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LEGISLATIVE PROPOSALS TO REFORM 

THE NATIONAL FLOOD INSURANCE 

PROGRAM, PART II 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

INSURANCE, HOUSING, AND 

COMMUNITY OPPORTUNITY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

APRIL 1, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–23 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON INSURANCE, HOUSING, AND COMMUNITY OPPORTUNITY

JUDY BIGGERT, Illinois, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

PATRICK T. MCHENRY, North Carolina 

LYNN A. WESTMORELAND, Georgia 

SEAN P. DUFFY, Wisconsin 

ROBERT J. DOLD, Illinois 

STEVE STIVERS, Ohio 

LUIS V. GUTIERREZ, Illinois, Ranking 

Member 

MAXINE WATERS, California 

NYDIA M. VELA ́ ZQUEZ, New York 

EMANUEL CLEAVER, Missouri 

WM. LACY CLAY, Missouri 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

April 1, 2011 ..................................................................................................... 1 

Appendix: 

April 1, 2011 ..................................................................................................... 19 

WITNESSES 

FRIDAY, APRIL 1, 2011 

Fugate, Hon. W. Craig, Administrator, Federal Emergency Management 

Agency (FEMA) .................................................................................................... 1 

APPENDIX 

Prepared statements: 

Walberg, Hon. Tim ........................................................................................... 20 

Fugate, Hon. W. Craig ..................................................................................... 21 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Fugate, Hon. W. Craig: 

Additional information provided in response to questions from Representative Waters .................................................................................................. 32 

(1) 

LEGISLATIVE PROPOSALS TO REFORM 

THE NATIONAL FLOOD INSURANCE 

PROGRAM, PART II 

Friday, April 1, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON INSURANCE, HOUSING, 

AND COMMUNITY OPPORTUNITY, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:35 a.m., in room 

2128, Rayburn House Office Building, Hon. Judy Biggert [chairwoman of the subcommittee] presiding. 

Members present: Representatives Biggert, Hurt, Dold, Stivers; 

Waters, Cleaver, and Sherman. 

Also present: Representatives Walberg, Palazzo, Schweikert, and 

Green. 

Chairwoman BIGGERT. The Subcommittee on Insurance, Housing, 

and Community Opportunity will come to order. 

We are delighted to have Administrator Fugate of the Federal 

Emergency Management Agency (FEMA) with us today, and we 

thank you so much for being here. We are very sorry that you could 

not be at our last hearing, but that certainly was understandable. 

As a reminder, it was the day of the earthquake and the tsunami, and obviously, FEMA was very much engaged in that. So, 

thank you for giving us the opportunity to have you here to talk 

about the flood bill. 

We have decided between the ranking member and myself that 

opening statements will be made a part of the record, so that we 

can get right to your testimony. 

I would now like to introduce Administrator Fugate. As is our 

usual policy, you will have 5 minutes to summarize your testimony, 

although we do have some leeway when you are here. After that, 

we will have the opportunity to ask questions at 5 minutes each. 

So, if you would like to proceed, please do. 

STATEMENT OF THE HONORABLE W. CRAIG FUGATE, ADMINISTRATOR, FEDERAL EMERGENCY MANAGEMENT AGENCY 

(FEMA) 

Mr. FUGATE. Good morning, Chairwoman Biggert, Vice Chairman Hurt, and the distinguished members of the panel. 

I think it is kind of interesting that my testimony—which again, 

we very much appreciate the committee’s indulgence in allowing 

me to come back at another date—dealt with an earthquake that 

2 

produced tsunami warnings for our territories, the States of Hawaii, California, and Alaska, with advisories for the rest of the 

coastal areas. 

In that, it was, I think, very appropriate that on the day of testifying about the National Flood Insurance Program (NFIP), we saw 

one of the hazards which would have put immediate and tremendous stress upon the Flood Insurance Program—a tsunami, rising 

water damages. 

And I think this is one of the challenges when we talk about hazards, in that when we look at how we manage risk, for most of us, 

we manage our risk through insurance, whether we are driving our 

car or protecting our home against fire or other types of casualties. 

But in the realm of flood insurance, since 1968 it has been the 

responsibility of the Federal Government to make that insurance 

available and the homeowners’ policies that most people have will 

not cover damages from rising water. Only a flood insurance policy 

provides that protection. And that rising water may be caused by 

hurricanes, tsunamis, heavy rainfall events, riverine flooding or 

other matters which could cause those types of damages. 

Over time, this program has evolved to try to mitigate this risk 

by ensuring that communities that participate in the Flood Insurance Program take the steps to mitigate future growth and development. You have funded the Federal Emergency Management 

Agency to update maps to provide better and more detailed data, 

oftentimes generating even more issues as that data may show increased or decreased risk. 

We have a requirement in the statute that, if you have a federally-backed mortgage in an area that is deemed high risk—a 1 percent risk or higher—that as part of your federally-backed mortgage, 

you need to protect that mortgage with flood insurance. 

We have built this program to fill the need of how do we provide 

protection to homeowners, and also to the mortgage industry, 

against a hazard that the private sector does not offer to the average homeowner? And that program has, over the years, been 

amended to address the issues that have occurred in previous 

floods. 

But after Hurricane Katrina, another issue arose, and that was 

the tremendous exposure to the taxpayers for the losses incurred. 

Originally, close to $19 billion had to be borrowed from the U.S. 

Treasury to pay those claims. Currently, that debt has dropped. 

But it is unlikely that FEMA will ever be able to retire completely the Katrina-Rita-Wilma debt, based upon our current rate 

of collection and our current rate of payments due to ongoing and 

reoccurring floods. 

We are very much engaged with our stakeholders, and have been 

for the last almost 20 months, in asking the question: What are the 

next steps we need to take in the National Flood Insurance Program to address both the concerns that have been raised by 

Katrina and other disasters, but also the issue that is raised by 

members of this committee, as well as your fellow Members of Congress, about the cost and affordability of these products that are so 

necessary to provide and protect the financial well-being of those 

that have property they are insuring? 

3 

And lastly, the draft reauthorization. Having heard this from numerous constituents, I must again, I think, agree with the direction 

the committee has taken for a 5-year reauthorization. 

Of all of the things—and I think there are a lot of things in the 

bill we would like to work with you on—the one thing that I have 

heard loud and clear from the insurance industry, the Write Your 

Own Companies, from the homebuilders, from the REALTORS®, is 

short-term extensions of this program are detrimental to those organizations that depend upon the stability of a Flood Insurance 

Program to be able to continue to provide policy support, but more 

importantly, the sale and home ownership where federally-backed 

flood insurance may not be available during short-term lapses in 

reauthorization. 

So, we are very much in support of the 5-year reauthorization 

timeframe. 

And that will conclude my statement. I am ready for your questions. 

[The prepared statement of Administrator Fugate can be found 

on page 21 of the appendix.] 

Chairwoman BIGGERT. Thank you so much, Administrator. 

I will start with the questioning. 

But before I do that, I would like to ask unanimous consent to 

allow members to participate who are not on the subcommittee. We 

have one here now, Mr. Walberg from Michigan, and then Mr. 

Palazzo from Mississippi. And we may be joined by Mr. Schweikert 

from Arizona. 

Without objection, they may participate. 

Administrator, the NFIP calculates the premium rates it charges 

for flood insurance coverage based on average annual losses. But 

then it provides C grade discounts for a subset of high-risk properties that have been essentially subsidized by other NFIP policyholders and the Federal taxpayers. 

How important is it for the NFIP to move as rapidly as possible 

to full risk rates for all properties? And what do you see as the 

timeline for that to happen? 

Mr. FUGATE. I think it is a direction that Congress needs to 

make clear, that when we do this, there will be people who will 

come back to you and feel that they are unfairly being charged new 

costs that they are being told they must pay. 

And I think this comes back to really communicating the Flood 

Insurance Program’s purpose. It is not to produce an unfunded 

mandate or burden. It is an insurance program which we administer, which has—our responsibility to taxpayers is to insure, as 

close as possible at the direction of Congress, what risk general 

taxpayers should assume versus the homeowner or person benefiting from the property should assume for that risk. 

Because of moving towards more actuarially-based rates, some 

would see in many cases in the higher-risk areas, increases in 

those premiums. 

The tendency has been, as constituents have raised the issue of 

the fairness of that, that there has been a question of how fast we 

should move. We will move as fast as Congress directs in allowing 

us to raise those rates. 

4 

But I think we also need to be realistic that there will be some 

pain in that process. And that pain will be registered with constituents concerned about the accuracy of the mapping, the validity of 

whether or not these rate increases are warranted, and something 

that I have heard numerous times, that the only reason we are 

doing this is to pay off the existing debt load, not really look at the 

future impacts of losses to the NFIP. 

Chairwoman BIGGERT. Thank you. 

Will you have to wait for the mapping of some places, and how 

long does a mapping really take? 

Mr. FUGATE. I would hate to say there is an average timeframe. 

The process that we engage in when we meet with the locals to 

begin the map update really depends upon what is the quality of 

the existing data we are working from. How much new data will 

be required to do those maps, and then the engineering of that, 

then the outreach for the community as we go through the resolution? 

So, it is a several-year process from the time we start, and we 

begin by issuing the preliminary maps. 

But through an appeals process, and also through a—and answering the question of the validity of some of the assumptions in 

the planning, we have put together a scientific resolution panel to 

do a final review on maps to make recommendations for changes 

if appropriate. 

So, depending upon that, you could easily see that another year 

or two could be added into the review, appeal, and final determination of those maps. 

Chairwoman BIGGERT. Okay. Then over the past 5 years, FEMA 

has paid more than $2 billion, the interest payments to service the 

debt, and nearly $2 billion more to reduce it. But, FEMA still owes 

about $17.75 billion to taxpayers. Many have asserted that, and as 

you mentioned, the ability to ever repay it is in doubt. 

Do you foresee any scenario in which the debt can be paid over 

time? And can you outline a range of public policy options for how 

we might, in Congress, enable FEMA to address its debt? 

Mr. FUGATE. Unlike in the private sector, which can distribute 

its risk across investments and across different risks, we are solely 

invested in one risk. That risk does not give us the ability to utilize 

any type of tools that the private sector would have in the reinsurance markets or distributing that risk to other hazards. 

Given the current scenario, I think we would be good not adding 

to that debt, much less paying it down. I think our exposure in numerous areas of this country where we do have a high participation 

rate in flood insurance with large-scale flooding, hurricane or tsunami events could further add to that debt. 

So, I do not really think it is within the realm of what we are 

looking at right now with the existing structures we have, that we 

would make a significant impact unless we had no loss greater 

than our annual rate of payouts, that we continue to be able to pay 

back into the flood insurance fund and pay down that debt, and all 

things being equal, somehow we increase the number of people who 

participate in the Flood Insurance Program to further distribute 

that risk. 

5 

But since the only requirement to buy flood insurance is on those 

who have the highest risk, it is unlikely you are going to distribute 

that risk far enough to actually see the ability long term to guarantee any ability to pay down. I think the exact opposite happens. 

Not only do I not see this debt being paid down, except over a 

very long time with no outstanding catastrophic flood events, I 

think the reality is, we have a greater risk of that going up with 

something as straightforward as another hurricane striking in the 

Gulf Coast or the Atlantic Coast area. The debt as currently structured is not, as I see it, going down. 

It is long-term, dependent upon nothing new happening. And the 

only way I see us looking at this—and this is one of the things that 

we were very excited to see in the discussion draft, some of the provisions about looking in the private sector through pilot projects— 

without some ability to look at what other tools would be available 

to us, unless you require more people to purchase flood insurance 

and distribute that risk further, I think it will still be very difficult 

to retire that debt. 

Chairwoman BIGGERT. So it really is important to have more private sector participation? 

Mr. FUGATE. Private sector participation or hybrids where we 

can utilize and maybe get the private sector engaged in some of the 

ways of distributing risk. 

I think this is one of the things that—we do not think this is an 

either/or. We do not think full privatization of the Flood Insurance 

Program would be achievable unless there were some changes. I 

am not sure what those would be. 

And I do not think that a fully government-run program is successful in the long term. 

I think looking at what are the conditions we could set to engage 

the private sector, and either participation and direct provision in 

those areas where they can manage the risk, recognizing we may 

still have to provide protection for the highest risk, or utilize tools 

that they have with reinsurance to distribute this risk, and look at 

that from the standpoint of protecting the exposure to future 

claims. 

Chairwoman BIGGERT. Thank you. I would ask you about what 

are the barriers and regulatory barriers to private sector, but my 

time has expired. 

So I will turn to Ms. Waters, from California, for 5 minutes. 

Ms. WATERS. Thank you very much, Madam Chairwoman. 

I would like to thank Mr. Fugate, the Administrator of FEMA, 

for being here this morning. 

I have some other questions I would like to ask. But continuing 

along the lines that Ms. Biggert has been questioning you, you pay 

interest on this debt to the Treasury. Is that right? 

Mr. FUGATE. Yes. And that rate is adjusted annually. We have 

a very low rate. 

Again, if that rate was raised, I doubt we would be making any 

impact to principal. Because Treasury is currently giving us an extremely low rate, we have been able to retire some of the principal 

debt in addition to the interest payments. 

Ms. WATERS. What do you mean when you say extremely low? 

6 

Mr. FUGATE. I would have to ask my staff to get back to you in 

writing, but it is less than the commercial rate or the general rates 

that you would have for Treasury loans. 

[The following information was received after the hearing: ‘‘The 

average interest rate on the National Flood Insurance Program 

borrowing of $17.75 billion of borrowing is currently 0.323%. 

The largest note ($16.7 billion) carries an interest rate of 

0.25%.] 

Ms. WATERS. Has there ever been any discussion about forgiving 

the debt? Not forgiving the entire debt, but forgiving the—not reducing the interest rate, but wiping out the interest rate, not having an interest rate on that debt—interest-free loan? 

Mr. FUGATE. It has been discussed outside of FEMA. We have 

been looking at that as part of Flood Insurance Program reform. 

And we do not have the ability to forgive the debt. That is something, literally, that is a fiscal decision. 

And the fact that we have been able to make some progress in 

retiring that debt shows that we can in certain circumstances continue to pay down principal. 

But it is, I think, a question that has to be asked. With that outstanding debt, is it the intention to continue to utilize these programs and try to distribute risk so we can continue to pay down 

that principal or do something else with it? 

I would suggest that, in looking at some of the ideas that we 

have seen in the proposed legislation and the possibility of privatization, there may be some ability to pay down that debt, if we are 

engaging other parts of the team. 

Ms. WATERS. Rather than forgiving the debt, really what I think 

perhaps is more reasonable and could help somewhat, is to waive 

the interest rate on the debt. 

So, without going any further into that, I really want to get to 

what happens when our constituents challenge you on the maps. 

I happen to have had the opportunity to be involved with some of 

my constituents who organized their community and did a lot of 

work themselves, and challenged FEMA. And they were successful. 

But I do not understand whether or not there is a prescribed way 

by which our residents can get involved in a process to challenge 

the mapping. And whether that is on the Internet, now how does 

that work? Or do they just have to find out and do it the best way 

that they possibly can? 

Mr. FUGATE. I am not sure how an individual—because when we 

are doing the mapping, we work through the community that is the 

taxing authority or the jurisdiction for the area of mapping. So, we 

generally do it through the process of the city adopting the maps, 

through their public hearings. And that is when, generally, the 

public engages in those activities. 

We also do the— 

Ms. WATERS. Let me interrupt you just for a minute, because I 

only have so much time. 

We discovered in this community that the City of Los Angeles 

had not responded in any shape, form or fashion to the notification 

I guess they get from FEMA. And it was just lost. It was not done. 

So, what happens in that case? 

7 

Mr. FUGATE. I would like to be able to respond back in writing 

to your question. But I think you are raising a valid point we see 

time and time again, the disconnect between the formal process of 

adoption, and then when those changes come out, how the public 

was notified other than just receiving a notice that they are now 

in a high-risk area and are required to purchase flood insurance. 

I think that is something we would also like to work on, how we 

engage the public as maps are going through the planning process, 

not through the implementation process. And again, that is something I think we can work with the committee on, particularly in 

the bill and some of the pilots. 

Ms. WATERS. My staff has indicated that it could cost a homeowner over $1,000 to have their home removed from a floodplain. 

Low-income homeowners are less likely to have these resources 

than higher-income homeowners. 

What kind of assistance does FEMA provide to homeowners who 

would like to remove their homes from a floodplain? Do you believe 

that FEMA should provide resources to low-income homeowners? 

As I mentioned, in the community that I worked with on this 

issue, they organized. They had a neighborhood homeowners’ association. And they had some individuals who were pretty bright, 

pretty smart. And they went out and measured curbs and did a lot 

of stuff, and they were able to prevail. 

But what if an individual homeowner is challenging the mapping? What do they do? And how do we get to this $1,000 figure 

that it would cost them? 

Mr. FUGATE. I am not sure if the question is how much it would 

cost them to challenge or appeal their base flood elevation, or to 

buy out the property. If it is the base flood elevation, the engineering— 

Ms. WATERS. To have their home removed from a floodplain costs about $1,000. 

Mr. FUGATE. Okay, I understand. So, this is going back, and we 

do allow individuals to come back. If they can demonstrate the elevation of the lowest adjacent grade of their home is higher than the 

base flood elevation, it takes them out of that special risk. 

And, yes, there is a cost to that. And, no, we do not have the 

funds or the program to offset that for low-income people. 

That is a challenge that we have with these programs. How do 

we deal with the income inequities of a program that, when you do 

not have the funds available to challenge the maps, you may find 

yourself in the Flood Insurance Program? But if you do have your 

own funds, you can get yourself taken out. 

And as designed, the program does not currently provide that 

kind of specific assistance to low-income people or what that level 

of assistance would be. 

Ms. WATERS. Thank you, Madam Chairwoman. I yield back. 

Chairwoman BIGGERT. Thank you. 

I have one more unanimous consent request, for Mr. Green of 

Texas, who is a member of the Financial Services Committee, but 

not of this subcommittee, to be able to participate. 

Without objection, it is so ordered. 

Mr. Hurt, our vice chair, for 5 minutes? 

Mr. HURT. Thank you, Madam Chairwoman. 

8 

And thank you, Mr. Fugate, for making time to come back and 

appear before this committee. 

I was glad that you noted as you did, that this hearing is coming 

on the heels of a horrible tragedy in Japan that obviously had an 

effect here in the United States. And I think it is worth noting for 

all of us that we were very blessed and fortunate that we did not 

have more damage than we did, and that under different circumstances, we could have suffered the same type of impact that 

Japan did, a Katrina-type event, and that is something I think we 

should all and can be thankful for. 

I say that as background. And I also say I think it is important 

to remember that this program is $18 billion in debt. Our country 

is currently borrowing 40 cents on every dollar we spend. And we 

have a deficit of—or a debt—of $14 trillion. I think that the size 

and scope of this program necessarily has to take those two realities into effect. 

It is my hope that what we come up with at the end of the day 

is something that minimizes the risk to the taxpayer and the cost 

to the taxpayer. It is my hope that we can shift as much of the burden to the homeowner as possible, as much of the burden to the 

private sector as possible. 

But I think it is also important that we remember that, if we 

really want to try to reduce risk as much as possible, we should 

not be encouraging people to live in places they should not live. I 

think that should be said, and those are certainly the principles 

that guide me. 

With all of that said, I would like to get your thoughts on the 

proposal, the current proposal that we are considering that would 

expand coverage. We had testimony when you were not able to be 

with us that suggested that insurance works by numbers. 

The more you have, the easier it is to spread the risk. That, obviously, makes sense. And obviously, we want this program to be successful. 

But at a time that we have a plan that is $18 billion in the red, 

how do we justify offering additional coverage for loss of business 

and for, I think it was contents, home contents? 

Can you talk a little bit about that? What is your opinion about 

whether or not that really makes sense as a part of this program 

going forward? 

Mr. FUGATE. The short-term answer is if you are selling more 

product and you are bringing in more revenue, it may help the existing debt. But what is the long-term exposure? I think this is the 

balance that we really need as a foundation of the reauthorization 

going forward. 

I believe it is in the interest of the taxpayer to determine what 

is the level of risk we should subsidize, but then determine what 

should be done not to encourage more growth and development 

without mitigating these effects, or find ourselves with greater exposure that is not really distributing. 

I think as long as you are writing flood insurance policies, and 

the only people buying them are those who are perceived to have 

the highest risk, you have not distributed the risk at all. You have 

merely added to that. 

9 

And again, it may give you some short-term benefit if you are not 

paying claims out. But if you are not charging a high enough rate, 

or somehow leveraging that risk across a much larger geographical 

area, I do not see what we have done other than just continue to 

incrementally grow the exposure to the program. 

But I do think it comes back to, when we looked at the Flood Insurance Program at the beginning, it was to cover the mortgages. 

Now we are looking at business interruption and additional living 

expense coverage. I am not saying this is bad. 

But I am saying there is a point at which you have to look at, 

are we really increasing the amount of people participating? Yet if 

they are in the same geographical area with the same risk as the 

existing policies, did we distribute that risk and offset that increase? 

Mr. HURT. So, it sounds like you do not have a clear answer. 

Mr. FUGATE. What I tend to find is that what may benefit one 

group may penalize another group. And if you look at your premise 

that the U.S. taxpayer is ultimately backing this program, is this 

putting more exposure to the U.S. taxpayer, keeping it neutral or 

reducing it? 

I would suggest we would need to come back and actuarially look 

at that and look at that risk before we gave an answer. 

But I think, if your premise is we should not be increasing the 

risk to U.S. taxpayers, we would need to study that closely and not 

just look at additional revenues or coverages, but say, does that increase the risk, decrease the risk, or is it still neutral to the overall 

risk to the taxpayer? 

Mr. HURT. Great. And then, I just have a few moments remaining. But let me ask you about the reinsurance. 

It is my understanding that, in the past, the program has been 

authorized to purchase reinsurance. We have not. Why not? 

It seems to me that would be a very important part of the future 

success of this program, if we try to make it successful and have 

the private sector support it as much as possible. 

Mr. FUGATE. I would agree. That is why we looked at the pilot 

provisions, to look at both how would we do reinsurance, how 

would—because this would be—essentially, we would use our funds 

that we collect to buy reinsurance on an annual basis. 

What is the level we need to carry? How do we make that work? 

Again, these would be funds, once expended, we would not have 

any return on that investment other than the protection it gave us 

for that calendar year of whatever we purchased. And what is the 

best mix to buy? 

The other area we wanted to look at was, is there a way to 

incentivize the private sector to begin writing some or additional 

policies and do a multi-peril, versus just doing their standard policies and then having to have a separate flood insurance policy to 

go with it. 

Mr. HURT. Thank you. My time has expired. 

Chairwoman BIGGERT. Thank you. 

The gentleman from Missouri, Mr. Cleaver, is recognized for 5 

minutes. 

Mr. CLEAVER. Thank you, Madam Chairwoman. 

Thanks for being here, Mr. Fugate. 

10 

During the 1990s, when I served as mayor of Kansas City, my 

political enemies conspired to bring about two 500-year floods. Kansas City, as you may know, is almost a city that lives with water 

all around it. Some of it is a comprehensive levee system around 

the city. And I am not sure that we have had full recovery. 

But on page 5 in your testimony, in the 4th paragraph, you talk 

about how the 2-year extension provides more time for the affected 

communities to upgrade or mitigate flood control. 

I can tell you experientially that is not sufficient, particularly 

when you consider the fact that we do not have earmarks anymore, 

which do not add one penny to the deficit or to the budget, and people have been falsely sending out information that is inaccurate. 

So, we are unable to direct money, which is the constitutional responsibility of Congress, to projects that are in desperate need. And 

then, when you add onto that the reality of today, which is that 

most municipalities are in dire straits, like most States and like 

the Federal Government, I do not know how in the world we are 

going to be able to address these issues in a 2-year period. 

The Corps of Engineers, which we normally would direct money 

to, to deal with these projects, is almost doing nothing now, because there is no money available to do these projects. 

So, do you think that your agency needs to reconsider this 2-year 

extension period? 

Mr. FUGATE. There is a two-part answer to this, and I think it 

gets to an issue that you raised, and other Members have raised. 

And looking at what we call the provisionally accredited levees, 

and the 2-year timeframe that we will look at those levees, what 

we are really talking about is there are levees that actually meet 

the standards. We just need to get the data to support it. That is 

part one. 

And generally within 2 years, we can get that information. The 

problem we have is that those levees that would not meet that 

standard cannot be accredited without significant work. And I 

think this goes to the infrastructure issue and the funding issue of 

how we bring levees up to these standards. 

Previously, FEMA had taken kind of a binary approach. If you 

had an accredited levee, then we would afford you the protection 

in the special high-risk area and put you into what we call ‘‘Zone 

X,’’ which would show the levees protect you, and you are not required to buy flood insurance. 

If that levee was not accredited, it was a zero. It did not matter 

that there was a levee there. It did not matter that it may provide 

some protection. It was just zero. 

We have been asked by both the House and the Senate to look 

at this. We have made a decision that we are going to work—we 

think there is the ability to take the existing levees as they are and 

determine what level of protection they offer, versus merely taking 

a position that, unless they are accredited, they do not exist, and 

do not factor in what protection existing levees may have. 

This will allow us to give a truer accounting of the existing infrastructure and what those impacts would be, and map according to 

that, versus saying, until all your levees are fully accredited, we 

are not going to recognize that they offer protection to some degree. 

11 

So, this will be a technical process we will go through at first to 

see how we will ultimately do that. 

But it is our goal to move from only accredited levees being 

mapped, to levees being mapped based upon the level of protection 

they offer, with accredited levees providing protection against a 1 

percent annual chance of flood or greater. But we will account for 

existing levees and what that protection is in determining what 

areas would be in the special flood hazard area and what would 

not. 

Mr. CLEAVER. Is that policy in place today? 

Mr. FUGATE. We have responded back to the letter saying we are 

doing that. We are currently doing the technical reviews of how we 

will determine that level of protection in the engineering. 

It will increase the cost of mapping, in many cases double to 

what the previous cost was. But it will give a truer accounting of 

existing levee infrastructure that may not be accredited, but would 

better identify protection in communities that will require longer 

lead times to repair or improve those levees. 

Mr. CLEAVER. Just keep in mind that when the snow started 

melting up in the Dakotas, and start—where the Missouri snakes 

its way down, all the way into the State of Missouri and meets 

with the Mississippi and the Kaw, that is not a—that is probably 

30 or 40 days away. 

And, it is a rare spring that we do not have a flood in Missouri. 

So, it is a pressing problem. 

I have one other question, so I need to go on. 

Chairwoman BIGGERT. The gentleman’s time has expired. Sorry. 

Mr. CLEAVER. Thank you. 

Chairwoman BIGGERT. The gentleman from Illinois, Mr. Dold, is 

recognized. 

Mr. DOLD. Thank you, Madam Chairwoman. 

And I want to thank Administrator Fugate for taking the time 

to be with us today, and I certainly want to thank you for your 

service to our Nation, and especially your efforts to monitor and assist with the tragic situation going on in Japan. 

I do have just a couple of questions, maybe more than a couple, 

but I may only get to a few. 

With the program carrying significant debt, as you had outlined 

earlier in your testimony, has FEMA actually taken the maximum 

allowable premium increases allowed by law? 

Mr. FUGATE. For those that were not actuarially based, we were 

given the authority to increase those a certain percentage each 

year, but I think that is currently at 10 percent. And looking at 

being able to accelerate that process is one of the things I believe 

the draft bill is looking at. 

For many people, again, this is, how quickly do you phase in 

some of these changes, because of the financial impact. Currently, 

I think the maximum premium increase allowed is 10 percent. I 

think in your draft bill, you are looking at a higher percentage increase to get those policies quicker to the actuarial rate that we 

would charge to a policyholder. 

Mr. DOLD. Sure. And my question just simply is, has, traditionally, FEMA taken the maximum allowable premium increase? 

12 

Mr. FUGATE. Those policies, we normally increase to the 10 percent cap to get them to the actuarial rate. But that is the cap that 

we can move them to right now. 

Mr. DOLD. Okay. And obviously, our goal is that we want to 

make sure we can—part of our goal is that we want to make sure 

people are covered. And we want to make sure that we take some 

of the burden off of the government and the taxpayer, and put 

more of it onto the private sector. 

And in order to do that, the premiums are going to have to rise. 

I think you have outlined what that balance is going to be for the 

taxpayer, for the homeowner in those areas. 

Now, the other thing is, I like the idea of allowing policy owners 

to make installment payments for premiums. But I am also concerned that installment payments could also result in adverse selection with policy owners paying premiums only during the perceived high-risk seasons, while letting policies lapse during times 

where it is perceived to be low-risk seasons. 

In that case, FEMA would receive only about half of the premiums they are currently receiving right now. 

Are you concerned that installment payments could negatively 

impact the program’s finances? And what can FEMA do to eliminate this adverse selection possibility? 

Mr. FUGATE. I know you have more questions. I am going to try 

to be short. 

If I have an escrow account, my insurance and taxes, and all 

these things, are paid out annually. But if I am personally buying 

my insurance, the ability to make quarterly payments, I think is 

critical for somebody who gets that large bill one time a year. 

I think we have to just make it clear, though. The rules have to 

say, you buy insurance a year ahead. So, your quarterly payments, 

if you stop, not only do you not get to come back in the program, 

you owe us money, because we covered you for the whole year. 

I think this is the way, when you buy car insurance or anything 

else where you do monthly payments, you do not buy it that month. 

You buy it at 6 months or 12 months, and you are paying for the 

full bill. So, if you do not make those payments, you now owe the 

U.S. taxpayers money back, because you were sold that insurance 

policy for the full year. 

I think that is where the rules have to come back to, that you 

are not buying it by quarter. You are buying it at a year with installment plans. If you fail to make those payments, you are in arrears to the taxpayers. And there has to be a penalty about how 

you get back into the program until you satisfy your debt. 

Mr. DOLD. Is there an enforcement mechanism that you are 

thinking of? I like the penalty. Does that mean that you are going 

to push that off? To whom? 

Mr. FUGATE. That would— 

Mr. DOLD. Or how is that going to be enforced? 

Mr. FUGATE. Traditionally, the way we would look at this program—and we go to the quarterly basis, as I believe the draft legislation looks at—we would make it so that, when you buy the policy, 

you are buying a year’s worth of policy. 

13 

If you fail to make those payments, you will go in arrears. We 

are going to send you a bill. If you don’t pay that, we turn those 

over to the Treasury for collection. 

And then we would look at what the rules would say about 

where you would be able to re-enter that program. Would you have 

any probation, additional costs? Would you be at higher risk for the 

penalty of payment? 

I think it would be contingent upon, again, our traditional—we 

do not necessarily collect debt, but we do turn over debt to the 

Treasury to collect. And I would say, we are selling you a year policy. If you don’t make those payments, you owe the taxpayer the 

money back. 

Mr. DOLD. Administrator Fugate, the GAO says that the program is not actuarially sound by design. Does the program reserve 

for losses like the private insurers do? And has the program ever 

reserved for losses? 

Mr. FUGATE. In the beginning, it was not really envisioned that 

there would be any funds built up to absorb disasters. Congress 

over time has allowed some to be built up. But with the existing 

debt, we are not able to really maintain a large reservoir of funds. 

It was, I think, a decision that we are going to subsidize some 

risk. But I think the unintended consequence is that risk kept 

growing, not going down. 

And so, I think this is where we have to come back and look at 

the reauthorization, how do we determine what is the level that 

taxpayers should subsidize versus what the homeowners should be 

required to protect, and make sure they can protect their mortgages and their investment. 

Mr. DOLD. I thank the Administrator. My time has expired. 

Chairwoman BIGGERT. Thank you, Mr. Dold. 

Mr. Stivers is recognized for 5 minutes. 

Mr. STIVERS. Thank you, Madam Chairwoman. 

I appreciate the Administrator being here today, and I appreciate 

your comments on the draft bill. I think you did a great job, and 

Mr. Dold was just asking about this, of talking about the real adverse selection that is in our national flood insurance today. 

And one of the comments that you made, I look back at the portion of the bill that allows you to do private risk management initiatives, and I have a couple of questions that will make me wonder 

if that will work. 

So, you have risk-based pricing today. What is the lowest amount 

in the very low-risk area that somebody would pay for flood insurance, on average? Two hundred bucks a year? Three hundred? 

Mr. FUGATE. Yes, it is a couple hundred dollars. It depends upon 

the amount of coverage. But it is, if you are in what we call preferred risk outside of the flood zone, it is, depending upon the size 

of the home and the amount of coverage, a couple hundred dollars. 

And so, the idea of privatization is, would there be any— 

Mr. STIVERS. Yes, I am getting there. But so, I think the average homeowner pays about $2,000 a year in home insurance. 

My question to you is, would you—and I can tell that it is authorized in this bill—but would you be willing to work with some 

private insurance companies who might be interested in selling a 

wrap-around insurance product that includes flood- and water-reVerDate Nov 24 2008 17:27 Jun 24, 2011 Jkt 066861 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\66861.TXT TERRIE
14 

lated risk, and then reinsure their risk for the flood piece for some 

portion of that premium, in order to get folks who have less risk 

in the pool, to try to make the pool a little more standard? 

Mr. FUGATE. I do not really know about the reinsurance piece. 

But I have asked the industry this question, particularly the Write 

Your Own Companies. 

I asked them the hypothetical question, what could we do as the 

Federal Government—and I think part of this would come from direction from Congress—to incentivize you writing multi-peril policies that include flood insurance? And are there any areas of that 

risk that you would be willing to look at versus the higher risk 

where that could still be primarily a Federal role? 

One of the— 

Mr. STIVERS. But if they take all the risk and all the premium, 

that does not help your pool. 

Mr. FUGATE. No, but in many cases, those are people who are not 

currently buying flood insurance in the first place. 

Mr. STIVERS. Right. But if we are going to save your pool of flood 

insurance, don’t you have to get people—get the lower risks in your 

pool? 

Mr. FUGATE. If that— 

Mr. STIVERS. Unless you want to lose money. 

Mr. FUGATE. Here is the question that I would ask: If those people do not have insurance, we are going to end up, in many cases, 

providing disaster assistance dollars. 

So, that is where I think we have to see what the trade-offs are. 

A term used is, do we allow the most favorable policies to go to the 

private sector, and we retain the most, highest risk? Would that be 

offset by reductions in disaster assistance costs, because people 

were not insured against those losses? 

Mr. STIVERS. Okay. Great. And on reinsurance, have you ever 

looked at—because you have had the capacity to do it before. And 

I missed this question. I think Representative Hurt asked it. My 

understanding is, the program has not used it traditionally. 

Mr. FUGATE. It has not. And I think that is one of the things I 

am going to have to write a response back to the committee on the 

history of that, what they have looked and what they saw as obstacles, and what our history has been on looking at that. 

Mr. STIVERS. And I hope you will let us know, because I think 

this bill gives you the authority, as well as studying how it would 

work. But if there are any obstacles, we want to try to remove 

those, because it is in the bad years that reinsurance could help reduce your risk exposure, so, things like Rita and Katrina. 

Representative Dold already asked about the quarterly payments. And I think that my question to you is, do you feel like you 

have all the tools to make that work? Because I know a lot of people pay through escrow payments. And do you feel like you have 

everything you need to make that work? 

Mr. FUGATE. We are looking at it. And I think we can report 

back, if we see any obstacles there. 

Part of this has been the reluctance, as was pointed out, to do 

quarterly payments and risk that people would only buy it when 

they perceived risk. And I think this would—we would have to 

come back and see if we need additional authority— 

15 

Mr. STIVERS. That goes back to my first statement about who is 

in the pool. And I would ask you to take a serious look at that, because unless you can get people in the pool who have a lower actual risk, then as long as you only have people who want insurance 

who are going to lose money, then the fund is always going to lose 

money. 

So, I would ask you to take a look at how we can encourage people to get in the pool who are lower risk, but have some risk, and 

want to mitigate that risk with insurance. 

Thank you. I yield back the balance of my time, Madam Chairwoman. 

Chairwoman BIGGERT. Thank you. 

We are facing votes soon, and we are going to have nine votes. 

So, we have to get through this really, really fast. I hope that everybody will have an opportunity to have a minute or two. 

I am going to yield to—we will leave and not be able to come 

back—so I will yield to Mr. Sherman, and I hope that you can divide some time and do it quickly. 

Mr. SHERMAN. Yes, I represent an area known as a desert. So, 

why am I concerned with flood insurance? First, I represent 

Northridge, and I look forward to us building on the idea of Federal 

involvement in flood insurance to—a role that hopefully—that we 

can play in earthquake insurance, while at the same time being actuarially sound and not a cost to the Federal Government. 

The second reason I care is—and I have been here a long time— 

every time there is a disaster, we have uninsured people. The uninsured people’s Representatives then come to us for emergency appropriations. And how do you vote against an emergency appropriation for uninsured people who have lost their home? 

I have one question, and that is, State Farm left the Write Your 

Own program. FEMA, as I understand it, is administering all those 

policies. 

Do you want to keep administering those policies? Do you have 

a fair system to transfer those to the private companies that are 

participating, and in particular, to transfer those in a particular 

State to a company that is doing flood insurance business in that 

State? 

Mr. FUGATE. My preference would have been for State Farm to 

have sold its book of business to another Write Your Own Company; however, State Farm Chose not to do that. 

I found out the real issue that I am really concerned about is 

going to be, when we have a big disaster, we all use the same contractors to process a claim. So, where previously we would have one 

claims adjustor going out doing Write Your Own Companies, we 

are going to have to send two out: one for the company that wrote 

the other part of the damages; and one that is going to have to 

cover the flood. And that is going to put an additional strain on the 

people who are doing the adjustments. 

So, my goal is to explore whether there are contractual or other 

obstacles to moving the former State Farm policies from the NFIP 

Direct Side to other Write Your Own Companies, bearing in mind 

that we must consider the wishes of policyholders. 

But it is an issue that I found out the hard way. With asking 

the questions, hopefully we will know this now. 

16 

There is a finite number of adjusters that people use under contract to go out and process a large number of claims. When we do 

the direct provision of those policies, we double the number of demand for adjustors in those disaster areas. 

Mr. SHERMAN. So, your plan is to move these policies to private 

companies, try to deal with the adjustor issue, and you seem to be 

nodding. And I am going to yield to the gentleman from Texas. 

Mr. GREEN. Thank you for yielding. 

And thank you, sir, for appearing today. 

Sir, I have two questions. The first has to do with a study. Having lived along the Gulf Coast and Florida, Mississippi, Alabama, 

Texas, Louisiana—born in Louisiana—the question is, is there a 

study that gives some intelligence on the economic impact associated with not having flood insurance along those areas—given that 

the people who live there depend on it, and they do business with 

the businesses that are in the area—have we had such a study that 

you are aware of? 

Mr. FUGATE. I would have to research it. I know the question in 

regard to my experiences in Florida is that, without the flood insurance policies, we would have even more people in worse financial 

shape. 

The thing people do not understand is, even if you get a disaster 

declaration, FEMA assistance does not take care of your mortgage. 

We only provide a very limited amount of funds, about $30,000 

maximum to individuals to help them recover from a disaster. 

Obviously, if your home is damaged or destroyed and you do not 

have flood insurance, you lose the entire equity and investment 

that you had left in your home. 

The other corresponding piece of this is, in those coverage zones 

where we do not provide flood insurance such as Coastal Barrier 

Resource Areas, there is a very character of development and sustainability for those vulnerable areas. 

Mr. GREEN. Thank you. The second question: Have we sufficiently answered the question that we had to address—Katrina, 

primarily, is where I became knowledgeable of it—with reference 

to wind versus water? Did we get that resolved sufficiently? 

Mr. FUGATE. I think it is still going to be a challenge, because 

when you have different perils covered by different policies, there 

will always be the question: Which did the bulk of the damages? 

And it is a challenge. 

That is why our ability to work with the private sector and find 

ways to write more policies as multi-peril is a benefit to both the 

homeowner and to the people involved. 

But it will, I think, continue to be a challenge. I think we work 

diligently with the Write Your Own Companies and with the adjustors to make those determinations. 

But when you have a wind storm and massive storm surge, it 

will oftentimes be a question that, unfortunately, in many cases is 

being resolved in the court system. Is this flood, or is this wind? 

Mr. GREEN. Since we have a bit of time left, mega disasters. 

Would you prefer that I yield, Madam Chairwoman? 

Chairwoman BIGGERT. Please. 

Mr. GREEN. I will do so. 

17 

Chairwoman BIGGERT. Thank you so much. We have two members left. 

Mr. GREEN. Thank you. 

Chairwoman BIGGERT. Mr. Walberg from Michigan, you have 1 

minute. 

Mr. WALBERG. Thank you, Madam Chairwoman. 

In lieu of the time here, if I would ask the chairman and the 

committee for the opportunity to submit a more extended statement— 

Chairwoman BIGGERT. Absolutely. 

Mr. WALBERG. —as well as questions. 

Chairwoman BIGGERT. And that will be available to all members. 

Mr. WALBERG. I appreciate that. And thank you for the opportunity to be here. 

Chairwoman BIGGERT. Thank you. 

Mr. Palazzo from Mississippi is recognized for 1 minute. 

Mr. PALAZZO. Thank you, Madam Chairwoman. And I just appreciate the opportunity to be on this important committee. 

As the Representative from Mississippi’s 4th Congressional District, the Mississippi Gulf Coast where Katrina hit in 2005, this is 

extremely important to me. And I urge this committee to consider 

all of the reforms put forth by Administrator Fugate. 

And if I can, I will just skip to one quick question. If we run out 

of time, I will submit questions for the record. 

Is there a coastal wind insurance crisis? And are there solutions 

that you may have in mind that could actually help solve our coastal insurance crisis? 

Mr. FUGATE. Sir, I am from Florida. The answer is, yes. And the 

second part of it is, I do not know if there has been a good answer 

yet. 

I look at Florida and the unintended consequences of reinsurance 

and the CAT Fund, and the problems that we see in the exposure 

as a taxpayer in Florida that I face with that coverage. It is very 

challenging. I would not recommend the flood model to address it. 

Chairwoman BIGGERT. Thank you so much. 

The Chair notes that some members may have additional questions for this panel which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

And with this, let me thank the Administrator for being here, 

and I am sorry that we had votes. You have been a great witness, 

and thank you for your help. 

And with that, this hearing is adjourned. 

[Whereupon, at 11:26 a.m., the hearing was adjourned.] 

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