critical to individual quality of life and a community’s economic vitality.

One of FEMA’s most successful mitigation grant programs, the Hazard Mitigation

Grant Program (HMGP), continues to be jeopardized. Using these post-disaster

funds, States and communities have implemented projects that reduce the damage

potential for over 25,000 buildings. Examples of successes abound. The ASFPM has

published several ‘‘Success Stories’’ publications illustrating examples from all over

the Nation (available online at http://www.floods.org/Publications/free.asp).

For the past 3 years the Administration’s budget has attempted to eliminate

HMGP. It is notable that through the fiscal year 2003 budget process, the amount

of mitigation funding that is made available in the post-disaster period was halved.

This program is formula-based, resulting in funds for mitigation as a function of certain categories of FEMA’s disaster assistance expenditures. It provides funding at

the most opportune time, after a federally declared disaster. Although FEMA has

created a nationwide Pre-Disaster Mitigation program, it will never be as successful

as HMGP because it does not take advantage of the post-disaster period when communities and victims are most aware of their risk and are willing to participate and

leverage other funds. The ASFPM urges the Members of this Committee to learn

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about successful post-disaster mitigation efforts in your home States and to support

continuation of HMGP and to restore it to the 15 percent level.

Conclusion

We appreciate that in the past Congress has provided an array of flood mitigation

tools which increase the prospects that communities, States, and businesses and

families can be truly resistant to future flood disasters. This Committee’s consideration and action on new authorities and funding to allow us to mitigate repetitive

loss properties are vital next steps.

Thank you for the opportunity to provide our thoughts on these important issues.

The ASFPM and its members look forward to working with you as we move toward

a common goal of reducing flood losses.

—————

PREPARED STATEMENT OF WILLIAM STIGLITZ, III

INDEPENDENT INSURANCE AGENT, HYLAND, BLOCK, HYLAND

INSURANCE, LOUISVILE, KENTUCKY

ON BEHALF OF

THE INDEPENDENT INSURANCE AGENTS AND BROKERS OF AMERICA AND

THE NATIONAL ASSOCIATION OF PROFESSIONAL INSURANCE AGENTS

MARCH 25, 2004

Good afternoon Chairman Bunningy, Ranking Member Schumer, and Members of

the Subcommittee. My name is Bill Stiglitz and I am pleased to have the opportunity to give you the views of the Independent Insurance Agents and Brokers of

America (IIABA) and the National Association of Professional Insurance Agents

(PIA) on the National Flood Insurance Program (NFIP or the Program). I am an

Independent Insurance Agent with Hyland, Block, Hyland Insurance of Louisville,

Kentucky, and a member of the Executive Committee of the IIABA.

IIABA is the Nation’s oldest and largest national trade association of independent

insurance agents, and represents a network of more than 300,000 agents and agency employees nationwide. IIABA members are small businesses that offer customers

a choice of policies from a variety of insurance companies. Independent agents offer

all lines of insurance—property, casualty, life, health, employee benefit plans, and

retirement products.

PIA, founded in 1931, is a national trade association that represents member insurance agents and their employees in all 50 States, the District of Columbia, and

Puerto Rico. PIA members sell and service all lines of insurance, specializing in coverage of automobiles, homes, and businesses. PIA represents its members’ interests

in State capitals and in Washington, DC to ensure that policymakers understand

the perspectives and concerns of insurance agents.

Introduction

Let me begin by stating clearly that IIABA and PIA support the NFIP. NFIP provides an important service to people and places that have been hit by a natural disaster. The private insurance industry has been, and continues to be, almost entirely

unwilling to underwrite flood insurance because of the catastrophic nature of these

disasters. Therefore, NFIP is virtually the only way for people to protect against the

loss of their home or business. Prior to the introduction of the program in 1968, the

Federal Government spent increasing sums of money on disaster assistance to flood

victims. Since then, NFIP has saved disaster assistance money and provided a more

reliable system of payments for people whose properties have suffered flood damage.

It is my understanding that since 1986, no taxpayer money has been used to support the NFIP, rather the NFIP has been able to support itself using the funds from

the premiums it collects ever year. We want the program to continue and we hope

it will get stronger.

Our members—independent insurance agents and brokers—play a vital role in

the delivery system for flood insurance. The NFIP has about three and one-half million policies in force with over $370 billion in coverage. The majority of these policies are sold by the more than 110,000 insurance agents participating in NFIP’s

‘‘Write Your Own’’ program. This system operates well and this aspect of NFIP does

not need revision. In fact, IIABA and PIA are greatly concerned about FEMA efforts

to change the WYO program as it applies to insurance agents. I will address that

issue briefly at the close of my remarks.

It is clear, however, that reforms of the NFIP are necessary to address operating

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cient to allow the Program to build up reserves to cover long-term expected losses.

According to the General Accounting Office, multiple loss properties (defined as

those with two or more losses over $1,000 each in a 10-year period) account for

about $200 million in claims per year and about 36 percent of all claims paid on

a historical basis.

What I would like to do this afternoon is explain the five principles that IIABA

and PIA believe must animate any NFIP reform efforts to both improve the program

and avoid any unintended negative effects of reform:

• Strengthen NFIP building regulations.

• Increase compliance with the mandatory purchase requirement.

• Provide additional resources for flood loss mitigation efforts.

• Stop abuse of the program through multiple claims.

• Require mandatory disclosures of flood information.

Strengthen NFIP Building Regulations.

The first principle that we believe should be part of any reform of the NFIP is

strengthened NFIP building regulations. The building regulations help communities

better manage their floodplains in two ways. First, the regulations require communities to ensure that any new construction in floodplains includes safeguards

against flood damage such as building new homes above the flood elevation on pilings. Second, the regulations require that any substantial improvements made to existing buildings in the floodplain incorporate safeguards similar to those required

for new construction.

Experience with the program demonstrates that the building regulations work.

The majority of flood losses are caused by damage to older homes. In fact, only 4

percent of repetitive loss properties were built after 1974. In 1999, the Federal Insurance Administration estimated that the program’s construction standards were

saving $1 billion per year. Structures that are built to the program’s standards are

three and one-half to four times less likely to suffer flood losses. In addition, the

damages to structures built to these standards are 40 percent less per claim than

the damages to older structures.

For example a client of mine with a home on the Ohio River suffered a total loss

of $250,000 in the flood of 1997. In order to rebuild he was required to raise his

home above the hundred year floodplain and comply with all lower level standards

set by the NFIP. My client now has a magnificent home in total compliance with

NFIP requirements and is paying a reasonable premium to continue his flood coverage.

In light of this success, building requirements should be tightened to ensure that

properties are built to minimize potential flood damage and to discourage unwise

construction in floodplains.

Increase Compliance with the Mandatory Purchase Requirement

NFIP would receive additional premiums and improve its financial condition if

there were a better rate of compliance with the mandatory flood insurance purchase

requirement. In 1973, the purchase of flood insurance became mandatory for any

property in a floodplain having a 1 percent or greater chance of flood occurrence in

a given year. The purchase requirement takes effect when a loan is made, increased,

extended or renewed on the property. The Federal Emergency Management Agency

(FEMA) has found that fewer than twenty 5 percent of buildings in areas covered

by the mandatory purchase requirement are actually covered by flood insurance.

And compliance rates vary dramatically. Based on past disasters, coverage has

ranged from less than 10 percent to seventy 5 percent of eligible properties. In fact

I have seen that many insured’s do not renew their mandatory coverage after the

first year due to the cost of the policy and the lack of an enforcement mechanism

on the part of lenders.

Sanctions for and enforcement of the mandatory purchase requirement need to be

improved so that the program can collect additional premium to help balance its

books, and fund the payment of future losses with a reduced likelihood of having

to borrow from the Federal treasury.

NFIP Should Have Additional Resources for Mitigation

NFIP should take action to prevent future losses. There are two basic ways to do

this. The first is through buying the homes and businesses of property owners in

the most flood-prone areas so that those individuals can move out of the floodplain.

The second is through providing grant funds to owners of existing properties so that

they can make improvements (such as raising their structures) that decrease the

risk of flood loss. These preventative measures will decrease the number of repetitive claims and save the program money.

73

Repetitive loss properties are clearly a drain on the financial resources of the

NFIP. In fact, one-quarter of 1 percent of the properties in the program are responsible for 10 percent of the losses. Multiple loss properties account for $200 million

per year in claims. As of 1999, GAO reported that the cost of multiple claims had

reached $2 billion over the life of the NFIP. GAO also noted that about 40,000 properties that had made multiple claims were still insured by the program. Reduction

in the number of repetitive loss properties, which would save the program millions

of dollars, can be accomplished through grants to buy-out property owners or to

modify structures to come into compliance with NFIP standards.

A perfect example of the proper use of mitigation funds is the town of English,

Indiana. Formerly located on the Blue River, a tributary of the Ohio River, this

town was continually inundated by flood waters. Finally, after devastating losses in

the early 1990’s this small city was moved in it’s entirety to higher ground. The citizens of English now enjoy a very nice new town as well as the recreational land

along the river which is available for public use.

Buy-outs allow residents to relocate outside the floodplain and prevent future

losses. Of course, we must be sensitive to the needs of residents when using buyouts. Many residents bought their homes before we had full information about the

floodplains. The value of many of these homes also may not be sufficient to allow

homeowners to relocate to a comparable home. We should avoid creating a new

problem by pushing residents out of their homes without sufficient resources to relocate.

As long as the program is sensitive to the potential dangers, buy-outs can be beneficial tools to improve the financial state of the NFIP. Former FEMA Director

James Lee Witt has estimated that there will be a $2 return on every $1 spent on

buy-outs of repetitive loss properties. That is an impressive return on investment

that we should maximize by putting more money into the program for buy-outs.

Past efforts have proved that mitigation works. Damage to towns along the Mississippi River following the 1993 floods were huge—$67 million in Wisconsin, $251

million in Iowa, and $253 million in Illinois. Last year’s flood carried about as much

water in some areas as in 1993, but, according to the Washington Post, damage estimates in those three States was only $30 million total. Overall damage from the

1993 flood was more than $10 billion, but last year was a fraction of that. While

some of those savings are attributable to differences in the floods, a lot of it is because people and towns were bought out and moved.

NFIP also should have additional resources for structural modification of properties to prevent losses. Many residents do not want to move and should not be

forced to do so. Experience with the NFIP building standards has shown that many

owners can elevate their homes or businesses and effectively reduce flood risks. In

some cases, modifying the current property is less expensive and equally (or almost

as) effective as a buy-out. And this option can help preserve communities to the fullest extent possible. NFIP needs the authority and resources to help property owners

improve their properties before the program suffers additional losses.

Stop Abuse of the Program Through Multiple Claims

We need to do more to stop the abuses of the program. Some individuals have

bought in flood zones in order to take advantage of repeat payments from the NFIP.

While the people in this category are a small minority of all property owners, they

are an expensive minority. There must be some mechanism to either remove these

individuals from the program or make them pay the full, unsubsidized premium

based on sound actuarial standards. This approach would be similar to the limitations put on the crop insurance program in which farmers who file numerous, repetitive claims again are put in a special ‘‘high risk, nonclassified’’ system with increased rates and less than full guarantees. Simply reducing abuse of the system

will be an important boost to the financial soundness of NFIP.

We also need to recognize that not all repeat claimants are abusing the system.

The majority of these people are the victims of natural disasters and bought their

homes or businesses without any desire at all to make a claim for flood damage.

These are difficult events in people’s lives and they should not be punished for

them. Many bought without full knowledge of the flood risk to their property and

many more do not have the resources to elevate their properties or move. And many

of these individuals cannot sell their homes for a reasonable price because they have

suffered repeat flood damage—these people are stuck in the program through no

fault of their own. They need to be given mitigation options to enable them to escape

this nightmarish cycle.

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Require Mandatory Disclosures of Flood Information

One of the best ways to avoid future problems with the NFIP is to give people

information about flood risks. As I said before, many people originally bought their

properties without knowledge of the risk of flood. Reform of the NFIP needs to include mandatory disclosures of the flood history of the property so that buyers can

make an informed choice in their purchases and they can properly value the home.

To make mandatory disclosure effective, we should create an accessible electronic

database of flood losses. Disclosure of flood information will help ensure that when

a tragedy strikes in the future NFIP does not have to pay for an artificially overvalued property. The disclosure also should bring more people into the program by

giving them the information about their risks.

Finally, IIABA and PIA support the provision of the House-passed bill, H.R. 253,

that lengthens the program reauthorization period from 1 year to 5 years. In 2002,

Congress adjourned without reauthorizing the NFIP program. This put the program

in limbo, and left the industry and more importantly consumers not knowing when

or if the program would be reauthorized and wondering how they should proceed

in the meantime. Thankfully, Congress reacted swiftly and passed a reauthorization

bill the first week they returned from recess. Those 2 weeks of uncertainty, however, caused a great deal of panic in the market and had the potential to freeze the

entire real estate market because consumers need flood insurance to be able to close

on a mortgage. We strongly support the provisions in H.R. 253 that change the reauthorization period to 5 years and change the expiration day from the end of the year

to another time, as to avoid having the program expire at the same time as Congress is adjourned.

Proposed FEMA Regulations Would Harm Agents and NFIP

Before I conclude, I would like to address a pressing issue that greatly concerns

agents who sell and service policies under the program. As I mentioned at the beginning of my testimony, the Federal Emergency Management Agency (FEMA) has

proposed a rule that would harm the position of insurance agents participating in

the WYO program and, ultimately, be detrimental to NFIP. The proposed rule, published in the Federal Register on October 14, 2003, would amend the Federal Insurance Administration, Financial Assistance/Subsidy Arrangement. Paragraph 61.5(f)

of the FEMA proposed rule would change current standard practice by designating

independent property and casualty agents as ‘‘agents’’ of insureds, not agents of

private Write Your Own insurers, for the purposes of selling and servicing NFIP

policies. Currently, the status of an insurance producer as an agent or broker is a

contractual issue determined by the producer and insurer.

The regulatory intervention by FEMA into private contractual relationships between insurers and their agents is a sea change in the way NFIP has functioned

since 1983 when private insurers were brought into the program and, more broadly,

in the relationship between insurers and their agents. The contractual relationship

between the insurance producer and insurance company is the defining element in

the determination of the status of a producer as ‘‘agent’’ as opposed to ‘‘broker.’’

FEMA’s proposed rule, by dictating that an agent is, essentially, a broker for purposes of NFIP, undermines the agent’s ability to establish such a contractual relationship and, therefore, alters the rights and responsibilities provided for in such

contracts.

It is currently standard practice to include cross-indemnification provisions in

agency contracts. Thus, agents are required to indemnify insurers in instances

where the carrier is held liable for an agent mistake. Similarly, companies are required to indemnify agents for company mistakes. By restructuring the agent-company relationship, FEMA’s proposed rule would effectively do away with agency

agreements, including these cross-indemnification provisions. In essence, this

change would shield private insurers from liability for their own errors, leaving

agents fully responsible for errors which may not be their fault. This will increase

the liability exposure of agents and exacerbate the already-difficult task of securing

errors and omissions coverage for their businesses. Loss of such coverage could force

agents to drop out of NFIP or leave the insurance business entirely.

Finally, the FEMA proposed rule’s effective elimination of agents from NFIP

would violate the National Flood Insurance Act. It has been clear since Congress

passed the Act that the law and rules promulgated thereunder define the relationships between the Federal Government and the private parties with which the Government deals directly under NFIP. To date, however, the Act and rules have not

attempted to define the relationships of private parties with each other. The proposed rule is the first time FEMA has attempted to interfere with private parties

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tory or regulatory authority for interfering in the relationship between agents and

the WYO insurers for whom they are selling flood coverage.

For these reasons, we urge you to take action to prevent FEMA from adopting

the proposed rule, which FEMA intends to make effective May 1 of this year.

Thank you for giving me the opportunity to express the views of the Nation’s insurance agents on this important program. The IIABA and PIA look forward to

working with the Committee on this issue and I will be happy to take any questions

you may have for me.

—————

PREPARED STATEMENT OF GREG KOSSE

ASSOCIATE GENERAL COUNSEL

KENTUCKY FARM BUREAU MUTUAL INSURANCE COMPANY

ON BEHALF OF

THE PROPERTY CASUALTY INSURERS ASSOCIATION OF AMERICA

MARCH 25, 2004

Chairman Bunning, Ranking Member Schumer, and other Subcommittee Members, Kentucky Farm Bureau Mutual Insurance Company (KFB Insurance) on behalf of the Property Casualty Insurers Association of America (PCI) appreciates the

opportunity to testify before the Senate Banking Subcommittee on Economic Policy

regarding the National Flood Insurance Program. KFB Insurance and PCI strongly

support a multiyear reauthorization of the Federal flood insurance program.

PCI, an association formed in January with the merger of the National Association of Independent Insurers and the Alliance of American Insurers, represents over

1,000 member companies that write over $154 billion in direct annual premium, almost 40 percent of the U.S. property and casualty market. KFB Insurance, a mutual

insurance company owned by its policyholders, is representative of much of PCI’s

membership. We welcome the opportunity to comment and hope that the comments

that follow help to explain the importance of the National Flood Insurance Program

to your constituents across America.

Kentucky Farm Bureau Mutual Insurance Company

Kentucky Farm Bureau Mutual Insurance Company is a member service of the

Kentucky Farm Bureau Federation, an organization of families across Kentucky,

both rural and urban. The Kentucky Farm Bureau Federation has over 440,000

members in Kentucky. In the 1940’s, the Kentucky Farm Bureau recognized the

need for affordable insurance with prompt and fair claim service for its members;

hence the birth of the Kentucky Farm Bureau Mutual Insurance Company. From

our humble beginnings of providing insurance needs from a card table in a feed

store, KFB Insurance has grown to be the largest property and casualty insurance

company based in Kentucky.

• We are the largest in total premiums written in Kentucky.

• We are the largest in property insurance premiums written in Kentucky. We insure more residential property—homes, farms, mobile homes, and apartments—

in Kentucky than any other insurer. We have nearly 304,000 personal property

policies.

• We insure more cars in Kentucky than any other insurer. We write nearly

700,000 automobile insurance policies.

• We are the largest volume insurer of farm property in Kentucky.

• We are the second largest volume homeowner insurer in Kentucky.

• We are the fifth largest commercial writer of business in Kentucky, specializing

in small businesses and family businesses.

• In 2002, we serviced nearly 158,000 claims.

KFB Insurance only writes business in the Commonwealth of Kentucky. We are

representative of many of the Farm Bureaus across America that offer insurance

services to consumers in only one State or a few States. Our strength lies in our

relationships with and presence in the local communities across Kentucky. We firmly believe that consumers want to deal with professional insurance agents and

claimspersons, who are members of their communities, whether that community is

a rural county or an urban neighborhood. Customers desire to deal with people with

whom they have relationships.

Kentucky also has a very diverse and competitive insurance market. We have over

200 companies authorized to write property and casualty business in Kentucky,

ranging from the strong national companies, such as Allstate, to the smaller local

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niche companies like Kentucky Growers. We believe strong marketplace competition

serves consumers’ best interests. KFB is a single State writer and serves a critical

need in the insurance market. Because of our knowledge of the Kentucky market

and our presence throughout Kentucky, we assist in keeping the Kentucky insurance marketplace available and affordable. Reauthorizing the NFIP plays an important role in maintaining this effective marketplace.

The Importance of the National Flood Insurance Program

The National Flood Insurance Program (NFIP or program) was created in 1968

because of severe and catastrophic losses resulting from floods. Flood insurance is

offered through the Federal Emergency Management Agency (FEMA), now part of

the U.S. Homeland Security Department. The program is significant, both for consumers and insurers, such as KFB Insurance. The NFIP allows for available and

affordable coverage for consumers for catastrophic and widespread flood losses. The

program partners with the insurance industry to distribute and service the program.

Finally, after losses, by partnering with communities and lending institutions, the

program enforces and encourages mitigation of future flood losses.

Available and Affordable Flood Coverage

The program was originally established because the Federal Government and private insurers recognized the widespread catastrophic loss potential of floods. The

Federal Government recognized that private insurance companies lacked the resources to identify all the flood-hazard areas (the mapping) and were unable to

measure the potential loss. Furthermore, these catastrophic losses could not be sustained by private industry alone without becoming prohibitively expensive or simply

unavailable for consumers.

The Federal Government undertook the job of classifying flood-hazard areas. Mapping the entire United States for flood zones took roughly 6 years. Most flood insurance rating maps (pre-FIRM) dates are 1974. Many maps have been updated or

revised in the 30+ years the program has been in existence, and the NFIP is currently undertaking a 7-year project to remap, using more sophisticated techniques

(such as geo-coding), the entire United States. While mapping may have helped

make floods more predictable and measurable, fully 25 percent of all the flood losses

(according to the NFIP) occur in areas outside of the existing 100-year mapped

floodplains. This fact reinforces the widespread nature of this type of catastrophic

loss and reinforces the need to continue the remapping project underway.

The NFIP serves a critical function for an insurance carrier such as KFB Insurance. If no Federal program existed and flood insurance became a private sector

responsibility, flood insurance would either be unavailable or unaffordable for consumers. Insurers base their rates on predictability of risk. Insurers distribute the

propensity for loss among many policyholders making the coverage affordable for all.

For example, when a KFB insured has a loss due to a hailstorm or tornado, all KFB

insureds pay for the loss. However, while such events as hailstorms or tornados are

unpredictable, they typically will not result in widespread catastrophic loss. Floods,

on the other hand, are typically more catastrophic and more regionally predictable.

For example, history teaches us that floods will likely occur in Kentucky, from the

mountains of eastern Kentucky to the great Ohio and Mississippi Rivers in the

north and west. Running water abounds in Kentucky, and it is likely that flooding

will occur and be catastrophic in nature affecting many consumers.

Private insurers, like KFB Insurance, are an integral part of the competitive

markets in each State; however, a one-State operation like ourselves could not adequately spread the risk of loss from these potential floods to policyholders nor absorb the losses when they occur. The NFIP, on the other hand, spreads this risk

across the entire country based on floodplain exposure levels, making the product

more affordable for all. If the flood program were shifted to the private sector, to

insurers such as KFB Insurance, one of two things would happen:

• Insurers would need to charge extremely high premiums to cover the flood exposure making flood coverage unaffordable, thereby making consumers uninsured

for flood losses.

• The risk would be prohibitive, so insurers would not write and flood coverage,

thereby making consumers uninsured for flood losses.

A Practical and Effective Distribution and Service Network

Another advantage of the NFIP as set-up today is that the Federal Government

partners with carriers like KFB Insurance to sell flood insurance when a customer

is purchasing all of their insurance needs. In other words, the Federal Government

assumes the premiums and losses of the program, yet the distribution and servicing

network of the program is through the local companies and their agents and adjustVerDate 11-MAY-2000 16:55 Oct 06, 2005 Jkt 000000 PO 00000 Frm 00080 Fmt 6633 Sfmt 6621 23729.TXT SBANK4 PsN: SBANK4
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ers. This fits well within the KFB Insurance framework, policyholders purchasing

needed affordable coverage through persons in their community with whom they

trust and have a relationship. Simply, more consumers purchase the needed coverage, thereby allowing society to rebuild after catastrophic losses.

After Loss Partnering to Rebuild and Mitigate Future Loss

The program also encourages mitigation efforts to reduce future losses, while

partnering with the financial lending sector to rebuild after losses. We, as a society,

value the amenities, business opportunities, and lifestyle of property close to water.

The NFIP helps building efforts near water, but requires that rebuilding efforts be

done with an eye toward mitigating flood losses in the future. The NFIP helps to

strike the balance between our desire as a society to be close to water and the practical necessity of ensuring that flood losses are minimized.

Local communities must adopt sound land use policies or floodplain management

ordinances. If these local municipalities do not adopt such plans and submit these

plans to the Government for approval, the municipality cannot participate in the

NFIP. If they cannot participate in the NFIP, they simply lack the resources to rebuild.

The existence of the NFIP has allowed communities to develop the land in some

flood-prone areas (with the buildings properly elevated). This would not have been

possible in the private insurance marketplace as the risk of loss would have been

too great and without some incentive, buildings would have been put, even more

than they already are, in harm’s way.

The NFIP also encourages more property owners in floodplains to purchase and

pay for flood insurance. Since 1973, any federally backed mortgage (for example

through FHA, VA, SBA, Freddie Mac, or Fannie Mae) on a property in a floodplain

(an area located in the 100-year floodplain), must purchase and maintain flood insurance. Mortgage lenders are required to make sure the insurance is purchased

and maintained on the property. This furthers society’s desire to have buildings

near water, but requires those individuals to pay premiums to insure that property.

The U.S. economy is just now getting back into a growth mode; however, the

housing market has remained very strong, even through the recent downturn. Longterm reauthorization of this well-established program is vital to the U.S. economy,

new and existing home purchasers, mortgage lenders, and the insurance industry.

Program Improvement—Repetitive Loss

There are several ways the program could be improved. We would support, because of the high-cost of continually repairing or replacing repetitive loss structures,

an expansion of the FEMA program that purchases these properties (at a fair-market cost) to reduce the costs to the program. We would also support charging these

repetitive loss properties the true ‘‘risk-based’’ premium, based on sound actuarial

principles, if the property owner or the community is not willing to relocate or sell

the property. Repetitive losses account for almost 30 percent of all losses paid by

the NFIP on an annual basis while the most costly of these repetitive losses (those

where the loss has exceeded the building value in a 10-year period—10,000 properties), amount to over half of 1 percent of the 4.4 million flood insurance policies.

In addition, we support including language clarifying Federal court jurisdiction

over lawsuits arising out of NFIP in comprehensive legislation affecting the program.

We would be happy to discuss repetitive loss or jurisdictional issues with any of

the Committee Members or their staff; however, support of the reauthorization is

the primary purpose of my appearance here today.

Summary

There is a delicate balance between the Federal Government and the private insurance industry on several insurance-related programs that must be preserved.

Programs such as Federal Crop and Crop-Hail Insurance, Terrorism Reinsurance,

the Price-Anderson Act for Nuclear Liability, Federal Deposit Insurance, and the

NFIP, exist because of the truly immeasurable (from both a frequency and severity

viewpoint) risks associated with these types of losses. We believe only the Federal

Government has the resources to address these risks.

As evidenced by letters sent last year on behalf of the industry, this program is

vital to a diverse and competitive property and casualty insurance market. We understand that the current program will end June 30, 2004, without reauthorization.

This is the beginning of the hurricane season (June 1) and the height of the real

estate season, thus, we would strongly encourage Congress to act and extend this

program for a minimum of 5 years (if not permanently). We would also recommend

that Congress provide the authority to modify existing regulatory provisions and

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coverages to address legal and consumer issues. Finally, we would encourage Congress to fund a pilot program for repetitive losses.

Again, on behalf of the Kentucky Farm Bureau Mutual Insurance Company and

PCI, we appreciate the opportunity to comment on the importance of the National

Flood Insurance Program.

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PREPARED STATEMENT OF STEVEN M. FELDMANN

DIRECTOR OF COMMUNITY AFFAIRS

THE FISCHER GROUP, CRESENTVIEW HILLS, KENTUCKY

ON BEHALF OF

THE NATIONAL ASSOCIATION OF HOME BUILDERS

MARCH 25, 2004

Chairman Bunning, Ranking Member Schumer, and Members of the Economic

Policy Subcommittee, I am pleased to appear before you today on behalf of the National Association of Home Builders (NAHB) to share our views concerning repetitive losses in the National Flood Insurance Program and Congressional efforts to

reauthorize the program. We appreciate the invitation to appear before the Subcommittee on this important issue.

My name is Steve Feldmann and I am the Director of Community Affairs for The

Fischer Group. The Fischer Group is one of the largest home builders in the Nation

and focused exclusively in the Northern Kentucky and Greater Cincinnati Region.

The Fischer Group has been providing high-quality, affordable housing, and the joys

of homeownership, for over 20 years.

Mr. Chairman, NAHB represents more than 215,000 member firms involved in

home building, remodeling, multifamily construction, property management, housing finance, building product manufacturing, and other aspects of residential and

light commercial construction. The Federal Emergency Management Agency’s

(FEMA) National Flood Insurance Program (NFIP) plays a critical role in directing

the use of flood-prone areas and managing the risk of flooding for residential properties. The availability and the affordability of flood insurance gives homebuyers

and homeowners the opportunity to live in a home of their choice in a location of

their choice, even when the home lies within a floodplain. The home building industry depends upon the NFIP to be annually predictable, universally available, and

fiscally viable.

A strong, viable national flood insurance program enables the members of the

housing industry to continue to provide safe, decent, affordable housing to consumers, in a design of their choice and in a location of their choice. The choices

American consumers make when they are buying homes are some of the most critical aspects of the homebuying process. Through decisions about where to live,

where to shop, and how to get around town, consumers apply the power of the marketplace to shape the Nation’s communities. The NFIP, by enabling the choice of

purchasing a home in a floodplain, allows consumer preferences to shape towns and

cities into communities that maximize quality of life and economic development.

Without the NFIP, many communities would be unable to provide affordable

housing to many of their citizens. Despite a decade of unprecedented prosperity,

many communities are seeing a growing gap between the supply and demand for

housing. Families across the economic spectrum are finding it increasingly difficult

to find a home that meets their needs. One of the leading causes of the housing affordability problem is the shortage of buildable land. By guaranteeing affordable

flood insurance, the NFIP allows communities to use land that would otherwise be

too costly due to high flood insurance premiums. Through the NFIP, flood insurance

policies remain available and affordable and residential structures can be constructed in floodplains as long as they are built to withstand flooding. Therefore,

the NFIP provides the means by which communities can address housing needs by

making homeownership in areas prone to flooding safe, affordable, and practical.

The NFIP provides flood insurance to approximately 4.4 million policyholders, enabling them to protect their properties and investments against flood losses while

living in a home of their choice, in a location of their choice. Further, the NFIP creates a strong partnership with State and local governments by requiring them to

enact and enforce floodplain management measures, including building requirements that are designed to ensure occupant safety and reduce future flood damage.

This partnership, which depends upon the availability of comprehensive, up-to-date

flood maps, ensures that State and local governments can create policies that reflect

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the needs of local communities, enabling them to direct development where it best

suits the needs of their constituents and consumers.

Unfortunately, the solvency and stability of the NFIP is threatened by an extremely small percentage of properties that have suffered multiple, costly flood damage. Approximately 48,000 currently insured properties, deemed ‘‘severe repetitive

loss properties’’, have incurred two or more floods within a 10-year period. An even

smaller subset of the severe repetitive loss properties, which number approximately

10,000, have had four or more claims that cumulatively exceed the value of the

property. These properties, which make up only 1 percent of the current policies,

cost the NFIP approximately $200 million annually and account for approximately

25 percent to 30 percent of the claims paid by the program. The vast majority of

severe repetitive loss properties were built before implementation of floodplain management standards and are eligible for subsidized flood insurance that is below the

actuarial risk rate.

These severe repetitive loss properties significantly impact the national flood insurance program, drive up the cost of premiums for all policyholders, and allow the

system to teeter on an unstable actuarial foundation. Because of the frequency and

expense of the claims on these severe repetitive loss properties, FEMA oftentimes

does not have funds to keep the NFIP solvent. Insolvency threatens the future of

the NFIP and the ability of the program to provide affordable flood insurance and

service its 4.4 million policyholders. The Nation cannot afford to have this program

collapse. By focusing on improving and mitigating potential damage to these severe

repetitive loss properties, FEMA can ensure a viable, long-term program.

As this Subcommittee, and the Congress as a whole considers legislation to reauthorize the NFIP, NAHB urges you to fully weigh the following principles:

Five-Year Reauthorization of the NFIP

NAHB recognizes the importance of the NFIP in enabling consumer choice by protecting life and property in flood-prone areas. Although Congress recently extended

FEMA’s statutory authority to issue flood insurance policies until March 31, 2004,

a lapse in authority after that date, as experienced in early 2003, will have severe

repercussions for a vast number of landowners. Allowing FEMA’s authority to limp

from one short-term authorization to the next does not instill confidence or consistency for policyholders, future homebuyers, or industries that depend on a viable national flood insurance program. Congress should reauthorize the NFIP for a full 5

years. The uninterrupted availability of affordable flood insurance is vital to allowing the home building industry to continue to deliver safe, decent, affordable housing to consumers in a location of their choice.

All Properties must Remain Eligible for Flood Insurance

Congress must ensure that all properties located within a FEMA-designated floodplain, including severe repetitive loss properties, remain eligible for flood insurance.

NAHB recognizes the need to address the problem that severe repetitive loss properties pose to the long-term health of the NFIP. However, these properties must be

allowed to remain eligible for flood insurance. H.R. 253, the Flood Insurance Reform

Act of 2003, as passed by the House of Representatives during the last session of

Congress, in attempting to address severe repetitive loss properties, ensures that,

at a minimum, severe repetitive loss properties are allowed to remain eligible for

flood insurance. NAHB soundly agrees with this policy.

Narrowly Define Severe Repetitive Loss Properties

Severe repetitive loss properties, which represent a disproportionate number of

claims to the NFIP, must be addressed in order to ensure the long-term viability

of the NFIP. NAHB believes that the NFIP reauthorization legislation, however,

must narrowly define severe repetitive loss properties to only include those that

pose the most severe flooding risks. By narrowing the scope of targeted properties,

FEMA is directed to address the most problematic properties first, which will quickly lead to significant savings to the NFIP.

Unfortunately, the definition of severe repetitive loss properties in H.R. 253 contains a threshold that is too low and does not truly reflect the cost of flood damage

in many areas. In such instances, minor flooding can produce claims that exceed the

threshold simply because the carpet or electrical systems were damaged by an inch

of water. These are not the properties that we believe should be targeted.

At a minimum, severe repetitive loss properties should be defined according to existing law, which states that,

The term ‘‘repetitive loss structure’’ means a structure covered by a contract

for flood insurance . . . that has incurred flood-related damage on 2 occasions during a 10-year period ending on the date of the event for which a

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second claim is made, in which the cost of repair, on the average, equaled

or exceeded 25 percent of the value of the structure at the time of each such

flood event. (42 U.S.C. 4121(a)(7))

If an authorization bill is to target the most severe properties, that universe, by

definition, should be smaller than the pool established by current law. Therefore,

the current definition, as stated above, should serve as the baseline for the definition of ‘‘severe repetitive loss properties.’’

Encourage the Redevelopment of Affected Properties

The Congress should encourage FEMA, with the participation of State and local

governments, to facilitate and provide funding for the redevelopment of affected

properties in accordance with FEMA standards. Oftentimes, FEMA proposes to a

property owner an offer to buy-out a severe repetitive loss property. The offer serves

two purposes: (1) the buy-out allows the landowner an opportunity to relocate to an

area with reduced or zero flooding risks and (2) it allows FEMA the ability to remove a repetitive claim, high cost property from the flood insurance roles. Given

that the vast majority of these properties were built before implementation of floodplain management standards, many of these properties are not sufficiently floodproof. It makes good policy sense for FEMA to mitigate (that is elevate, relocate,

demolish, flood proof, and/or construct small flood control projects) or purchase these

properties to reduce their flood risk or remove them from the insurance roles.

However, after a buy-out, these properties are ineligible for redevelopment because they fall under clause i and ii of Section 404(b)(2)(B) of the Robert T. Stafford

Disaster Relief and Emergency Assistance Act (the Stafford Act) (42 U.S.C.

5170c(b)(2)(B)). Under the Act, any property acquired by FEMA with disaster assistance funds only can be used as open space, a recreational area, or for wetlands management. This means that for every home purchased via the NFIP, a formerly

buildable lot has been taken out of production.

In order to facilitate the responsible redevelopment of these properties, NAHB encourages FEMA to work with the affected State and local governments prior to offering buy-outs to plan for the redevelopment of these properties so that they meet

local floodplain codes and regulations, as do newly constructed homes. If these properties are allowed to be redeveloped to current floodplain standards, local governments can satisfy local housing needs while ensuring that the properties are less

prone to future floods and costly insurance claims. Further, local governments, not

FEMA, should be allowed to make the decision as to whether or not the properties

should be redeveloped. NAHB believes that local communities are the best arbiters

for land use decisions, not the Federal Government.

Ensure Properties are Purchased at Fair Market Value

In cases where FEMA makes an offer to buy a property, the property owner must

be paid fair market value for both the land and the structure. Any reauthorization

proposal must honor the 5th Amendment to the U.S. Constitution, which states that

no ‘‘private property be taken for public use without just compensation.’’ This principle is a long-held core belief of the members of NAHB. To that end, we are pleased

that H.R. 253 adheres to this principle.

Higher Premiums for Severe Repetitive Loss Properties

In its efforts to address severe repetitive loss properties, FEMA, through the

NFIP, should be granted the authority to charge a higher premium for those severe

repetitive loss properties for which reasonable mitigation offers were refused. As

stated earlier, the drain on the NFIP from severe repetitive loss properties demands

that the owners of these properties, in coordination with FEMA and local governments, take action to decrease the instances of flood damage. To that end, NAHB

supports the provision in H.R. 253 that authorizes FEMA to increase the flood insurance rates for severe repetitive loss property owners that refuse mitigation.

As set forth in H.R. 253, FEMA would have the authority to offer mitigation assistance (that is elevation, relocation, demolition, flood proofing of structures, and

minor physical localized flood control projects or purchase) to the owners of severe

repetitive loss properties. Under H.R. 253, if an owner of such a property refuses an

offer of mitigation, and is ineligible for a waiver, FEMA may begin to charge higher

flood insurance rates, up to the sound actuarial rates for that property. It is NAHB’s

hope that this provision will reduce Federal expenditures for flood control and disaster assistance by encouraging severe repetitive loss property owners to agree to

the mitigation offer and rehabilitate their properties so that flood damage is reduced.

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Notification of All Current Policyholders

Given the sweeping changes to the NFIP that are being considered by this Subcommittee, NAHB believes that any reauthorization legislation include a provision

to require FEMA to notify all current policyholders of the changes to the program.

It would be unfair to the 4.4 million policyholders, especially the approximately

46,000 severe repetitive loss property owners, to be caught unaware by changes to

the NFIP without the opportunity to read and understand the policy changes. Unfortunately, H.R. 253 is silent on this issue.

Mr. Chairman, thank you for this opportunity to share the views of the National

Association of Home Builders on this important issue. We look forward to continuing to work with you and your colleagues as you contemplate changes to the

National Flood Insurance Program. We urge you to fully consider NAHB’s position

on the issue and how this program enables the home building industry to deliver

safe, decent, affordable housing to consumers. I look forward to any questions you

or other Members of the Subcommittee may have for me.

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STATEMENT OF THE NATIONAL ASSOCIATION OF REALTORS®

MARCH 25, 2004

Thank you for the opportunity to submit this statement for the record presenting

the views of The National Association of REALTORS® (NAR) on the National Flood

Insurance Program (NFIP) and the issue of repetitive flood loss. The one million

members of NAR—including its institutes, societies, and councils—commend Chairman Bunning for holding this hearing on a subject that is of great importance to

REALTORS®. It is often said that REALTORS® do not sell homes, we sell communities. The

members of The National Association of REALTORS® are concerned and active

members of our communities. We recognize and support the important role the National Flood Insurance Program plays in managing the risk of flooding that affects

so many of our citizens.

The NFIP is a unique partnership between our three levels of government. It enables property owners in participating communities to purchase insurance as a

protection against flood losses in exchange for State and community floodplain management regulations that reduce future flood damages. As a result, Federal expenditures for disaster assistance and flood control are reduced.

Flood insurance is required in order to secure financing to buy, build, or improve

structures in Special Flood Hazard Areas (SFHA’s). Federally regulated or federally

insured lending institutions must determine if a structure is located in a SFHA and

must provide written notice requiring flood insurance. Flood insurance is available

to the owner of any property located in a community participating in the NFIP.

The program partners with nearly 20,000 communities nationwide and holds 4.4 million policies representing $623 billion in insurance coverage. It provides over 90

percent of all flood insurance nationwide and close to 100 percent of flood insurance

coverage for individually owned properties and small- to mid-size commercial properties. Ninety-one insurance companies write flood insurance, either under the

Write Your Own program or through direct sales. In fiscal year 2002, the program

generated $1.4 billion in written premiums, with an average premium of $393, average coverage of $142,204, and an average payout of $24,551. By providing affordable

flood insurance that is unavailable in the private market, the NFIP helps our citizens achieve the American Dream of homeownership.

Unfortunately, the program is currently burdened by the cost of repetitive loss

properties. Approximately 48,000 insured properties nationwide have incurred two

or more flood losses over a 10-year period, each of which exceeds $1,000. These properties cost the flood insurance program over $200 million annually. The top 10,000

structures alone cost the program over $65 million annually. Repetitive loss properties comprise approximately 1 percent of insured properties but account for

approximately 25–30 percent of claims losses. By not paying premiums that adequately reflect their exposure to the risk of flooding, these properties threaten the

flood insurance program’s actuarial foundation.

As a consequence, the NFIP faces continuing pressure to increase premiums for

all policyholders nationwide. To do so would have a serious negative impact on the

real estate industry and our Nation’s economy. Directly and indirectly, the housing

sector has played a critical role in keeping the overall national economy afloat. With

over 6.1 million existing home sales, 2003 was a record-setting year. The over 1 million new home sales in 2003 was also an all-time high. However, continued progress

is threatened when costs in the form of higher insurance premiums are added to

the home transaction and potential homebuyers are shut out of the market.

NAR believes that Congress must address the repetitive loss issue in order to

place the flood insurance program on firmer financial ground. We support an approach that has three main components: (1) repetitive loss properties remain eligible

for Federal flood insurance; (2) flood mitigation measures are offered to the worst

repetitive loss properties; and (3) if a mitigation offer is refused, the owner of a repetitive loss property will be required to pay a higher insurance premium. This winwin approach ensures that insurance payouts will be reduced by properly mitigating

the worst repetitive loss properties. At the same time, it allows the property owner

to remain in the program, while paying a premium that adequately reflects the

property’s flood risk.

We feel that H.R. 253, the repetitive loss bill approved late last year by the House

of Representatives, is a constructive and viable bi-partisan effort to address the repetitive loss problem. It is designed to improve the financial soundness of the NFIP

by shifting more of the burden of recovery costs to property owners who choose to

remain vulnerable to repetitive flood damage. The bill focuses on the most severe

repetitive loss properties, and it provides an appeals process to prevent unfairness

and injustice.

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We must make one final point on this issue. It is critical that flood insurance remain accessible and equitable for all individuals who own property in a floodplain.

NAR opposes a phase-out of subsidized flood insurance for second homes and rental

properties. Non-primary residences should be given the same consideration as primary residences. These properties face a flooding risk which is identical to that of

adjacent primary residences. For reasons of fundamental fairness, they should not

be charged full risk premiums unless they fall under the definition of repetitive loss

properties.

Furthermore, charging full risk premiums for second homes and rental properties

would significantly increase their insurance costs. Consequently, the purchase price

of homes in resort and coastal areas would increase, their affordability and marketability would decrease, and local economies would suffer. Owners of rental properties would be forced to pass on the increased costs of flood insurance through rent

increases to their tenants, placing additional strain on the budgets of low- and fixedincome renters.

At the same time that Congress works to improve the financial soundness of the

NFIP, it is important that you maintain the program’s continuous authority to provide flood insurance coverage. Two year’s ago, the 107th Congress adjourned without extending FEMA’s statutory authority to issue flood insurance policies beyond

the end of the year. Thakfully, Congress and the President acted quickly in the

early days of this Congress to pass and sign retroactive reauthorization. In the interim, FEMA and a coalition of public and private sector organizations worked hard

to provide guidance to private industry and the public and prevent disruptions in

the real estate, insurance, and lending industries.

Although disruptions were largely averted, such a lapse of authority could have

severe repercussions for an industry that continues to be one of the few bright spots

in our Nation’s economy. An absence of authorization raises compliance and legal

questions for lenders and insurers. In such an uncertain climate, home purchases

and insurance policy renewals are jeopardized. For prospective homebuyers, this can

mean an opportunity delayed . . . or possibly lost entirely. FEMA estimates that

a short lapse in authority could affect approximately 400,000 households seeking to

obtain or maintain flood insurance.

This situation should not be allowed to happen again. We encourage Congress to

enact a multiyear reauthorization, as is provided in H.R. 253, in order to ensure program continuity.

Thank you for allowing the National Association of REALTORS® an opportunity

to share our views on important issues involving the National Flood Insurance Program. We urge the Subcommittee and Committee to undertake a bi-partisan effort

and pursue improvements that will strengthen the NFIP and make it more effective

for policyholders nationwide. We look forward to working with you in support of this

effort.