Segment 1 Of 2     Next Hearing Segment(2)

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PLEASE NOTE: The following transcript is a portion of the official hearing record of the Committee on Transportation and Infrastructure. Additional material pertinent to this transcript may be found on the web site of the Committee at []. Complete hearing records are available for review at the Committee offices and also may be purchased at the U.S. Government Printing Office.







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Printed for the use of the

Committee on Transportation and Infrastructure

BUD SHUSTER, Pennsylvania, Chairman

WILLIAM F. CLINGER, Jr., Pennsylvania
THOMAS E. PETRI, Wisconsin
HOWARD COBLE, North Carolina
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JOHN J. DUNCAN, Jr., Tennessee
WILLIAM H. ZELIFF, Jr., New Hampshire
BILL BAKER, California
JAY KIM, California
STEPHEN HORN, California
BOB FRANKS, New Jersey
PETER I. BLUTE, Massachusetts
JOHN L. MICA, Florida
ZACH WAMP, Tennessee
RANDY TATE, Washington
RAY LaHOOD, Illinois
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NICK J. RAHALL II, West Virginia
ROBERT A. BORSKI, Pennsylvania
ROBERT E. WISE, Jr., West Virginia
BOB CLEMENT, Tennessee
ELEANOR HOLMES NORTON, District of Columbia
PAT DANNER, Missouri
JAMES E. CLYBURN, South Carolina
BOB FILNER, California
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FRANK MASCARA, Pennsylvania
GENE TAYLOR, Mississippi


SHERWOOD L. BOEHLERT, New York, Chairman

ZACH WAMP, Tennessee, Vice-Chairman
THOMAS E. PETRI, Wisconsin
WILLIAM H. ZELIFF, Jr., New Hampshire
STEPHEN HORN, California
BOB FRANKS, New Jersey
BUD SHUSTER, Pennsylvania
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(ex officio)

ROBERT A. BORSKI, Pennsylvania
ROBERT E. WISE, Jr., West Virginia
ELEANOR HOLMES NORTON, District of Columbia
BOB FILNER, California
GENE TAYLOR, Mississippi

(ex officio)



OCTOBER 18, 1995
    Baker, Hon. Bill, a Representative in Congress from California
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    Clark, Jordan, President, United Homeowners Association

    Emerson, Hon. Bill, a Representative in Congress from Missouri

    Ewing, Hon. Thomas W., a Representative in Congress from Illinois

    Fazio, Hon. Vic, a Representative in Congress from California

    Frazer, Hon. Victor O., U.S. Delegate from the U.S. Virgin Islands

    Hoffman, Scott, Director of Operations, Americans for Tax Reform

    Horn, Hon. Steve, a Representative in Congress from California

    Hunter, J. Robert, Director of Insurance, Consumer Federation of America

    Hutchinson, Hon. Tim, a Representative in Congress from Arkansas

    Keating, David L., Executive Vice President, National Taxpayers Union

    Klagholz, James R., Secretary-Treasurer, Clayton N. Sterling Associates, Inc., Seaside Park, NJ, and Chairman, Government Affairs Committee, Independent Insurance Agents of America

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    McCollum, Hon. Bill, a Representative in Congress from Florida

    Murphy, Susanne, Deputy Insurance Commissioner, State of Florida

    Paulison, R.D., First Vice President, International Association of Fire Chiefs, and Director, Metro-Dade Fire Rescue Department

    Pomeroy, Hon. Earl, a Representative in Congress from North Dakota

    Quakenbush, Chuck, Insurance Commissioner, State of California

    Snyder, Rick, President-Elect, California Association of Realtors

    Weber, Jack, Executive Director, Natural Disaster Coalition

    Weldon, Hon. Curt, a Representative in Congress from Pennsylvania


    Baker, Hon. Bill, of California
    Emerson, Hon. Bill, of Missouri
    Ewing, Hon. Thomas W., of Illinois
    Fazio, Hon. Vic, of California

    Frazer, Hon. Victor O., of the U.S. Virgin Islands
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    Horn, Hon. Steve, of California
    Hoyer, Hon. Steny H., of Maryland
    Hutchinson, Hon. Tim, of Arkansas
    McCollum, Hon. Bill, of Florida
    Oberstar, Hon. James L., of Minnesota
    Pomeroy, Hon. Earl, of North Dakota
    Poshard, Hon. Glenn, of Illinois
    Wamp, Hon. Zach, of Tennessee
    Weldon, Hon. Curt, of Pennsylvania


    Clark, Jordan
    Hunter, J. Robert
    Keating, David L
    Klagholz, James R
    Murphy, Susanne

    Norquist, Grover (Scott Hoffman)

    Paulison, R.D

    Quackenbush, Chuck
    Snyder, Rick
    Weber, Jack
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Borski, Hon. Robert A., Representative in Congress from Pennsylvania:

Letter, Robert E. Rubin, Secretary of the Treasury, U.S. Department of the Treasury, October 18, 1995
Letter, James L. Witt, Director, Federal Emergency Management Agency, October 17, 1995
Weber, Jack, Executive Director, Natural Disaster Coalition:

NDPA Accomplishes More in Disaster Mitigation than Administration Proposals with Less Hassle for States and Local Governments, chart

Natural Disaster Coalition Members, list

The Natural Disaster Coalition Organization Profile

The Natural Disaster Insurance Corporation: Estimates of Future Revenues and Expenses, report

DECEMBER 5, 1995

    Bullock, Jane A., Acting Chief of Staff, Federal Emergency Management Agency, accompanied by George Bernstein, Chairman, Advisory Committee, National Earthquake Hazards Reduction Program
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    Dreier, Hon. David, a Representative in Congress from California

    Harper, Charles F., President, Harper Perkins Architects, Wichita Falls, TX, on behalf of the American Institute of Architects

    Klein, John M., President, Hazard Mitigation Services Company, Inc., Annapolis, MD

    McCool, Thomas J., Associate Director, Financial Institutions and Markets Issues, General Government Division, U.S. General Accounting Office, accompanied by Lawrence Cluff, Assistant Director, Financial Institutions and Markets Group

    McKinney, Stan, Director, South Carolina Emergency Preparedness Division, Columbia, SC, on behalf of the National Emergency Management Association

    Parker, Hon. Mike, a Representative in Congress from Mississippi

    Quinn, Rebecca C., Legislative Officer, Maryland Department of the Environment, Annapolis, MD, on behalf of the Association of State Floodplain Managers, Inc

    Schwartz, Mark, First Vice President, National League of Cities and Council Member, Oklahoma City, OK

    Thompson, Mozelle W., Deputy Assistant Secretary, Government Financial Policy, U.S. Department of the Treasury
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    Boehlert, Hon. Sherwood L., of New York

    Horn, Hon. Stephen, of California

    Oberstar, Hon. James L., of Minnesota

    Parker, Hon. Mike, of Mississippi


    Bullock, Jane A

    Harper, Charles F

    Klein, John M

    McCool, Thomas J

    McKinney, Stan

    Quinn, Rebecca C

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    Schwartz, Mark

    Thompson, Mozelle W


    Bullock, Jane A., Acting Chief of Staff, Federal Emergency Management Agency, Audit of FEMA's Disaster Relief Fund, Office of Inspector General, Audit Division, July 1995

Emerson, Hon. Bill, a Representative in Congress from Missouri:
Proposed Changes to Natural Disaster Protection Act, statement

NDPA Accomplishes More in Disaster Mitigation than Administration Proposals with Less Hassle for States and Local Governments, chart

    Horn, Hon. Stephen, a Representative in Congress from California, statement of Dr. Richard Williams, Dean of Engineering, California State University, Long Beach

    Klein, John M., President, Hazard Mitigation Services Company, Inc., The U.S. Structure Fire Problem, chart


Association of State Dam Safety Officials, Inc.:
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ASDSO Draft Federal Legislation

Dam Safety—A National Concern, fact sheet

1994State Dam Inventory Data, chart

    Beers, Paul, Advisory Committee Member, Laminated Glass Information Center, statement

    City of Oakland, memorandum

    Griffin, Mary, Insurance Counsel, Consumers Union, Washington Office, statement

    Joslin, Roger, Chairman of the Board, State Farm Fire and Casualty Insurance Co., statement

    Kuchnicki, Richard P., CEO, Council of American Building Officials, letter and chart

    National Association of Homebuilders, statement

    New York Times, article, ''A Storm Over Housing Codes'', December 1, 1995

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U.S. House of Representatives,

Committee on Transportation and Infrastructure,

Subcommittee on Water Resources and Environment,

Washington, DC.

    The committee met, pursuant to notice, at 11 a.m. in room 2167, Rayburn House Office Building, Hon. Sherwood Boehlert (chairman of the subcommittee) presiding.

    Mr. BOEHLERT. Good morning, and welcome to the Water Resources and Environment Subcommittee. Today we will consider an issue that has the potential to touch the lives of every American—improving our Nation's preparedness for natural disasters.

    On June 15th of this year, I joined Mr. Emerson, a distinguished member of this committee, and Mr. Mineta, who has left our committee for greener pastures, in introducing the Natural Disaster Protection Partnership Act, H.R. 1856. I felt then as I do now, that this bill is an important first step in improving our Nation's preparedness for natural disasters.

    The goals of H.R. 1856 are consistent with those in natural disaster legislation I have championed over the last four Congresses. As a senior member of the Science Committee and a co-chairman and founder of the Congressional Fire Caucus, I have been an active supporter of improvements in natural disaster preparedness.
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    We must put far greater resources into disaster mitigation. Investing millions in mitigation will save us billions in natural disaster losses. We must assure the availability of hurricane and earthquake insurance to homeowners. And finally, we must develop a natural disaster policy that assures the exposure insurance companies face from natural disasters is commensurate with the resources available for claims.

    Natural disasters such as earthquakes and hurricanes pose a unique challenge to insurers. These events tend to be of extremely low frequency but of enormous cost. These facts make the public's interest in purchasing hurricane or earthquake insurance very low, and the cost of earthquake or hurricane insurance very high.

    The Natural Disaster Protection Partnership Act is an effort to increase the availability and use of reasonably priced natural disaster insurance. However, the scope of the Natural Disaster Protection Partnership Act and the problems it seeks to address are enormous. This legislation involves billions of dollars and has the potential of impacting the insurance rates of most homeowners in America. Many organizations that serve as Government watchdogs, such as the National Taxpayers Union and the Consumers Union, have raised serious questions about the direct impact of H.R. 1856 on the Federal Government and the indirect impact on the U.S. taxpayer. Representatives from within the insurance community have voiced concerns about the workability of H.R. 1856.

    The problems that the Natural Disaster Protection Partnership Act seeks to address are real. However, we must be certain that the solutions we come up with reflect the financial realities facing both the Federal Government and the public.
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    I am certain that today's hearing and the hearing we will schedule for November 2nd will shed important light on the numerous financial questions that now surround this legislation. As the Chairman of this Subcommittee and an original co-sponsor of this legislation, I am committed to the development of a fiscally sound natural disaster program.

    It is now my pleasure to recognize the distinguished ranking member of the Water Resources and Environment Subcommittee, Mr. Borski of Pennsylvania.

    Mr. BORSKI. Thank you, Mr. Chairman. I congratulate you on holding this hearing on the crucial issue of how to address the numerous serious financial problems that result when natural disasters strike. In the 103rd Congress, as chairman of the Subcommittee on Investigations and Oversight, I held hearings on the disaster relief program. It was clear that the problem was one of not getting relief to the people who needed it so desperately.

    There is no question that FEMA Director James Lee Witt has made numerous changes that have greatly improved the performance of FEMA. It is absolutely essential, however, that we develop a national policy that will promote mitigation in disaster-prone areas. We must reduce the continuing and substantial costs to taxpayers in other areas to pay for damage caused by careless development in flood plains, earthquake zones and other disaster-prone areas.

    We also must implement an insurance program that will reflect the true risk that is posed to homeowners and businesses in disaster-prone areas. We must provide assurances that there is an adequate insurance pool to pay claims resulting from catastrophic disasters.
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    I compliment the authors of H.R. 1856 for their attempt to address these issues and for their active efforts to move the process forward. I am concerned, however, that criticisms have been raised about portions of this bill by such groups as the Consumers Union, the Association of State Flood Plain Managers, and other insurance organizations. I look forward to a second day of hearings on November 2nd when we can explore these issues in more depth and hear from some other witnesses, including FEMA, Treasury and other Federal agencies.

    And Mr. Chairman, I ask unanimous consent at this point to submit for the record letters from the Secretary of the Treasury and the Director of FEMA.

    Mr. BOEHLERT. Without objection, so ordered.

    [The referenced material follows:]

    [Insert here.]

    Mr. BORSKI. I look forward to working with you, Mr. Chairman, on revisions to this bill, so that we can move a bill forward that will provide protection for victims of major disasters.

    Mr. BOEHLERT. Thank you very much.

    Now I turn to the prime mover, the author of this bill, Mr. Emerson of Missouri.
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    Mr. EMERSON. Thank you, Mr. Chairman.

    Let me explain that I have a very unusual situation here this morning. I have two measures of which I'm the principal sponsor, the Natural Disaster Protection Partnership Act being one of them, and another one relating to English as our common language. And hearings on both issues were scheduled at the precise same hour on this day. And for that reason, I have been tardy in appearing here.

    I don't want to interrupt the process. If the witnesses at the table have not yet testified, I would be glad to yield to them and make my statement when they have finished. Because I recognize they may have conflicts also. I'm sort of off the hook right now. I can stay a while.

    Mr. BOEHLERT. That's very good, because the Chairman will depend upon you to relieve him momentarily.

    And may the Chair congratulate Mr. LaTourette and the Cleveland Indians on a magnificent victory last evening. The audience may applaud, if you're Cleveland fans.

    [Applause, laughter.]

    Mr. BOEHLERT. Our first panel consists of three very distinguished colleagues who have proven by performance over the years that they are serious legislators and want to make a significant contribution to responsible legislation, Mr. McCollum, Mr. Fazio and Mr. Ewing. And we'll proceed in the order I announced them. Mr. McCollum, you're first up.
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    Mr. MCCOLLUM. Thank you very much, Mr. Chairman.

    I first of all want to commend you and Mr. Emerson for the bill and for the sponsorship in having these hearings today. My State of Florida is as impacted as any state with the natural disaster problems. We just finished with Hurricane Opal down there. It's the third swipe by a hurricane this year. And we have a tremendously under-capitalized insurance fund in the State, because we've lost insurance due to the hurricanes like Hurricane Andrew a couple of years ago. So this legislation's absolutely critical to us.

    It's my understanding from looking at the data that over the past 6 years alone, if we look at the cost of natural disasters in this country, it's been more than $50 billion. And that would come to roughly $500 million per household in this country. In my judgment, the insurance companies that have decided to bail out of the State of Florida and many disaster-prone areas have decided to do so because of probably good, prudent business judgment, considering that the risk that they are engaged in does not spread adequately through the pool across the country.

    As a result of that, Florida embarked on a joint underwriting association and windstorm association to be the insurers of last resort for those who cannot find private insurance. The funds have come from the State itself, and it's terribly over-subscribed, terribly under-capitalized. And frankly, it's a man-made disaster waiting to happen, in my judgment.
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    This bill, though, is a bill that would recognize that problem, that states can't do it alone in this area. It would do it by creating a private insurance pool in essence, a natural disaster insurance corporation, privately funded, providing reinsurance to the private insurance companies which provide primary insurance to homeowners in disaster-prone areas. It would improve the availability of the insurance obviously to homeowners located in this area.

    And it, as I said, would spread the risk, which I think is very important, across a large sector of homeowners. It's that pool, from my experience on the Banking Committee and elsewhere, and I'm sure yours, that's really critical to the establishment and success of any insurance program.

    If the corporation had been in operation over the last 10 years, a study by the Natural Disaster Coalition says that it would have paid every claim resulting from the worst disasters in this country's history, including Hurricanes Andrew and Hugo, which resulted in $20 billion in losses, and earthquakes on the west coast in about $15 billion in losses. When people carry insurance, the cost to the Government is greatly reduced. I think that's a pretty obvious thing. This proposal, without involving taxpayer dollars, this bill that you have before you today, would indeed ensure that people would carry insurance. Every homeowner with federally-backed mortgages located in disaster-prone areas would have to purchase insurance under this plan. That's essential to spreading the risk.

    In addition, coverage would have to be made available to those without the federally-backed mortgages in disaster-prone areas, but wouldn't be required. Virtually every member of Florida's Congressional delegation is a co-sponsor of this legislation: our Governor, our state insurance commissioner, most of our legislators, all really recognize this is absolutely critical.
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    I would like to just summarize this statement, Mr. Chairman, I don't want to take more time with it. But I'd like to submit it for the record, if I could. And I thank you very, very much for considering this critical bill.

    Mr. BOEHLERT. Thank you very much. And I want all our colleagues to know that their statements will appear in the record in their entirety. We value your words of wisdom.

    And Mr. McCollum, you've had a lot of experience in the State of Florida with natural disasters. And so, too, has our next panelist, Mr. Fazio of California.

    Mr. Fazio.


    Mr. FAZIO. Thank you very much, Mr. Chairman. And I want to thank you and Mr. Borski for convening this hearing and taking the lead in trying to fight through to a solution to this problem. And I would obviously like to congratulate Mr. Emerson, also, for the leadership role he and Norm Mineta played in bringing this issue to the fore.

    I hope you'll understand when I make this joke, Mr. Emerson, maybe you ought to combine your two bills and require that insurance be written in English.

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    Mr. EMERSON. Not a bad idea.

    Mr. FAZIO. But at the same time I say that, I do appear today not as a critic of FEMA, not as somebody who thinks that James Lee Witt has not done an outstanding job. I associate my remarks with those of Mr. Borski. I think we've seen a real improvement in the productivity and the success of that agency. I've had personal experience with them and they're doing a fine job.

    But it's fair to say that our current ad hoc system of disaster relief is drastically inadequate. And while costing the American taxpayer billions of dollars a year, the current system provides few mechanisms for loss prevention, loss mitigation or proactive financial planning. Over the past 5 years, the Federal Government has spent over $45 billion on disaster relief. We all understand that's increasingly a difficult thing to do in the appropriations process. And this is not, of course, counting the devastating hurricane season which is currently ravaging Mr. McCollum's state and other areas of the south Atlantic.

    Mr. Chairman, we are faced with growing disaster losses, the potential for a future catastrophic disaster, and escalating costs to the Federal budget. And it's due time that we come up with a plan that instills fiscal sanity and preventive planning into disaster relief. Not only is our current system a tremendous strain on the taxpayer, it actually discourages adequate mitigation and preparation, such as complying with Federal and state building codes. Homeowners in disaster-prone areas have come to rely on Federal assistance and relief, and they do not spend money on measures such as structural improvements that would greatly reduce risks and costs.
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    Additionally, disaster-related insurance is at best difficult to get in disaster-prone areas, as Mr. McCollum has alluded to. Ask any California homeowner if it's easy to get earthquake, fire or floor insurance. Nearly 75 percent of the victims of the Northridge earthquake in my State had no applicable insurance.

    Mr. Chairman, the main problems we face in terms of natural disasters are the skyrocketing costs of relief and the lack of adequate preparation and planning. The Natural Disaster Protection Partnership Act provides a good start towards solving these problems. This legislation will establish the National Disaster Insurance Corporation, which will be privately funded and guaranteed by the Federal Government.

    And because the entire insurance industry will likely back the NDIC, it will be able to provide disaster-related insurance within high risk areas by equitably spreading the financial risks. This will save the American taxpayers billions of dollars every year, and provide every homeowner or person holding a federally-backed mortgage with the opportunity to buy disaster insurance, or else risk losing Federal assistance in the event of a disaster.

    Additionally, since the NDIC will be privately funded, it will not cost the taxpayers any money. Any Federal loans to the NDIC will be by law repaid at non-subsidized rates within a specified time period.

    Mr. Chairman, I think everyone here knows that this concept could provide incentives and means for homeowners in localities to undertake cost effective loss mitigation and prevention measures, such as compliance with Federal and state building code measures. It could create a mitigation account to allocate funds to states that comply with these requirements. Compliance with building codes alone could have saved 30 to 40 percent of the costs involved in losses from Hurricane Andrew.
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    And so, Mr. Chairman, members of this subcommittee and members of this full committee, my district has tremendous problems with floods. My constituents find flood insurance either unaffordable or unavailable. They are desperate to see the Congress intervene and take a leadership role in providing for a long-term solution here. I think that this committee can provide the key to finding a bipartisan approach to building a rational foundation upon which we can change the current system.

    And I would indulge the committee at this point and place the remainder of my remarks in the record. I realize there are critics, I realize there are problems, Consumers Union, FEMA and others will bring them to your attention. But I hope this committee will take the time to fight through them, to find solutions to the legitimate concerns about defining what mitigation is, determining how we can in fact not provide subsidies for people who don't need them. I think there are clearly oversight responsibilities that the state and local government may need to provide, or have the Federal Government provide.

    But these are not insurmountable problems, and I'm hopeful that this very good and balanced committee can find solutions to these legitimate concerns, so that we can find a way to bring a bill to the floor and to the President in this Congress.

    Thank you.

    Mr. BOEHLERT. Thank you very much for that expression of confidence in the subcommittee. We will do our level best to be responsive to the problem and responsible in addressing it.
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    Mr. Ewing.


    Mr. EWING. Thank you, Mr. Chairman.

    And I'm going to put my remarks in the record, but I would like to make just a few comments. I want to congratulate the committee, the ranking member, Mr. Emerson, the chief sponsor, and of course, Mr. Mineta. And I'm pleased to be, myself, one of the original sponsors of this legislation.

    And I think the comments that I would like to make today are that we face not only the disasters in this country which have become all too frequent, and the enormous costs in the billions of dollars, and we have the problem, of course, of the Federal budget, the lack of funds. We're constantly raising our deficit by making payments for these disasters, not by cutting back in other areas, but by adding to the deficit.

    You might wonder why a person that comes from the heartland, which has less of these disasters than maybe on the fringes of the country, on the coast lines, would be interested. Well, I'm interested because I think we need to save the taxpayers some money with the new disaster problem. We changed disaster programs for rural America. I think we should save disaster programs for urban America, and the parts of the country that are covered under many of those, or hit by many of these disasters.
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    I also represent a state that's heavily into the insurance industry. And I think it's time for the insurance industry and the Government to work together in a partnership to be prepared to address these disasters when they hit, so that we don't come to a crisis situation where we find that our insurance industry is staggering under a load of disaster payments that is more than they can bear. So that is why I think we're here today. I encourage this committee to look at the problems, to listen to the different elements that we'll be talking about, how we devise a bill that does protect homeowners, property owners, taxpayers and yes, the insurance industry. And we'll work together to make this a really good piece of bipartisan legislation.

    I congratulate you again and look forward to working with you in the days ahead.

    Mr. BOEHLERT. Thank you very much, Mr. Ewing.

    Unless any of the members of the subcommittee feel compelled to ask a pertinent question, we'll proceed to the next panel of colleagues.

    Mr. EMERSON. Mr. Chairman.

    Mr. BOEHLERT. Yes, Mr. Emerson.

    Mr. EMERSON. If I may just very briefly. I think the three members on this panel have made particularly constructive statements. And I just want to say, somewhat in response to what they said, the whole evolution of our attempt to address this issue has been almost perfectly bipartisan. That's one of the most remarkable things about it.
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    Our task force, which Dick Durbin and I co-chaired in the last Congress and in which Norm Mineta and Curt Weldon were very active participants, we proceeded in a most unusual bipartisan way. There have been no partisan splits. None of the elements of this bill have any real partisan genesis. And we recognize the natural disaster issue for what it is, something that natural disasters strike without reference to party or philosophy.

    And we have today, as a result, I'm going to introduce a co-signup sheet today that will bring our total number of co-sponsors in the House to 225. So Mr. Chairman, we do have the votes. And more are coming in every day. The hurricane season has given some impetus to this measure.

    So I just want to assure all witnesses who have called for a bipartisan approach here that the whole genesis, the whole evolution of the matter has been very, very bipartisan. I'd say the co-sponsors are almost equal Republicans and Democrats. Norm Mineta has throughout been a great leader in this cause. And Chairman Shuster has acted very favorably in helping us expedite and bring to a head, come to grips with this issue.

    So any concerns about a partisan division should go by the board here. We have very broad bipartisan support. This measure should move forward on a fast track, I hope with little delay. Because we've got such a good, broad, solid base in support of it.

    Mr. BOEHLERT. I thank Mr. Emerson for those pertinent comments. You are correct that this does enjoy a strong bipartisan support.

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    I think there are some areas of concern that are being raised that we're going to have to address very thoughtfully and very carefully. But I think there's no question in my mind that both sides of the podium, and my colleagues who are testifying here today demonstrate that, that we want to proceed in a responsible manner.

    We're going to have some panelists a little later on in the proceedings that won't fall under the category of being cheerleaders. They are going to raise some legitimate concerns, and I'm confident that this committee, with the cooperation and assistance of our colleagues who are identified with this legislation, can work constructively to address those concerns. We don't want to rush to judgment, yet we don't want to delay one bit.

    Thank you very much.

    Now, to the next panel. The second panel—Mr. Weldon is going to be on the second panel. Pride of Pennsylvania.

    Our second panel consists of Mr. Emerson, who will speak from the dais, Mr. Weldon from Pennsylvania, Mr. Hutchinson, a member of the subcommittee, and Mr. Horn, also a member of the subcommittee, and our friend Mr. Frazer of the Virgin Islands, who has just been through one of the most recent and severe natural disasters.

    Gentlemen, we'll proceed in the order in which you were introduced. So I'll ask Mr. Weldon, no, I'll defer Mr. Weldon to Mr. Emerson. Because in addition to being the author of the bill and having great pride in the product, he is also a member of the subcommittee and upon completion of his statement, I will ask him to assume the Chair temporarily.
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    Mr. EMERSON. Thank you, Mr. Chairman.

    I am very pleased to be here today to talk about this issue, an issue that we desperately need to address, if this Congress is going to get a handle on reining in the exceedingly high costs of paying for natural disasters. And I applaud you, Mr. Chairman, and I thank Chairman Shuster for his support in our efforts to come to grips with this issue.

    I also want to welcome my colleagues who are here testifying in support of H.R. 1856, the Natural Disaster Protection Partnership Act of 1995. As I mentioned a little bit earlier, we do as of today have over 225 co-sponsors, with more support coming in every day. This effort is completely bipartisan, which attests to the support of moving forward with this effort.

    As you may know, Mr. Chairman, we have broad support from folks throughout the country who recognize that we can no longer afford to ignore this issue, and the grass roots movement in support of this legislation has been tremendous. You've mentioned, Mr. Chairman, that there are elements in opposition to this. I wanted to share with you the fact that in the last Congress, I was co-chairman with Dick Durbin of the Natural Disasters Task Force. We reached out to any group that conceivably had an interest.

    These were not hearings in the nature of what we're holding here today, but they were open meetings. I can't tell you how many meetings we had. But scores of meetings. Mr. Weldon, who's at the table now, and Mr. Horn, were both very much involved with that. And we held out the opportunity for everyone with a concern on this subject of reining in costs of any concern whatever relating to natural disasters to come forward.
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    And I will tell you that the overwhelming evidence, and expressions of concern, are on the side of the fact that this issue has got to be addressed. It's got to be addressed in an expeditious manner, and we've got to get on with the matter.

    Now, I certainly agree that we must be thoughtful and address all concerns. But there are some organizations, unfortunately, who like to throw little rocks out there in order to cause the issue to drag along. And this is an issue that we've had a lot of hearings on. The Natural Disasters Task Force, different committees of the Congress, we are ready and poised to move forward.

    So I would, while sharing the Chairman's concerns that there are elements in opposition whose concerns have to be addressed, I would hope that we don't see any serious foot dragging here. Because I see some elements ginning up whose purpose may be to do just that. And I can assure you that with 225 co-sponsors here in the House, I know that my 224 colleagues and I have every intention of wanting to move forward.

    Mr. BOEHLERT. Let me interrupt here to assure you there will be no foot dragging on the part of the Chair or the ranking minority member.

    Mr. EMERSON. Oh, I wasn't suggesting that. I know the gentleman was engaged. I was saying, there are elements out there who, now that we're poised, have 225 co-sponsors and are ready to go, who throughout 3 years of deliberations on this subject, counting everything we did in the very bipartisan task force in the last Congress, are now starting to pick and wanting to find some way to slow the momentum here.
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    And I'm telling you, the momentum is gaining. And just now, some people who want to put an impediment in our way are beginning for the first time to come forward. And frankly, some of the issues that I have seen raised on the subject, I'm going to hear them all out, but some of them are phony, have already been addressed. The organizations advancing the issues know they've already been addressed. So there are some issues in opposition out there that can be disposed of pretty quickly, if anybody wants to bother to look at the facts.

    I have had a longstanding interest in this issue, as you have pointed out, Mr. Chairman. Throughout my tenure in the Congress, I've seen quite a few of my constituents suffer at the hands of natural disasters. After all the eastern boundary of my district is the Mississippi River. In my district, we have had floods, the constant threat of tornadoes, we get some hurricane spillover, because a lot of our weather comes right up the Mississippi Valley from the Gulf of Mexico. Whenever a hurricane hits in the Gulf region, we get the spillover effects of it in southern Missouri.

    And what may surprise a lot of people is that my region, Mr. Hutchinson's region, Mr. Wamp's region, sits on top of the most serious earthquake fault in the North American continent, known as the New Madrid fault, centered in New Madrid, Missouri. The last big one to kick off there was in the early 1800s, before we were very seriously populated. But the estimates are that it was an earthquake of a magnitude that had it been possible to measure it on the Richter scale at the time, probably would have been in the neighborhood of 8.5.

    During the last Congress—I see my time has expired, Mr. Chairman. Could I be extended some time?
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    Mr. BOEHLERT. You are extended that special courtesy because of your hard work on this legislation.

    Mr. EMERSON. Thank you. I appreciate that.

    During the last Congress, the Republican and Democratic leadership appointed eight members from both parties. We had a task force of 16 members to find solutions to the increasing costs of natural disasters in this country. As co-chairmen, my good friend and colleague Dick Durbin and I held extensive meetings with various interests throughout the country.

    We spoke on several occasions with James Lee Witt, the Director of FEMA. We met with the first line emergency responders who are great advocates of this measure and I'm sure Congressman Weldon, who is at the table, will speak on behalf of their interests today. The General Accounting Office, state insurance commissioners, citizens, individual citizens who were victims of disasters, private voluntary organizations, state emergency managers, officials of different agencies of the Government that I haven't already mentioned, including the White House, just everyone who wanted to talk to us, we talked to them.

    There were several overwhelmingly consistent themes that we heard as a result of these hearings and briefings. One was injecting the idea of personal responsibility back into the individual property owner. Second was mitigation with emphasis on preparedness and other efforts to limit damages from these catastrophes.

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    The final suggestion was finding a way to make sure that individuals who lived in areas that are prone to recurring disasters were offered affordable insurance based on actuarially sound rates. We looked at numerous legislative proposals, concepts and ideas from past Congresses, and those being considered at the present time.

    Essentially, we all wanted to craft legislation that would get to the heart of these three issue and reduce the supplemental appropriations that are annually coming before this body in increasing magnitude. Using legislation introduced last year by our former colleague, Mr. Mineta, as the foundation, and injecting the recommendations of the bipartisan task force on natural disasters, we crafted a bill that has garnered this broad support, enhancing the Mineta legislation in the areas of mitigation, working to limit the Federal Government's exposure, and using many other recommendations of the Task Force.

    I believe, Mr. Chairman, that we have a product here today that is worthy of this subcommittee's and the full committee's consideration. This is legislation created from our bipartisan task force that specifically looked at these issues and made specific recommendations.

    Now, I have a fairly detailed statement remaining here. I'm going to, if I may, take just a couple more minutes, and then submit the whole statement for the record. I realize we're under some serious time constraints.

    Mr. BOEHLERT. The Chair is very indulgent.

    Mr. EMERSON. I appreciate that, Mr. Chairman, more than you can know.
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    H.R. 1856 would establish a privately-funded entity known as the Natural Disaster Insurance Corporation to provide homeowners with primary coverage for major disasters, and reinsurance companies that insure businesses and multi-family residential structures. Anyone with a new federally-backed mortgage living in an area prone to disasters would be required to purchase coverage against these perils. Insurers participating in the NDIC would sell and service the corporation's coverage in addition to their standard homeowners policy. The corporation would then build a surplus over time that would be used to offset losses after a major disaster.

    If for some reason the funds were not sufficient to cover the disaster, the corporation could also borrow money from private financial institutions or the Federal Government to help cover these losses. But if in fact the corporation chose to borrow funds from the Federal Government, it could be done, but only with the approval of the Congress.

    Moreover, the amount is capped with the amount the corporation is able to pay back in 20 years, and the rate is unsubsidized at market interest rates. During our task force debates, we were very insistent that whatever legislative solution we pursued, the idea was to limit the liability of the Federal Government and to place this issue where it belonged in the private sector. And this legislation achieves both of those goals.

    I'm proud to say that H.R. 1856 encourages states to adopt model building codes by providing them with mitigation funds and grant money to implement preparation and loss reduction strategies. Certainly in this Congress, we're very sensitive to the issue of unfunded mandates.

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    And Mr. Chairman, this bill has none. Because it provides significant private sector funding for disaster mitigation efforts. Losses in disaster-prone areas like California and Florida and Alaska can be slashed by as much as 40 percent if existing building codes are in force. By creating incentives for enforcement, we can do a better job of preparing for disasters before they strike.

    It also takes politics out of Federal disaster policy, by insisting that Federal payments to states beyond the 7525 cost share under the Stafford Act are subject to a budget point of order unless the excess Federal assistance is put on budget.

    Mr. Chairman, in conclusion, let me say that no one can prevent natural disasters. But we can plan intelligently to minimize the financial and physical damage that they cause. This Congress and the American public are in no mood to continue to spend the vast amounts of taxpayer dollars to pay for natural disasters. These disasters have cost the taxpayer over $70 billion dollars. Think of that, $70 billion since 1983. I look forward to continuing to work with this subcommittee, the full committee, our witnesses and the various groups that they all represent, and all of my colleagues, to improve upon H.R. 1856, and to move this forward, this legislation forward in this Congress, hopefully in this session, as expeditiously as possible.

    Thank you, Mr. Chairman, for your indulgence.

    Mr. BOEHLERT. Thank you, and thank you for a very comprehensive statement, and I appreciate that, and would welcome you now to take the Chair as we proceed with our panel of witnesses.

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    Next we call upon Mr. Weldon of Pennsylvania. Mr. Weldon.


    Mr. WELDON. Thank you, Mr. Chairman. And let me first of all, before you leave, acknowledge your leadership in the area of fire prevention, the fire service of this country and disasters. As the current chairman of the Congressional Fire Services Caucus, you have done an outstanding job in heightening the awareness of issues around this country. And we appreciate your leadership in that regard.

    Mr. Chairman, 20 years ago, I was a volunteer fire chief in my home town, later to become the mayor of that town. And it was on a cold night in January that I had to handle the largest fire in America, that resulted in some $100 million of property damage. As a result of that incident, I was able to put together a publication, a document of that disaster, and looked at some ideas about what should be done in America to help this country deal with disasters of all types. The eighth recommendation of that report 20 years ago was to establish ''a disaster type insurance established in a similar manner to Federal flood insurance to provide guaranteed coverage and financial help for residents and businessmen who suffer damage from disasters, yet do not qualify for state or Federal disaster relief assistance.''

    Mr. Chairman, since that time, I've served as a mayor, as a county commissioner of a county of 600,000, and as a member of this Congress. And I have tried to heighten the awareness nationally of the need to respond to disasters of all types and in all situations and in all parts of the country. Over the past 9 years, I've been present on just about every disaster this country has faced, from the Loma Prieta earthquake to the Northridge earthquake, the wildlands fires in Yellowstone, southern California, Hurricane Andrew, Hurricane Hugo, the midlands floods. I've had a chance to talk to people and to work with those first responders who have to deal with each of these situations. And I've come back to the Congress and made recommendations about dealing with the issue which confronts us today, which you as the acting chairman have taken a leadership role in.
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    Mr. Chairman, this country has not been prepared for, has not dealt with properly, and does not have an adequate way to pay for disasters in this Nation. I don't care what type of disaster you're talking about, we are unprepared. The taxpayers have suffered, the American people have suffered, and those first responders who oftentimes are taken for granted, the one and a half million men and women who don't often, can't often take time from work to come down here, because 80 percent of them are volunteers, in 32,000 organized departments across this country. They have been hurt, because we have not been provocative in dealing with disasters up front. In traveling around the country over the past 9 years and in talking to these local emergency responders, I have heard some recurrent themes. First of all, a lack of pre-planning, where counties may or may not have done their proper effort in planning for disaster. For instance, counties like Metro-Dade County, that had Hurricane Andrew. We spent a week there after it occurred. The biggest criticism in the newspaper was, the codes were in place, but they weren't being properly enforced. And as a result of that, the roofs came off in areas where they shouldn't have come off. Because the building standards were not properly compliant with the type of controls that should have been in place that would have reduced the loss both in terms of property and the loss of life and injury. So the issue of pre-planning is an issue of concern nationwide.

    The second issue deals with the lack of proper codes and enforcement mechanisms. If you look at the California earthquake, it was about the same on the Richter scale as the Armenian earthquake. The Armenian earthquake killed 25,000 people. The San Francisco earthquake killed fewer than 100 people, yet it was in a major metropolitan area. And the reason for that difference, even though the earthquakes were similar in size, was because San Francisco has the most up to date building codes, dealing with provisions for being able to withstand an earthquake, of any city in the world. San Francisco is the exception to the rule. Most cities and towns and counties don't go to that length to protect their citizens from the kinds of problems that result from natural and man-made disasters. That needs to be dealt with, and that's a recurrent theme we heard throughout the country.
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    The third is a lack of proper methods to pay. We're not just talking about the direct payments by the Federal Government. It's been noted that we've paid out tens of billions of dollars for people that should have bought flood insurance, that should have bought earthquake insurance, that should have bought fire insurance, but didn't do it. I'm not just talking about that dollar loss. I'm talking about the uninsurable loss, the unreimbursable loss. We tried in the hearings that we held, under your leadership, we tried to get the IRS to give us an estimate, the Treasury Department, of how much has been written off in the way of deductions in Federal income tax by people who have written off their casualty losses. That's never been estimated. If you were ever, ever to try to come up with that amount of money, it would be in the tens of billions of dollars above and beyond insurance costs, above and beyond the costs that the Federal Government has paid out directly.

    And so when we talk about the costs associated, we have to look at how much have the taxpayers written off of their income tax because of casualty losses not covered by their insurance mechanism. Because that also has cost the taxpayers of this country.

    But perhaps the most significant thing that I've found, Mr. Chairman, is the lack of support of America's domestic defenders. We support our military, and I'm on that committee, and proudly support their efforts. I'm talking about the one and a half million people, in 32,000 organized departments, who respond to every disaster this country faces. When we have people come before your committee today and criticize this bill, let them offer your plans as to how they're going to help those 1.2 million volunteers who save the taxpayers of this country hundreds of billions of dollars every year, and ask for nothing in return. Ask those groups what their plans are to encourage more people to volunteer in our towns and our cities, so we don't have to resort to paying public officials to respond to disasters. Because that's what this bill is about. This bill is about helping those men and women who support this country in every disaster. They are the heart and soul of this Nation. Every major group that represents all one and a half million of those people supports this people, the National Volunteer Fire Council, the IAFF, the Chiefs Association. Every one of those first responder groups wants to take the steps that we've outlined in here that creates incentives, first of all for insurance, and second of all, to push some money back to the towns to help them pre-plan, help them buy the proper equipment, help them do the training, so that more and more people volunteer. What better statement can we make in terms of saving the taxpayers money than the incentives in this legislation?
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    Mr. Chairman, as a result of those efforts 2 years ago, I petitioned the President and the Speaker of the House to convene a task force. Speaker Foley finally did, and you ably led it. You and Mr. Durbin did a fantastic job in reaching out and bringing forth many of the recommendations in our final report to deal with this terrible issue nationwide. I applaud you for playing that role, and I support the efforts that you've made, because it's right for America.

    Mr. Chairman, let me also say, the recommendations in here are sound recommendations. We can't say that we're bailing out the insurance industry, because you're not. You can't force an insurance company to go in and make people buy insurance. We have a disincentive in this country now, if you live in a flood prone area, if you live in an earthquake area, if you live in an area where there's going to be a wildland fire, you don't buy insurance because the Government will come in and bail you out. The same thing is happening with local elected officials, knowing full well the Federal Government will come in and repair the bridges and take care of the road services. So we've actually created a disincentive for people to pre-plan financially for these types of instances.

    Why would an insurance company push its flood insurance program in an area where the prices are so high, because they can't spread the risk far enough to reduce the cost of the insurance premium that homeowners and property owners should be buying? Under this plan, instead of having only 20 percent of the people in the midwest affected by the midwestern floods insured, we would have almost 100 percent insured. Under this plan, instead of having only 15 or 12 percent of the people in southern California insured with earthquake insurance, we could provide them with lower cost insurance that would require all of them to buy coverage, so we as taxpayers would not have to bail them out.
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    Mr. Chairman, this legislation helps deal with a major problem in this country that we have not confronted in a logical, consistent manner. I implore you as leader of this committee, and I implore our colleagues, all 225, hopefully growing to a larger amount, those groups that have questions, instead of taking pot shots and sniping for a cheap headline, to sit down and work with us to craft perhaps a better piece of legislation, but ultimately one that solves the problems of dealing with disasters in this country.

    Thank you.

    Mr. EMERSON [assuming Chair]. Mr. Weldon, thank you for your very outstanding statement. I want to say for the record what a pleasure it was to work with you on the task force, and how much I look forward to continuing to work with you as this issue moves forward. Mr. Weldon brings obviously the perspective of a former local official to the table, a very important perspective. But most importantly, the emergency responders around the country, who are a vital part of the network, who are really solidly supporting this measure, Mr. Weldon is their voice in the Congress. And for those detractors of this legislation, I would urge them to get in touch with Mr. Weldon, the emergency responders, and find out the level of passion that they feel for this measure.

    Thank you for your past and present valuable contribution to this subject. Thank you, Curt.

    Mr. Hutchinson.

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    Mr. HUTCHINSON. Oh, I get to follow Curt. I don't know that I can speak with that kind of passion.


    Mr. HUTCHINSON. But with no less conviction. And Mr. Chairman, I want to commend you for your outstanding leadership on this critical issue, along with Mr. Durbin, Mr. Mineta, Mr. Weldon and all those involved in the bipartisan effort to bring forth this legislation to address this issue.

    The United States Geological Survey concludes that 39 states are prone to damaging earthquakes and related seismic disasters. Mr. Chairman, you have rightly pointed out that my area of Arkansas and Missouri and St. Louis, down to Memphis, a heavily populated area now, is one of the most vulnerable to earthquake and seismic disasters. Hurricanes, at least 18 Gulf and east coast states are hurricane prone. Flooding is a natural peril which regularly inflicts substantial damages, as underscored by the great floods of 1993 in your area, in Missouri as well as up and down the Mississippi River. Other natural disasters, including volcanic eruptions, tornadoes, forest, range and urban wildfires, mud slides, sinkholes, and on and on the list goes. Based on many types of insured and taxpayer losses, a very conservative estimate of the total future costs of natural disasters to the Federal Government and to insurance companies would be in the range of $5 billion per year. Reducing the risk to people and our society must be one of the principal goals of any national natural disaster mitigation program. In such a program, damage prevention and reduction is a principal foundation, because it helps to reduce the number of victims, property loss, environmental damage and disruption of the economy. In addition, damage prevention and reduction should be viewed as the means to increase demands for disaster response resources. Damage prevention reduces the principal causes, falling buildings, falling debris, fire spread, etc., of injuries and deaths, enables a quicker lifesaving response and economic recovery, because the community infrastructure remains intact, and reduces the societal impacts of natural disasters, because they result in less disruption of the social environment.
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    In essence, damage prevention is one foundation of sustainable community development. Recognizing that an ounce of prevention is worth a pound of cure, the sponsors and co-sponsors of H.R. 1856 included an authorization to provide funding for the centers for protection against natural disasters in both the House and the Senate bills. The cost effectiveness of their establishment and operation will be measured by well documented real and projected natural disaster damage reductions, directly attributable to the center's activities. These activities can be funded for a relatively small investment in comparison to the potential savings in mitigation costs. The potential reduction in the damage and mitigation costs caused by natural disasters could be as high as 10 to 20 percent. Greater reductions may be achieved through a more aggressive natural disaster prevention technology deployment policy. Based on the very conservative estimate of annual natural disaster damage costs, between $5 billion and $10 billion a year, and a 10 to 20 percent reduction in mitigation costs achievable by these centers, the centers' technology deployment activities could result in annual cost savings of between a half billion and $2 billion to the Federal Government and insurers alone.

    Not only would the creation of these centers produce significant annual cost savings, but would result in many saved lives, which is far more important than the monetary savings that could be achieved.

    So Mr. Chairman, I would ask that all of my remarks be included in the record.

    Mr. EMERSON. Without objection.

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    Mr. HUTCHINSON. Thank you. I think the facts and the figures urge for a very expeditious and swift passage of H.R. 1856. And I'm glad today for the opportunity to add my voice in support of this legislation.

    Thank you, Mr. Chairman.

    Mr. EMERSON. I thank the gentleman for his contribution.

    Mr. Horn.


    Mr. HORN. Thank you very much, Mr. Chairman.

    I'd like to commend you and former Chairman Mineta for this bipartisan effort. This is not a problem that affects just California or Florida or Missouri or Massachusetts. This is a national problem. And that's why you have a majority that has already co-sponsored the bill.

    This legislation is going to go a very long way toward reducing the tragedies we have seen, the deaths, the injuries, the property damage, from a variety of natural disasters. And it's hard to predict where they will really strike next. However, there are some aspects of the bill that can be significantly strengthened. One purpose of the Act is to forge a partnership with the state and the political subdivisions which you and I know are ultimately the ones that carry out the emergency measures, the preventive measures, the mitigation measures, and the basic emergency management implementation, before, during and after the crisis. Both the House and the Senate bill mandate the Director of the Federal Emergency Management Agency, FEMA, to carry out certain natural disaster hazard mitigation support programs. My colleagues and others have mentioned that it is important to enforce new building standards, conduct studies of national minimum consensus building construction standards, conduct the activities necessary to accomplish the designation of natural disaster-prone states.
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    Neither the House nor Senate bill, however, provides a source of funding to conduct those activities. That's potentially a large, unfunded mandate. And the Federal Emergency Management Agency should not be required to undertake these activities, unless the funding is provided in this legislation.

    The second area where I believe the bill needs to be strengthened is by putting more emphasis on natural disaster damage prevention before, as opposed to mitigation, after the natural disaster occurs. Many cost-effective technologies exist, and they can substantially reduce the damage caused by natural disasters, thus the need to pay out insurance. However, many of these technologies have not been employed.

    The Centers for Protection Against Natural Disasters (CSPAND) will focus on established technology deployment, not on research, not on the development of new technologies. There is authorization in the bill for the Director of FEMA to have research conducted. But this is not enough. CSPAND deals with the massive problem of getting the average citizen to utilize certain effective measures which can reduce the damage on that citizen's property, that home, that building, whatever property damage may occur. And both the House and the Senate version of the Natural Disaster Protection Partnership Act of 1995 authorize funding for the Centers for Protection Against Natural Disasters. My colleague, Congressman Hutchinson, ably outlined some of those provisions.

    Let me just suggest specifically what might be added to the bill. Funding should be provided, as I said, to FEMA, to conduct the education activities mandated by this legislation. The Director of the agency should be consulted in regard to the amount of funding required. FEMA funding should be derived from the annual net premiums collected for the primary insurance coverage and the reinsurance coverage program. This is in the interest of all parties affected by this legislation, the homeowner, the insurer, the government at all levels. The bill language which authorizes funding for the Centers for Protection Against Natural Disasters needs to be moved in the House bill from Title B, state and community programs to Subtitle A, Federal Emergency Management Agency, FEMA, section of the bill. The Federal Emergency Management Agency should be given the oversight responsibility for the Centers for Protection Against Natural Disasters. These centers should be authorized and funded at an annual level. This funding, as have suggested, should be derived from the annual net premiums collected for the primary insurance coverage and the reinsurance coverage.
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    Mr. Chairman, there are many areas in this Nation that have been devastated by these natural disasters. You and I have seen this happen in our own districts. This subcommittee has the opportunity to recommend forward looking legislation which will aid in education and prevention, as well as bring soundness to the funding of restoration, once disaster strikes.

    Thank you very much.

    Mr. EMERSON. I thank the gentleman for his statement. You've made many constructive recommendations there for how this legislation may be improved. And those are the kinds of constructive comments that we're looking for. And we look forward to cooperating with you as this moves forward in addressing your positive recommendations in the legislation.

    Mr. HORN. Thank you very much.

    Mr. EMERSON. Mr. Frazer.


    Mr. FRAZER. Thank you, Mr. Chairman.

    Mr. Chairman, I want to thank you and the committee for the opportunity to address this most important matter. And I know that you have personal knowledge of an experience that the Virgin Islands just went through.
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    I don't know if your colleagues know that you have a daughter that resides in my district, and was in fact a victim of this disaster. And I thank you for taking the time to come to the Virgin Islands and have a first-hand look at what we experienced as a result of Hurricane Marilyn.

    Mr. Chairman, I want to thank you for this opportunity to address this important matter—the Nation's exposure to natural disasters and private-public sector response. In this testimony, I will provide you with an overview of the homeowners insurance situation in the Virgin Islands and a possible solution. Let me start by telling you what the current situation is in the Virgin Islands. On September 15, Hurricane Marilyn, a category four storm, hit the Virgin Islands with wind gusts of 140 miles an hour. And there are many who said it approached 200 miles an hour. Governor Schneider estimated that Marilyn caused approximately $3 billion worth of damage to residential and commercial property in the Virgin Islands, whose population is less than 105,000. According to the property claims services division of the American Insurance Service Group, as much as 65 percent of the structures were severely damaged or completely destroyed on the island of St. Thomas. In addition, 25 percent of the structures were destroyed on St. John, and 45 to 50 percent were heavily damaged. More than 1,300 structures were totally destroyed on the island of St. Croix.

    Guardian Insurance Company, the Virgin Islands' leading property and casualty insurance company, suffered significant losses, and is under review with negative implications by the leading insurance rating company, A.M. Best Company.

    Therefore, Mr. Chairman, I'd like to say, the solution that we are proposing to this devastation in the Virgin Islands is one that needs Federal assistance. We are not able to, in the future, come back from the damages that we've experienced, such as with Marilyn, and as you yourself recall, Hurricane Hugo in 1989. As a matter of fact, after Hurricane Hugo in 1989, a few insurance carriers left the jurisdiction. As a result of that, the majority of the residents in the Virgin Islands were unprepared, lacking insurance for Hurricane Marilyn. More than 60 percent of the people in the Virgin Islands have no insurance, more than 60 percent. I guess it's difficult to find that acceptable in light of the fact that so many companies are available in the United States. But because of our insularity, we oftentimes are forgotten and treated as the out man in this institution.
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    As I see it, Mr. Chairman, there are three principal forces that appear to be driving the natural disaster debate. First, the costs of disasters have grown significantly in the last decade, with increasing potential for steady rise in Federal disaster declaration each year, and significant financing costs for disaster assistance through emergency supplemental appropriations. Second, the private insurers are reluctant to cover windstorm damages under the homeowners policies issued not only in the Virgin Islands. So again, this is not a Virgin Islands issue, and I hope no one will view it as such. We are here supporting this bill, Mr. Chairman, because natural disasters have become a national issue. We're speaking about windstorms, ice storms, hurricanes, tornadoes, all natural disasters. I find most jurisdictions are here saying that they're unable to pull out of these disasters on their own. That is why it's so important that this matter gets the support of the entire Congress.

    Second, Mr. Chairman, as I've said, our experience in the Virgin Islands following Hurricane Andrew in 1992 and Hurricane Hugo in 1989 suggests that the devastation caused by Hurricane Marilyn will retard future economic development for years to come, without an adequate supply of insurance. Mr. Chairman, as you well know, the Virgin Islands' major industry is tourism. A s a matter of fact, it's a backbone of the economy. It is going to take us an estimated 2 years before we get back on track. And if we don't have a major industry, there will be no cash flow in the Virgin Islands. We don't wish to be viewed as coming to the Congress for a handout. We wish to be viewed as an economy that wants to stand on our own, as well as responsible. However, this hurricane is making it almost impossible to get back.

    Mr. Chairman, I see the red light is on, but I ask for two minutes of your indulgence.
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    Mr. EMERSON. The gentleman is recognized.

    Mr. FRAZER. For that reason, Mr. Chairman, I strongly support H.R. 1856, a bill to create a public-private insurance and mitigation measure, to address the financial perils of natural disaster. According to the sponsors of H.R. 1856, this bill would, one, reduce the loss of lives and property through loss mitigation measures, two, reduce the need for Federal disaster assistance through widespread purchase of insurance, three, assure the post-disaster availability of insurance and federally subsidize the loss coverage. The insurance and mitigation programs envisioned in H.R. 1856 is justified by the national scope of the Nation's disaster problems, and the inability of private insurers to make pay-out without the Federal Government.

    Mr. Chairman, I must stress, however, there is a great sense of urgency and anxiety among the residents of my district in the aftermath of Hurricane Marilyn. While I am encouraged by H.R. 1856, its full implementation would probably take several years. Further, despite the ongoing transfer of the emergency resources coordinated under the leadership of Mr. James L. Witt, the Director of the Federal Emergency Management Agency, there remains an insurance availability and affordability crisis in the Virgin Islands. While the typical homeowner insurance policy provides protection against fire, windstorm, hail, theft and explosion, as well as other causes for loss, Mr. Chairman, private insurers operating in the Virgin Islands and other Atlantic and Gulf Coast states, as my colleagues have stated generally, have been excluded from windstorm homeowners insurance, making insurance financing difficult or impossible to obtain.

    Mr. Chairman, I will introduce legislation that will amend the Write Your Own program of the National Flood Insurance program to include property damage caused by wind, a major source of loss in a hurricane. This change to the existing NFIP program, I believe, would have the effect of dramatically increasing the accessibility, availability and affordability of private property insurance to residents in areas of the country that are subject to the hurricane peril.
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    The current Write Your Own program operates in all states, the District of Columbia and also the Virgin Islands. Some 220 private insurers sell Federal flood insurance to homeowners in areas subject to flooding, provided that the community where the property is located takes identifiable steps to reduce potential aggregate flood loss in the areas. From an administrative standpoint, including windstorm coverage could be well accomplished and easily realized. Adjusting a claim for windstorm damage is fundamentally the same as addressing a claim for flood damage following a hurricane. When an NFIP claims representative visits the site of a hurricane, he or one of his associates assigned to determine the damage or the loss can easily establish the liability on the NFIP. Therefore, in the process of assessing one, the other is simultaneously determined. I propose to simply add coverage for windstorm damage under the NFIP policy.

    Mr. Chairman, this bill is no panacea, and I'm sure none of us see it as such. But it's a very necessary step to helping all jurisdictions in this United States and the territories address the issue of natural disasters. We cannot at this time, and I don't expect we will in the future, be able to recover from natural disasters without Federal assistance.

    In closing, Mr. Chairman, I urgently appeal to this subcommittee under your leadership to approve H.R. 1856 and help resolve the special problems facing the residents of the Virgin Islands. There are major concerns, such as oversight, and such major concerns as whether or not the industry will be the only one assigned to setting rates, and also whether local mitigation requirements would be part of the policy. Mr. Chairman, as we speak, the Virgin Islands legislature is seriously considering a new code, fashioned after the State of Florida. We recognize the importance of having such a code. We are seeking your assistance in making sure there is affordable insurance in the Virgin Islands.
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    Again, Mr. Chairman, thank you and the committee for affording me this opportunity to come before you and lay out the problems that we have, the special problems in the Virgin Islands, and in support of this bill. Thank you.

    Mr. EMERSON. Mr. Frazer, thank you for your contribution. We look forward to working with you to iron out your concerns as they may specifically relate to the Virgin Islands. We share your concern for what has happened there natural disaster wise, and hope that as we face the future that you will have, I hope we can pass this legislation in a timely way and that we can make vast improvements to the prospects for better recovery than you're currently experiencing.

    Mr. FRAZER. Thank you, Mr. Chairman.

    Mr. EMERSON. Thank you.

    Mr. Baker.


    Mr. BAKER. Thank you very much, Mr. Chairman. I ask for unanimous consent to put my remarks in the record.

    Mr. EMERSON. Without objection, so ordered.
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    Mr. BAKER. I'll deviate from that right now and just give you two quick points, because we have a vote scheduled. First of all, I was at the World Series game when Loma Prieta struck. It took seven hours to get a half hour drive back home that night. I watched the City of San Francisco burning at the marina. I watched the damage to the Bay Bridge. I saw the damage to the freeways in Oakland. And I know what a disaster is.

    Keep the bill simple. This is a bill to allow for insurance companies to survive as well as the homeowner and the business person to survive a natural disaster. This isn't another way to fund FEMA or stop the heartbreak of psoriasis or save Medicare. This is a bill to save insurance.

    In California, and we have a corner on most of the natural disasters, 93 percent of the homeowners do not have earthquake insurance. Their insurance is either restricted or the insurance companies have stopped writing business at all.

    Why? Because we have failed to act. In the Loma Prieta and then again in the southern California which knocked down the freeways and got worldwide attention, insurance companies went under. Because there is no way they can make that amount of coverage. They're shaped for the bell curve. If they had to charge what it would take to save a Loma Prieta or a southern California earthquake, your premiums would be $5,000 a year. There's no way they can do it. They want to get together privately and have a safety net or reinsurance fund. And we ought to let them. But don't load this bill up with everybody's idea that this is a Christmas goose paid for by ratepayers. If they want to spend more money on Government, let them raise the taxes. But don't, please, load this bill up.
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    Lastly, if we move fast, they can start writing insurance in these disaster areas again. Everybody will know what the rules are. And the insurance companies who have courage enough to write insurance in flood or in high fire areas or in earthquake areas or in earthquake areas know that their brother and sister companies will be standing behind them with this reinsurance fund. Municipal bonds have done this, other areas have done this, and the insurance companies want to stay in business and they want to take care of us, and relieve the burden from government. Let's let them.

    Mr. EMERSON. Thank the gentleman for his contributions and certainly his last point is well noted. We want to move this legislation expeditiously. I couldn't agree more with what the gentleman says. We've got to have this law, we have to have this as a law on the books so we can begin addressing the problem in a truly responsible manner.

    We're delighted to recognize the gentleman from North Dakota.

    Mr. POMEROY. Mr. Chairman, we have a time problem.

    Mr. EMERSON. I'll either stay or we can recess and come back.

    Mr. POMEROY. If you wouldn't mind, I would like to make sure I get my vote in.

    Mr. EMERSON. Absolutely. The subcommittee will be in recess until we get back from voting, and someone's here prepared to take the Chair, hopefully about 10 minutes.
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    Mr. EMERSON. We'll come to order.

    Before recognizing the gentleman from North Dakota, the Chair would state that pursuant to the request of the ranking Democrat, Mr. Borski, and without objection, the statement of Mr. Hoyer will be placed in the record at this point, and the opening statement of the ranking member of the full committee, Mr. Oberstar, will be placed in the record following other opening statements.

    Without objection, that is so ordered.

    [The prepared statements of Mr. Hoyer, Mr. Oberstar, Mr. Poshard, and Mr. Wamp follow:]

    [Insert here.]

    Mr. EMERSON. We appreciate the indulgence and the patience of the gentleman from North Dakota, who brings a lot of expertise to the table, given his background and experience on the subject under discussion. And without further delay, the gentleman is recognized.

    I will state that another vote is expected rather imminently. So we want to have the opportunity for the gentleman from North Dakota to have his full say, at which point we will reconsider the schedule for the next panel. The gentleman from North Dakota.
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    Mr. POMEROY. Thank you, Mr. Chairman. And I will be as quick as I can be.

    I note my considerable drawing power with my caucus colleagues. I want to thank you for allowing me to testify and I have enjoyed working with you, Mr. Chairman, on the revisions we have made to the crop insurance program. Working on insurance issues as a member of Congress is a particular interest area of mine, in light of the 8 years I served as North Dakota's insurance commissioner, and as President of the National Association of Insurance Commissioners.

    I am very pleased to be a co-sponsor of this bill, because I think it addresses an issue that needs to be addressed. We must take steps to enhance and/or shore up the protections currently available for citizens confronted with natural disasters.

    It is my opinion, though, that the legislation before us is a starting point, not necessarily a product capable of quick enactment without thorough consideration and/or revision. The bill advances five legislative findings. The first four I absolutely concur with. Major natural disasters pose substantial long-term consequences. Two, state and local communities are ill-equipped to respond to natural disasters. Three, a self-sustaining funding mechanism should be established to help states and communities pay for pre-disaster hazard mitigation. Four, many high risk properties are not insured. I agree with all of those findings.

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    The fifth finding concludes that a private natural disaster insurance corporation should be created to provide primary insurance for homeowners and reinsurance to state insurance pools and private insurance companies. The bill lays out the mechanism that accomplishes that finding.

    Now, whether or not this is the approach to be taken in the form contained in the bill I think turns on three fundamental questions. First, is the risk of loss from natural disaster held to a minimum by that approach? Second, is the involvement of public funds for natural disasters held to a minimum by fully utilizing the capacity of the private insurance market for this exposure? And third, to the extent public funds or public interests are involved or committed, do regulatory safeguards exist within the legislation. I will discuss these points briefly. Minimizing loss. In order to hold down the losses stemming from the inevitable natural disasters, risk mitigation is critical. The need is compelling, as demonstrated by the growing severity of the potential of natural disasters, the exposure of natural disasters. By one estimate, at-risk insured property in coastal areas increased by 69 percent since 1988. This reflects both new development and rising property values. But a national disaster bill must contain a tough loss mitigation component. Failure to do so could actually accelerate the growth in high risk areas in light of the new protections offered for developers and property owners by the legislation.

    I'm certainly not an expert in risk mitigation, far from it. I am concerned, however, by discussions I have had with officials within FEMA. Their analysis of H.R. 1856 finds that the mitigation component is not sufficient. And I would strongly suggest an adage my grandmother used to say, and all of our grandmothers used to say, an ounce of prevention is worth a pound of cure. We surely don't want to short-shrift in any way hazard mitigation in this legislation. That needs further work, I believe.
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    Minimizing public exposure. This is a Congress clearly on record in support of reducing the role of the Federal Government and curtailing wherever possible its expenditures. Now, in this context, action which gives the Federal Government new responsibilities, including potential liability for significant expenditures in the future, must be very carefully undertaken. This action has to be undertaken with every bit as exacting scrutiny as the appropriations and budget bills have been regarding current outflow of resources.

    A natural disaster plan should involve no greater reliance on the Federal Treasury than absolutely necessary. In this regard, we must fully tap the capacity potential of the private market. Since 1989, just for example, the Federal Government has paid disaster losses totalling $34 billion. This expenditure has been matched nearly dollar for dollar by the insurance industry, which paid $33 billion during this same period.

    I ask for another couple of minutes leave, Mr. Chairman.

    Mr. EMERSON. Without objection. The gentleman has been very patient in waiting his turn, and we're going to accommodate him.

    Mr. POMEROY. Well, I'm going as quickly as I can.

    Serious questions exist about whether the natural disaster insurance corporation would encourage optimal private market participation. The bill envisions side by side market opportunities for consumers. They could pick from the NDIC, they could pick from the private market. While the coverage may look identical to consumers, the constraints under making that coverage available are quite different. The ground rules are different. For example, private companies would have access to more lenient cross-subsidy rating structures and more stringent underwriting standards, I believe, than might be available to the NDIC. Over time, this could result in a migration of risks, good risks to the private sector, inferior risks to the NDIC in light of higher premium costs that would be associated with those rating and underwriting practices. Accordingly, private insurance capacity could change over time from broad spread of risk to a creaming of the market, leaving the most loss-prevalent areas only for the mechanism backed by Federal loan dollars.
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    Now, the interplay within the insurance marketplace is very complex. I regulated it for 8 years, and don't begin to understand it fully. I do urge the committee to seek within the industry how they think this thing would ultimately play out. There is a growing chorus within the industry that the proposal before you would actually discourage private market participation and public oversight. I don't suppose there's a component of the bill that concerns me more than this part. While I was President of the NAIC, I interacted with each of the states represented on this panel. I appeared before Congress many times advocating the role of state insurance regulation. As Congress devolves authority back to the states from a bloated Federal Government, state insurance regulation is an example of a government function that has historically been handled by the states, and in a way that has produced, in my opinion, superior results to any financial services regulation undertaken by the Federal Government.

    Now, the bill would preempt all rate and contract coverage approval authority of state insurance departments. It would even eliminate consumer complaints because claims aren't being paid or paid fairly or paid on time. Now, these are important public interests here. How would we answer constituents completely dissatisfied with the handling of their claim, but finding out that state insurance departments were powerless to provide the kind of help and assistance they could to their neighbor who might have a private insurance company? One possible solution here, of course, is a Federal regulatory role. But this is preempted also. There's not a state role, there's not a Federal role. The bill as drafted, I think, clearly overreaches in that respect. There are important public issues, important public interests involved, and there is an exposure to public dollars from the operation of the NDIC. Some oversight, some regulatory structure, I believe needs to be put in place.

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    In conclusion, Mr. Chairman, I believe the bill before you brings to the table an important public policy issue. I'm proud to be a co-sponsor of it. I view it as a good starting point and surely look forward to working with you and the members of the committee as we refine it to the point where it is ready for enactment.

    Thank you.

    Mr. EMERSON. I thank the gentleman for his contribution. I would like to make two points in response, if I may.

    The first is that we had extensive consultations with James Lee Witt, for whom I happen to have a very high regard, living as I do on the Mississippi River, you know, he's dealt with two major floods in the last couple of years. And I think he's an outstanding public servant, with a high level of expertise in the subject area over which he has purview in the Federal Government.

    It could be that the measure that was before us last year was weaker in the mitigation provisions than the measure now before us. We have already acted on a number of the recommendations of Mr. Witt, and included them in this bill. You were 8 years an insurance commissioner, and say you still don't understand it all. What do you think about all of us who have never been insurance commissioners?


    Mr. EMERSON. So you have raised a number of points with respect to how the insurance is to operate that obviously need to be addressed.
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    Mr. POMEROY. You know, Mr. Chairman, you've just said something profound and unique in my experience. This is the first time, the first hearing on an insurance matter where a member has confessed lack of knowledge on the subject matter. Usually, it's been my observation that the less encumbered by knowledge they were, the more profound they held their views.

    Mr. EMERSON. Well, we have worked hard. We have worked hard to understand, and I think we've come a long way. But we still don't understand it all.

    You've raised some good points. This is the beginning. This is one of a number of hearings that will be held. You know in the Senate, there's similar legislation over there. As a matter of fact, they are holding a hearing in the Senate simultaneous to ours here today. While we don't want undue delay because this subject is serious, needs to be addressed, and we do need to get a law on the books, we want to do it right. And so you've made valuable suggestions. And as the subcommittee and the full committee move forward, I daresay you'll be working with us, and we will try to address your concerns.

    Mr. POMEROY. Thank you very much, Mr. Chairman.

    Mr. EMERSON. Thank you, Earl.

    I think another vote in the House is rather imminent. Let the Chair take this opportunity to say that because of the simultaneous hearings being held in the Senate and the travel schedules of some of our witnesses, we are going to reverse panels four and three. All of the witnesses on panel three reside in the Washington area. Some witnesses on panel four have had to travel great distances and have airplane connections to make. So we're not ready for panels three or four yet. We will proceed with panel two until the vote occurs. But I did want the audience and the witnesses to know that we are going to reverse panels three and four. And this has been done in consultation with the panel members themselves who are affected. I trust that will not further inconvenience anyone.
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    At this time, we will call panel two. The Honorable Charles Quakenbush of the California Department of Insurance, Insurance Commissioner, and Susanne Murphy, the Deputy Insurance Commissioner of the Florida Department of Insurance.

    Mr. Quakenbush.


    Mr. QUAKENBUSH. Mr. Chairman, it's a pleasure to be here to discuss this very critical issue with you. And my heart is frankly quite gladdened by the bias for action I detect here, the idea that you really want to do something about this very critical situation.

    I have been an insurance commissioner for about 10 months now. And first, about 60 percent of my time, the top priority of my department since I was sworn in in January has been to find a solution to a very critical insurance availability crisis in California. As of last summer, about 6 months after the advent of the Northridge earthquake, 75 percent of the insurance market went to the sidelines and began to quite writing new homeowners insurance and new earthquake insurance in the State. The effects of that shutdown of the market were not really felt for a while, because we didn't have a real estate boom going. People who wanted insurance already had it. And it wasn't until the economy began to pick up that people began to notice that we had less and less available product out there.
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    A recent study my department just conducted in June says that now 93 percent of the market has gone to the sidelines, and we have very little capacity remaining for selling in the State. This is beginning to impact our economy quite severely, and the fragile economic recovery that we're trying to put together out there. Consumers who are trying to close escrow on homes, people who are looking for insurance are having to pay 30, 40 and 50 percent more just for basic homeowners coverage. Earthquake insurance prices have gone up between 100 and 175 percent across the board, if you're lucky enough to find it anywhere. The crisis is continuing to build, and we need to have some type of a solution in place.

    I have consistently supported the idea of a natural disaster protection act coming out of the Federal Government. I think that is the overall solution to spreading the risk in the country to allowing that product to become affordable, and finally putting to rest this entire issue of preparation for natural disasters.

    I can't wait, though, for the NDPA to be passed and signed by the President. We have moved ahead already in the State by trying to create something to handle our problem there. We passed through the legislature and was signed into law Sunday by Governor Wilson the authority for the California Earthquake Authority to be formed. And it is a public-private partnership that we've put together, privately funded by the insurance industry, reinsurers, investors from the private sector, who will be building up a very large fund that will be able to pay substantial claims on day one of the implementation of this authority, come spring.

    It's important to remember, though, even at the best, when we get this thing fully funded, we're only going to be able to handle damages up to $10.5 billion, which is approximately two times the Northridge earthquake. We face, as you'll see later on in the day with testimony, disasters that are going to be quite a bit bigger than that. There is no way that California by itself is going to be able to handle this kind of a disaster. I look upon my program, the California Earthquake Authority, as a transition to that Natural Disaster Protection Act. Very important that something comes out very quickly from the Congress, and is implemented into law.
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    I won't get into all the details of the legislation, since that's been repeated several times. I do have formal remarks that I will submit for the record. I've already given it to your staff. But I would say, as you go through the deliberations on this issue, it's going to be very, very easy to take shots at it. Congressman Weldon's remarks were very appropriate. There's lots of issues that have to be wrestled through. But try to maintain that bias for action that I saw earlier, and make sure that this passes. It's very, very important that we do this.

    Thank you very much.

    Mr. BOEHLERT [resuming Chair]. Thank you very much. Our next witness is Susanne Murphy, Deputy Insurance Commissioner for the Florida Department of Insurance.

    Ms. Murphy.

    Ms. MURPHY. Thank you, Mr. Chairman, and good afternoon.

    I am the Deputy Insurance Commissioner of the State of Florida. I appear before you this afternoon on behalf of Congressman Bill Nelson, who is now the State Treasurer and Insurance Commissioner of Florida. We both thank you for the opportunity to offer our support of the Natural Disaster Protection Partnership Act. The complete text of our technical comments has been graciously provided by the subcommittee for its consideration.

    Mr. Chairman, before Hurricane Andrew stuck the south Florida coast in August of 1992, many experts believed that the most destructive hurricane possible could cause no more than $8 billion in insured property damage. This seemed a reasonable figure, since prior to Hurricane Hugo in 1989, no hurricane had resulted in claims in excess of $1 billion. But we all came of age with Hurricane Andrew, which radically altered the basis of our projections and forever changed the face of the insurance industry. With winds in excess of 120 miles an hour, this category four hurricane caused more than $15.5 billion in insured damage, making it the costliest natural disaster in history.
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    But consider if you would, had Hurricane Andrew made landfall on the New England coast line, the price tag would have been an incredible $110 billion. The threat of natural disasters, however, does not affect just the State of Florida. Some 60 million of our citizens now live in hurricane vulnerable coastal areas of the United States, and just within the last 2 weeks, 12 storm related deaths and more than $2 billion in damages from Florida to the lower Great Lakes were caused by Hurricane Opal. We can no longer ignore the increased threat of natural disasters or close our eyes to their ever-increasing costs. Rather, we need a plan, a consistent, unified, thoughtful plan, which will, number one, promote stability within the insurance industry, ease the critical availability problems that states like Florida, California and other states have experienced with access to insurance, encourage personal responsibility for individuals, and reduce Federal disaster relief costs. The State of Florida believes that the Natural Disaster Protection Partnership Act provides a framework for just such a plan, and we urge your careful consideration of this legislation. The Act's primary purposes are to improve the availability of catastrophic property insurance for all Americans, to encourage adequate financing of catastrophe losses through private insurance rather than Government disaster assistance, and to reduce losses through hazard mitigation. In our view, these goals can only realistically be achieved by a national program which is capable of protecting all of our citizens from catastrophic loss. No state, standing alone, has the resources or the capacity to fashion a successful long-term solution. And we vigorously disagree with those who argue otherwise. It is true that the property insurance industry in Florida has literally reinvented itself in an unprecedented public-private partnership. But that partnership has resulted in more than 800,000 policies being written in the state-created residential JUA, which has become the third largest homeowners insurer in Florida, with a total exposure of $88 billion. And our wind and hail underwriting association in Florida has additional total exposure of $33.8 billion.
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    While these residual market mechanisms may provide short-term solutions to a paralyzed insurance market in Florida, they clearly do not provide the sort of long-term stable solution which is so desperately needed. Mr. Chairman, the written comments we have provided contain our technical comments and solutions for possible amendments to H.R. 1856. And we commend those comments for your consideration. But I join my colleague from California in asking that you consider these comments in the spirit of improving the bill, but not in killing the bill.

    There's no question that the citizens of Florida and millions of others around the Nation are in critical need of a national disaster protection plan which ensures that catastrophic coverage is available, and which promotes the financial stability and viability of the insurance industry. We encourage the subcommittee to accept the challenge of passing such a plan and to assume the responsibility of crafting legislation which will meet the catastrophe needs of our Nation for years to come.

    Thank you, Mr. Chairman.

    Mr. BOEHLERT. Thank you both.

    Let me ask the first question of both of you. I understand that the National Association of Insurance Commissioners has not yet taken a position on this bill. Could you enlighten us as to why not?

    Mr. QUAKENBUSH. It seems to be they are going to wait until it takes a more final form before they decide to support it. There are great concerns among the organization about preempting the states' traditional regulatory authority of the insurance industry. And until that gets cleared up, I doubt that they would be in support of it until then.
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    We will be discussing that at the meetings that we have coming up in December in San Antonio.

    Ms. MURPHY. And Mr. Chairman, if I might add, there is a catastrophe working group that is specifically convened to consider this bill and offer comments on the bill. Their work is not yet completed.

    Mr. BOEHLERT. When do you expect that work would be completed?

    Ms. MURPHY. I don't know the answer to that. I wouldn't think it would be by the December meeting.

    Mr. BOEHLERT. Well, my concern is this. And Mr. Emerson, understandably so, has great pride in this bill, and a number of us have identified with it for some time. We don't want to, as he would express it, drag our feet. But we would like the best counsel we can get from the people directly involved on a day-to-day basis at the state level.

    So you say, Mr. Quakenbush, December, is the next meeting?

    Mr. QUAKENBUSH. Well, December, it's being discussed on an ongoing basis. And as this thing begins to move, they are going to be very involved in making comments on it. And so will my department. I'm vitally interested in passing this legislation. I've tried to work with former Congressman Mineta, my Congressman, on this issue. And it's critical for the State. I will be involved whether NAIC is going to take a stand or not.
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    Mr. BOEHLERT. And the task force, that's a task force of the national association?

    Mr. QUAKENBUSH. Yes, of commissioners from other states, along with staff.

    Mr. BOEHLERT. What would be the effect on insurance prices if H.R. 1856 is adopted? Do you expect the deductibles and the coverage of natural disaster policies would change?

    Mr. QUAKENBUSH. Well, that depends on how you design the product. I would, the immediate effect it would have in California is the re-entry of all the carriers back into the homeowners marketplace, which I think, competition being what it is, will begin to bring prices down, especially as reserves begin to refill. We just pulled, we just brought competition to bear on the workers compensation issue in California, and prices have dropped between 40 and 70 percent to employers. So I think there will be significant competitive pressures unleashed when that occurs.

    Earthquake insurance prices have gone up dramatically in California. I expect that the price that this product will be sold at should be as actuarially sound as possible, depending on the area that it's being marketed in. That's very critical to the survival of this fund.

    Mr. BOEHLERT. Staff just informs me that the bill, under the bill's provision, the rates could not be any lower, the rates charged by private insurance companies, than those charged by the NDIC. Is that true?
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    Mr. QUAKENBUSH. That should be the direction that the bill goes. I couldn't answer you for sure, because I'm not an expert on the technical aspects of this particular bill. But it's critical that you have actuarially sound rates. That is what I assume, as best as they can, the industry is attempting to charge for the product that they're able to sell right now. It's very important that price stay where it needs to be.

    Mr. BOEHLERT. Well, I'm just thinking about the homeowners, for the bargain that we're all looking for for them. They want to get the best buy for the buck.

    Mr. QUAKENBUSH. Right.

    Mr. BOEHLERT. And you were indicating that competition would drive the premiums down, as it has with workmens comp. But apparently, there's a barrier to having the premiums driven down.

    Mr. QUAKENBUSH. Well, it's two different types of products in California. We have the homeowners policy, which is separate from quake coverage. We have a linkage between the two products. And unfortunately, with earthquake, it suffers from adverse selection. People who wish to buy earthquake insurance usually are going to have to make a claim on it. And there's no way to be able to reserve enough money to cover those claims when they do occur. Adverse selection is the equivalent of selling health care policies only to people with cancer genes. You have a group that's going to cost you a lot of money, and you don't know when it's going to happen.

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    Mr. BOEHLERT. What percentage of the people in California have earthquake insurance, would you guess?

    Mr. QUAKENBUSH. About 25 percent, between 25 and 30 percent, across the board. About 30 to 35 percent within the high hazard areas of Los Angeles and San Francisco.

    Mr. BOEHLERT. Can you give me some feel of what the premiums are?

    Mr. QUAKENBUSH. It's right now roughly between $3 and $4 per $1,000 over coverage. It's expensive, and it's probably going to stay that way for a considerable amount of time.

    Mr. BOEHLERT. And real estate in California is expensive. So if I could draw a figure out of the air, I would say a $200,000 home in California, in a high risk area, what would insurance cost?

    Mr. QUAKENBUSH. You're going to make me do that in my head, Mr. Chairman?


    Mr. QUAKENBUSH. Like I said, it's—All right, $6,800, he tells me.
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    Mr. BOEHLERT. That's expensive.

    Mr. QUAKENBUSH. Very expensive.

    Mr. BOEHLERT. Let me ask each of you what the current practice is in your respective states for approving rates for hurricane or earthquake insurance. And I want to know if you're comfortable with the provisions of H.R. 1856 that preclude states from regulating disaster insurance rates.

    Ms. MURPHY. Mr. Chairman, Florida essentially looks at a catastrophic model in approving rates for windstorm coverages, for hurricane exposure. Those rates are all filed with us, and we approve them or disapprove them based on whether there's data to support those rate increases. This bill treats this program in a similar manner to the Federal flood program in that it preempts the application of state rating and forms laws to this program.

    Florida is not so concerned about the exemption of the application of state laws on the rate and forms side. Because we've seen that work fairly successfully with the Federal flood insurance program, where we also don't regulate the forms and the rates of that program. That has not been a tremendous problem in Florida.

    We would like to see the states have some authority to regulate the claims practices of this corporation to ensure that consumers are fairly treated. But from a rate and form perspective, I understand the concerns of some of my colleagues that the state should retain that regulatory role. But Florida does not believe that that is a critical component of the bill which would cause us not to support it.
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    Mr. BOEHLERT. Mr. Quakenbush, do you have any comments?

    Mr. QUAKENBUSH. We are also a prior approval state, the rates, forms, that have to be filed with the department. And we approve it based on the same types of modeling that is used in Florida. We have companies that do earthquake modeling.

    Some of these models are the subject of some dispute and controversy. But we're doing the best we can with the projects we get to decide if a rate is adequate or a rate is inadequate or actually too much. I don't think we would have a problem, either, with the preemption for states on this issue. It's similar to the way flood insurance has been regulated. We could go along with Florida on that. I don't think there's a lot of daylight between our positions on that issue.

    Mr. BOEHLERT. Okay, thank you both very much.

    Mr. Emerson.

    Mr. EMERSON. Mr. Chairman, I think these have been very valuable and constructive witnesses. And I do believe it is important that we have some unified input from the state insurance commissioners. I was reviewing here a couple of news articles indicating a former insurance commissioner, for example, had said that we put this thing on a fast track, that this is the only hearing we're going to hold, and that we're trying to move this measure through without due deliberation. And I think it's important to note, because I think assembled here are opponents and proponents of this matter, and certainly we have a couple of very distinguished state insurance commissioners before us, that nothing could be further from the truth. I would say that instead of being on a fast track, as the Chairman himself has indicated, we are on the deliberative track. There will be further hearings. The issues that are being raised here that are substantive in nature should be examined. But there is some tinkering going along. There is rhetoric here I'm reading in some of these news articles that just don't meet the test of reality. And when you see where some of these folks are coming from, you know, I would note, and I said in my opening statement, my opening remarks, there are people who just don't want this legislation to move at all. And I'm telling you that $70 billion that we have spent since 1983 on disaster relief is no small sum. Republicans and Democrats, liberals and conservatives alike, wring their hands every time a disaster occurs and says, my God, how are we going to figure out how to pay for this one.
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    The object of what we're trying to do here is to devise an insurance plan by which properly spread out, with a lot of actuarial statistical involvement, we're going at a low cost, you know, for pennies to cover the cost of this thing, rather than having to dig so deeply into the Treasury's pocket every time a disaster occurs.

    So I would say those are out there selling memberships in their organization to deter the movement of this legislation should remember that they are also taxpayers. You know, I know there are some organizations who, every time we have a natural disaster in this country, whether it's the south coast of Florida or somewhere on the California coast, or even in the flood plain of the Mississippi River in the midwest, would like to see nothing built back. They would love to see all of that development just go away, you know, if the homes have blown away or if the businesses have blown away or flooded out, you know, let's just cease and desist all activity there, or whatever. Let's have Florida revert totally to the swamp it once was, and likewise with southeast Missouri. But you know, that's not reality here in 1995. And I would hope that as we move forward on this issue that we could all deal in reality. A $70 billion price tag since 1983 is no small ticket item. Yes, California and Florida will be rebuilt after their natural disasters, and hopefully so will other areas of the country when they have natural disasters. But let's keep rhetorically this discussion on a reasonable plain, and not make allegations like, if they're going to have any hope of passing this thing, they've obviously to do it quickly. We do not have 225 co-sponsors because we've taken the matter lightly. This has been a matter of ongoing deliberation in which I've personally been involved for the last 3 years. And it hasn't just been me and a bunch of right-wing Republicans. There have been a lot of Democrats, and a lot of left-wing Democrats involved in that. I don't see anything partisan about it. There's a real problem that needs to be addressed here. So let's all keep in mind that we're trying to address a real problem in a realistic way and it serves no useful purpose to go off on these rhetorical flourishes that distort our intent and our purpose.
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    Thank you, Mr. Chairman, for your indulgence.

    Mr. QUAKENBUSH. Mr. Chairman.

    Mr. BOEHLERT. Yes.

    Mr. QUAKENBUSH. Congressman Emerson, I thought you were reading from one of the articles from the L.A. Times about my California earthquake.

    Mr. EMERSON. No, it was in the St. Louis Post-Dispatch.

    Mr. QUAKENBUSH. It's a charge that was leveled at me and my operation as we were moving the California Earthquake Authority. We passed our Earthquake Authority with bipartisan two-thirds majorities in both houses of our state legislature. The opponents of it really had no alternative. Their only thing was they tried to make a case that the status quo was acceptable. It was not. We acted, and I certainly hope you do, too.

    Mr. BOEHLERT. Well, thank you both very much.

    And here's the situation. We'll go to the next panel now. And based on prior approval, panel four will appear before panel three. And we're particularly sensitive to schedule. So I'll ask Mr. Snyder to be the first witness on panel four, since it's my understanding he has a pressing commitment. Mr. Rick Snyder, President-Elect, California Association of Realtors.
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    After Mr. Snyder, we will then take a break to go over and vote, unless Mr. Emerson wants to dash over and vote and come back. We'll see what we can do. Mr. Snyder, you proceed.


    Mr. SNYDER. I appreciate the consideration, Mr. Chairman. I already missed that flight, so I'm off onto the next one. But I appreciate it very much.

    My name is Rick Snyder. And I'm the President-Elect, incoming President of the California Association of Realtors, with 106,000 members.

    Let me first state at the onset that the Board of Directors for the California Association wholeheartedly supports 1856, and its enactment, due to the severe effects natural disasters have had in California. In the wake of the destructive 1994 Northridge earthquake, it became apparent that the existing system of earthquake insurance was unable to address the need of protecting homeowners, lenders, insurers and most importantly, taxpayers, in natural disasters. The post-Northridge earthquake experience also witnessed a sharp increase in the cost of the earthquake insurance, which has already been testified on. He indicated, or ask the question about what the cost of insurance has gone up, the annual premiums on typical California homes in relatively high risk earthquake risk area, which had been $300 previous to the earthquake, rose to over $800 in the wake of the Northridge earthquake. The fact that the diminished availability and higher cost of homeowners and earthquake insurance in California has negatively affected real estate transactions and housing affordability in California is the key reason I am here testifying on behalf of the realtors in California and taxpayers in California, and in support of H.R. 1856. From our perspective, perhaps the most meaningful provision of the legislation is its requirement that homeowners in disaster-prone states obtaining a federally-related mortgage purchase either NDIC or private disaster insurance. We would anticipate that FEMA would designate much, if not all of California, to be disaster-prone. And therefore, earthquake insurance would be mandatory on all new federally-related transactions in California.
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    While CAR supports the proposed legislation, we do believe, however, that Congress, before making the final decision on the proposed legislation, should consider ordering a study of the projected costs of NDIC insurance premiums prior to the passage of the legislation which for all intents and purposes mandates disaster insurance coverage in disaster-prone states such as California. It might be advisable for Congress to gather additional information on the estimated costs of the programs insurance.

    There is also a provision within the proposed legislation relating to building standards. The H.R. 1856 proposed FEMA study of the establishment of the national building standards also raises some concerns for realtors in California. We believe the envisioned FEMA study of national building standards should specifically include the opportunity for full public comment and discourse. Importantly, any other such studies should include a detailed cost benefit analysis and a housing affordability analysis of the impact of the proposed building standards.

    And finally, although not a part of the proposed legislation, CAR, the California Association of Realtors, has a similar concern on any mandatory building retrofit requirements that the NDIC may one day consider as imposing as a condition of obtaining NDIC disaster insurance. We wish to go on record as stating that any required retrofitting due to changes in building codes or renewal requirements upon obtaining NDIC insurance or transfers of ownership could cause significant hardships for existing property owners, and the ability for properties to transfer. Before such mandatory retrofitting can be required, CAR would recommend that a cost benefit analysis of this mandate, if undertaken, would also be done.

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    And in conclusion, I would thank you, Mr. Chairman, and the members of the subcommittee, for providing California Realtors with the opportunity to provide our perspective on this legislation. And we too support the legislation wholeheartedly and look to see it swiftly passed and enacted.

    Thank you.

    Mr. BOEHLERT. Thank you, Mr. Snyder.

    You know, the bill would compel any homeowner who obtains or refinances a mortgage through a federally-regulated bank to purchase disaster insurance. Do you know what percentage of homeowners in California that would include?

    Mr. SNYDER. I don't know specifically, but much of the loans that originated go into the secondary money market and are therefore federally-insured mortgages. I would estimate that probably 70 percent of such mortgages are in the Federal realm.

    Mr. BOEHLERT. Well, I thank you, and I appreciate your testimony. And we'll share it with my other colleagues who are not here to have the benefit of your words of wisdom.

    Mr. SNYDER. Thank you.

    Mr. BOEHLERT. And I want to thank the other panelists for allowing you to go first, because I know you have a tight schedule. Coast to coast isn't easy. Thank you very much.
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    Mr. SNYDER. Thank you very much.

    Mr. BOEHLERT. The other panelists, I hope you'll indulge me. We have eight minutes to go before the vote, so I'm going to have to depart. I think Mr. Emerson will be back shortly, and when he is, I'll allow him to proceed. And then I will return as soon as I vote. You're all familiar, you guys, Jack, you understand what it's like up here on Capitol Hill. I can't control this, and I'm often embarrassed when I have to have people just sit around and wait for me, but no choice.

    This hearing is recessed temporarily.


    Mr. EMERSON [assuming Chair]. The subcommittee will come to order. And we will proceed with panel four, Mr. Weber, Jim Klagholtz, and Chief Paulison.

    Mr. Weber.

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    Mr. WEBER. Thank you, Mr. Emerson. It's a pleasure to be here.

    When this legislation was introduced, there was a ceremony, I believe in this room. And there were many people that spoke. And I said at that time that, I was the 11th speaker, and at that time, a lot had already been said. And so much of my testimony has already been said more eloquently by some of the members of Congress and also the other folks that have testified here today. So I'd just like to ask that my written remarks be inserted in the record at this time.

    Mr. EMERSON. Without objection, so ordered.

    Mr. WEBER. I would like to try, in the few minutes that I have available, to address some of the issues that have been raised here today and some of the issues that I think will be raised in the next panel. First of all, in regards to the testimony from Congressman Pomeroy, who I thought made some very thoughtful points. He mentioned that he had spoken to the folks over at the Federal Emergency Management Agency and they were concerned about whether this bill did enough on mitigation. I'd like to submit in the record a matrix which attempts to summarize the mitigation portions of the Natural Disaster Protection Act and compares them to the proposals that have been made by the White House Task Force on Disasters and FEMA through their own national performance review and mitigation strategy. What that analysis does is show that this legislation does more for mitigation than any of the other programs by a sizeable margin. It's the only legislation that talks about enforcement and adoption of building codes in the 50 states within a reasonably prescribed period. It's the only legislation that creates a funding mechanism to handle the issue of how to reduce losses. So I'd like to insert that in the record, if I could.
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    Mr. EMERSON. Without objection.

    [The referenced material follows:]

    [Insert here.]

    Mr. WEBER. Mr. Pomeroy also indicated that he was concerned about the issue of migration of risk, where good risks would be insured by private insurers and bad risks by the NDIC. There's a provision in the legislation, Mr. Emerson, that clearly states that any company that participates in the NDIC must do so with all of its business, and it must do so for all of its subsidiaries. So that in other words, if an insurance company elects to participate in the NDIC, they do not have the option of electing which risks to put into the corporation and which to retain for themselves. There will be no migration of risk with that provision in the legislation.

    As to the point about a growing chorus within the insurance industry about this legislation, I'm here to tell you, Mr. Emerson, that this legislation is supported by, or excuse me, the entire approach to a Federal disaster legislation is supported by every major insurance trade association in this country. It is supported by large groups that represent large insurers and groups that represent small insurers. There is absolutely no truth to the comment that this legislation is not supported by the vast majority of the insurance industry. Yes, there are a few naysayers, but they represent an insignificant part of the market. And that is what Mr. Pomeroy was referring to. You have the firm support of the insurance industry behind this legislation.
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    In terms of the need for oversight, we have made it clear in conversations with the Association of Insurance Commissioners and others that we think that the issue of corporate governance, the issue of the independent board of actuaries that will certify that these rates that are charged by the corporation are actuarially sound may be in need of improvement. And we are looking forward to working with those groups in a responsible manner to come up with those modifications and changes.

    In terms of the issue of the role of states in approving rates, I would submit to you that one of the problems that we have had in this country is that in a system where we have had elected insurance commissioners there has often been a conflict between the interest of voters and the interest of the solvency of the insurers that do business in a state. What we have attempted to do with this legislation is take the politics out of rate setting. And the way we have done that is to create a private corporation that would submit rates to an independent board of actuaries, not made up of insurance companies, but appointed by the Secretary of Treasury. And that independent board of actuaries would have the responsibility of certifying that those rates were actuarially sound, and not to the benefit of any particular state or jurisdiction.

    In terms of the role of the Federal Government in backstopping this corporation, I think that it's important to keep in mind, if I could have just a couple more minutes——

    Mr. EMERSON. Without objection.

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    Mr. WEBER. I think it's important to keep in mind that this legislation very clearly states severe limitations on the participation of the Federal Government. Number one, the loan that is provided, if a loan is approved by the Congress, must be at market interest rates. It may not exceed the capacity of the corporation to repay it within 20 years. The cost of that loan has to be a net zero as scored by the Congressional Budget Office, or that loan cannot happen. And those provisions were inserted specifically for the purpose of ensuring that taxpayers would not ultimately be responsible for the debts of the NDIC.

    The financial performance of the corporation is something that we feel very strongly about. We commissioned a study to look at the performance of the NDIC. We put together the largest insurance data base that has ever been put together in the history of the world. It involved the participation of data from more than 80 percent of the insurance industry. And what we did was simulate the disasters that would have occurred if this corporation had been in effect for the last 10 years. What we said was, if this corporation was in operation from 1996 to 2005, and the disasters that struck during that same period were identical to the decade of the 1980s and 1990s, the worst decade in history, Hurricane Andrew, Hurricane Iniki, Hurricane Hugo, the Northridge earthquake, Loma Prieta, and many other events. What we found was that this corporation not only was able to cover the exposures from those events, and cover them, I might add, for everyone at risk, not just the 25 percent who are currently buying insurance, but the corporation was able to do that, show a surplus, and not need to borrow a single dollar from the Federal Government. We think that's compelling evidence and I would like to insert, I know we've changed hands here, Chairman Boehlert, but I would like to insert in the record that study that shows that the corporation has no need to borrow if the disasters of the last decade were repeated in the next 10 years.

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    Mr. BOEHLERT [resuming Chair]. Without objection.

    [The referenced material follows:]

    [Insert here.]

    Mr. WEBER. I would also like to point out that some of the witnesses that are going to follow me have some criticisms, and I would like to just point out a couple of things for the record. First of all, I remember 3 years ago almost to the day that I attended a press conference that was put forward by Mr. Hunter, who then was the head of the National Insurance Consumer Organization, and Ralph Nader. And at that press conference, Mr. Hunter called for a boycott of State Farm Insurance and AIG on the grounds that those companies were not writing enough insurance in the State of Florida. I have a copy of his press release and documents from that press conference right here with me.

    In his testimony that he is going to present to you today, one of the points that he makes is that the problem in Florida is that the two largest companies in the State, All State and State Farm, are writing too much business, and that if those companies simply stopped writing as much business, the problems in Florida would be taken care of. He also says that the State of Florida, in studies that have been done by the State of Florida, show that the State can handle the problem within its own jurisdiction.

    You just heard from the Deputy Insurance Commissioner from the State of Florida who told you exactly the opposite.

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    I again would like to thank the committee for the opportunity to be here. We are most interested in working with you to correct and right any wrongs that are in this legislation. But we feel that it's important to keep in mind that there's a difference between constructive criticism and criticism that's designed to do nothing but stop the process.

    Thank you.

    Mr. BOEHLERT. Thank you very much, Mr. Weber.

    Our next witness is Mr. James Klagholtz, Chairman of the Governmental Affairs Unit of the Independent Insurance Agents of America. Mr. Klagholtz?

    Mr. KLAGHOLTZ. Thank you very much, Mr. Chairman.

    Members of the committee, my name is James Klagholtz. And I'm the owner of Clayton N. Sterling Associates in Seaside Park, New Jersey. As was just mentioned, I'm also Chairman of the Government Affairs Committee for the Independent Insurance Agents of America.

    First, I'd like to congratulate you, Mr. Chairman, and Congressman Emerson, for your leadership on this issue. At the outset, I would like to say for the record, IIAA is wholeheartedly in support of this bill, and we would like to state for the record that we will offer our assistance in any way possible in seeing the bill become a reality.

    I'd also like to say that virtually every insurance trade association is in support of this bill. You may hear testimony or have heard testimony that this is a large company issue, driven by large companies and not supported by small companies. This is incorrect. The bill is supported by virtually every insurance trade association.
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    Like Mr. Weber, I have observed that a number of the people who have testified this morning have views similar to me, and have expressed those views. So rather than reiterate what has already been said, what I'd like to do is give you a practical perspective of an independent insurance agent located in Seaside Park, New Jersey, whose office is one block from the beach. The clients that I serve in Seaside Park and Ocean County, New Jersey, are also located very close to the shore of New Jersey.

    Mr. BOEHLERT. You're not going to suggest to us, are you, that that's a hardship location?


    Mr. KLAGHOLTZ. Possibly.

    In New Jersey, a number of companies have used the Garden State Parkway as a dividing line. And they say that they will not write any new property exposures east of the Garden State Parkway. I have four companies that I represent in my office, and virtually all have adopted the same philosophy. I understand their concern, their concern about the solvency of their companies. And this bill that we're discussing here today addresses the availability issue and the solvency issue.

    I said that the companies that I represent have used the Garden State Parkway as a dividing line and won't write east of that. Let me say that in the county where my office is located, the only thing west of the Garden State Parkway is New Jersey's pine barrens, and there's really nothing to insure west of that until you get into the Philadelphia metropolitan area.
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    So availability is a serious issue for me. It affects my business, it affects my clients and it affects the local economy.

    I also see this bill as a solvency issue. The potential catastrophes that this country faces can in essence bankrupt the U.S. property casualty industry. If we were to experience a significant catastrophic event, whether a hurricane or an earthquake, the capacity of the insurance industry, and insurance capacity is a financial matter, the capacity of the U.S. property casualty industry would be severely crippled. And what I experience as a coastal agent would be experienced across the country, because the industry could potentially be under-capitalized, so that in both the availability and the solvency areas, Mr. Emerson and Mr. Chairman, we see this as a very, very critical bill.

    The testimony, the majority of those testifying today, as I mentioned, hold views similar to the views that I hold. Some, however, hold views that are contrary to that. Those views, and I'm certain that the committee will consider those views and that should be so, because everyone testifying is testifying, based, I believe, on their legitimate concerns. However, we need to keep this issue in perspective. The problem will not go away. The problem is getting worse and worse each year. In the past 6 years, we've paid $64.6 billion in catastrophes. This year alone, with the storms battering the Gulf Coast, we've experienced another $3 billion to $4 billion. This is not another Federal bail-out of the insurance industry. And as I mentioned, it's not a big company issue, putting pressure on other groups to get their demands passed.

    As I mentioned, our organization stands ready to assist you in any way that we can and we appreciate the opportunity to testify here today. Thank you very much.
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    Mr. BOEHLERT. Thank you very much.

    Our next witness, and final witness on this panel, is Mr. R.D. Paulison, Vice Chairman of the International Association of Fire Chiefs.

    Mr. PAULISON. Thank you, Mr. Chairman, and members of the subcommittee, and subcommittee staff.

    I'm pleased to be here today to discuss the Natural Disaster Protection Act. I ask that my full written statement be included in the record, and I'll keep my comments as brief as I can.

    Mr. BOEHLERT. Without objection, so ordered.

    Mr. PAULISON. Thank you.

    This testimony is related to my experience with Hurricane Andrew. I'll add that I'm also the Fire Chief of Dade County, Florida. And how the Natural Disaster Protection Act can improve the chances of a positive outcome in the wake of a natural disaster.

    The four areas I'll cover are the building codes, the fire service as primary responders to natural disasters, funding for training for fire departments, and lastly, insurance. Dade County covers 2,000 square miles and has a resident population of just over 2 million people. In August of 1992, Hurricane Andrew swept across the southern portion of Dade County and left a path of destruction that covered 625 square miles. We had 355,000 people that lived in that area. It displaced over 200,000 of those residents, and destroyed or heavily damaged over 90,000 homes. Eighty-six thousand jobs were lost and 40 people were killed. The damage costs for insured people and non-insured approached $30 billion, making this one of the most costly natural disasters in modern history. The reality of the situation, which you've already heard, is that if this storm had hit another 10 or 20 miles farther north, it would have gone through the heart of two counties, and costs could have reached as between $75 billion and $100 billion. The lives lost could have reached into the hundreds. The Natural Disaster Protection Act will allow each state to better prepare its residents for any type of natural disaster.
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    My family has lived in Dade County since the early 1900s. We have been through a lot of hurricanes. And as we all know, hurricanes cause a lot of damage. But I have never seen the catastrophic failure of so many single family homes in my lifetime. The disturbing part is that most of these structures were in the newer homes. Over the years, our codes have weakened and our code enforcement has not been what it should have been. Unbraced gabled end roofs failed with dramatic regularity. Stapled on pressboard roofing systems lifted early in the storm and allowed water-laden ceilings to collapse on the occupants below.

    I had over 250 of my own firefighters that lost their own homes, and I could march them through here, and they each one could tell you how their houses blew apart around them, and most of those were newer homes. Strong building codes and proper enforcement will save lives, property and tax dollars for all of us. In my opinion, over 30 percent of the damage to single family homes was due to weak codes and poor enforcement. The Natural Disaster Protection Act encourages states to be better prepared to deal with natural disasters by meeting minimum building codes and providing for proper enforcement.

    What we have learned since Hurricane Hugo and confirmed in Hurricanes Andrew, Iniki and others since, earthquakes like Loma Prieta and Northridge, California, floods in the midwest, wildfires in Oakland, Long Island and our beautiful parks in the western part of this country, man-made disasters in New York and Oklahoma City, is that the fire service is always the first and premier respondent to disaster. There is no other organization that has the infrastructure, staffing, communications and equipment to provide first response during disasters. There is no other organization outside of the military that has the experience in using an incident command system that adjust to handle any size crisis.
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    It is no accident that the Federal Government uses local fire departments to respond to disasters around the world. The Office of Foreign Disaster Assistance has sent teams from our department and others to Mexico City, Russian Armenia, and the Philippines. Any time the United States is asked for disaster assistance by another country, trained teams from local fire departments are the ones that are sent. It is also no accident that all of the urban search and rescue teams in this country are assembled by local fire departments. Twelve of those teams were sent by FEMA to assist in Oklahoma City. And most recently, four teams were sent to my home State of Florida when Opal went through the Panhandle. The Natural Disaster Protection Act makes it clear that the fire service is a primary responder to natural disasters, and more importantly, allows for increased input into disaster response planning and legislation.

    One of the most important things the fire service needs now is funding for training. No adequate disaster response can happen without proper training. An example that seems simple on the surface, but had disastrous consequences during the aftermath of Hurricane Andrew, was the delay in receiving Federal assistance. The perception was that the Federal Government either did not care or was unable to respond in a timely manner. The truth is, our local government was partly to blame. We had no mechanism in place to allow for a quick and accurate estimate of the damage estimated by the storm. And Mr. Chairman, I would ask your indulgence for about two minutes.

    That, coupled with poor communications, resulted in a slow response from our own State and in turn, a slow response from the Federal Government. We have since trained each officer in our department in doing what we call ''windshield surveys.'' It's a quick, accurate method of estimating the damages. However, this training was expensive and time consuming. It also is just a very small part of the response puzzle.
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    A second example was the mutual aid we received. The unencumbered love that we received from around this country from all the other fire departments we will never forget. However, there was no control over that help coming into our area. We had over 2,000 firefighters coming to help us, and we couldn't even feed our own firefighters. We had no water, no electricity and no housing. We have 50 firefighters in a fire station designed for 7.

    The Florida Fire Chiefs Association has now developed a statewide mutual aid association that controls the amount and type of staffing and equipment that flows into the needy area. But this requires training at the statewide level. Local departments cannot do this. The system was fully activated during Hurricane Opal a few weeks ago as it went through the Florida Panhandle. It worked well enough to recognize that it's an excellent system, but there are enough major problems for us to realize we still need widespread training for it to work smoothly. There are simply no funds available to do this. The mitigation funds would make sure that this training is made available when and where it is needed.

    I'm the second person in this room that says I'm not an expert on insurance. But I am a homeowner that lives in an area that is prone to disasters. Adequate insurance is becoming more and more difficult to find. It often keeps new homeowners out of the insurance market and out of the housing market. It has a disastrous effect on low income families. Private insurance companies are reluctant to write new policies, and therefore the new homeowner must get insurance from our state-run government program which is expensive and totally inadequate.

    The Natural Disaster Protection Act, although not a cure-all, is a step in the right direction to solving some of the issues I have described. I urge your support of this very important issue.
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    I thank you very much.

    Mr. BOEHLERT. Thank you very much, Chief.

    Mr. Weber and Mr. Klagholtz, I'd like to ask you both, do you think disaster insurance premiums will increase, decrease or stay static if H.R. 1856 is adopted?

    Mr. WEBER. I'll answer that first. I think that in some places, insurance rates will go up, in some places they may go down. In most places, they will stay the same. We have places in this country where rates are not adequate to cover the risk. This bill requires that rates be actuarially sound. So in some of those areas, I think rates will increase.

    We have other places that are presently subsidizing those who are not paying an adequate rate, and hopefully I think in those areas rates will go down. But the fundamental fact is that in most parts of the country, you shouldn't see much of any change in rates. And that's because the lion's share of the risk, the lion's share of the exposure, is in areas we all know about. And the trick is to make sure that those people are insured. We don't have a problem in Idaho. We don't have a problem in South Dakota. We've got a problem in Louisiana and Texas. And so it's those areas that we need to concentrate on.

    I will say this, that we have looked at the pricing of insurance coverage under the Natural Disaster plan as compared to the California Earthquake Authority that Commissioner Quakenbush had talked about earlier today. We believe that the rates under the national plan will be lower than they will from the California Earthquake Authority, and that's for a number of different reasons. But the bottom line is, we think that they will be lower than some of the residual mechanisms that the states are using now.
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    Mr. BOEHLERT. How about east of the Garden State Parkway?


    Mr. WEBER. I'll have to get back to you.

    Mr. KLAGHOLTZ. I agree with what Mr. Weber just said. One of the things that our organization subscribes to and is inherent in the bill is personal responsibility rather than taxpayer responsibility. It's inequitable for example, someone at the top of a hill in West Virginia to be subsidizing, as they do today, as a taxpayer, someone in Seaside Park, New Jersey. That situation should not exist, and personal responsibility for the exposures that the individual faces rather than taxpayer responsibility, in my judgment, is the way to go.

    Mr. BOEHLERT. I agree wholeheartedly with your basic thesis. That's probably why I'm a Republican. But don't feel too sorry for West Virginia. They get a disproportionate share of return on every dollar they send to Washington.


    Mr. BOEHLERT. Chief, I'm going to throw a softball at you. How does improving first responder capabilities reduce disaster losses?

    Mr. PAULISON. Well, when we're able to get on the streets as quickly as possible with adequately trained people, we reduce the loss of life and reduce the loss of property damage.
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    Mr. BOEHLERT. Well, then, do you think, and I think I know the answer to the question, but I want to get it on record, and once again it's because of the great affection I have for your organization and all the dedicated people that I'm throwing you these softballs, you can hit them out of the park. Do you think we should spend more money on training and mitigation and less on response and recovery?

    Mr. PAULISON. Absolutely. Training is the key to any issue. If you train and plan ahead of time, you're going to have a good response. And you don't have to spend all those monies. And that's not only just in natural disasters, but in fires or anything else.

    Mr. BOEHLERT. All right. Now, I'll get to Mr. Weber. Who will set the disaster insurance rates under the bill?

    Mr. WEBER. The way that the legislation is presently set up, Mr. Chairman, the corporation will set rates for the various different coverages. Those rates before they can go into effect must be approved by an independent board of actuaries. That independent board of actuaries would be appointed by the Secretary of Treasury. Before the rates can go into effect, the board of actuaries has to certify that they are actuarially sound. If they are not, they are sent back to the corporation to be reworked.

    Mr. BOEHLERT. And there's no appeal process, so what does a homeowner or a business person who thinks the rates are too high, what recourse do they have?

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    Mr. WEBER. Well, first of all, when you say there's no appeal mechanism, one of the issues that we are looking at is whether or not there should be a way to review rates at a state level to see whether they are actuarially sound. We think that the issue of how the board of actuaries provides that analysis may need another look. And we are open to working with both insurance commissioners and others to make sure that that board of actuaries is doing the right job.

    The one thing that we want to emphasize is that this is not an effort of one group or one industry to try to get an advantage over others. We want to take the politics out of rate setting. We want to make it a scientific process. We think that folks that are experts in geology and meteorology ought to be a part of that process. And that's what I think this legislation does.

    Mr. BOEHLERT. My time is up, and I'm going to turn now to Mr. Borski. But before I do, I would first of all acknowledge there is no one who has worked harder in this town or anywhere in the country than you have to bring us to where we are today. I would encourage you to give it a little extra push with the Association of Insurance Commissioners, what is it?

    Mr. WEBER. NAIC.

    Mr. BOEHLERT. Yes. Work with them, because they would be very, very helpful to all of us if they could come in with a position. And I hope you will appreciate the fact, I know there's a lot of pride of authorship around here, you've worked very hard, Mr. Emerson has, I have too, I take some pride in having some contributions to this. I hope we don't get so wedded to specific language that we aren't receptive to constructive criticism and willing to make some adjustments to fine tune it. Because we all want the same result, I think.
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    Mr. WEBER. We've been in the process of fine tuning this legislation for the last 3 years, and we'll continue to do that.

    Mr. BOEHLERT. Thank you very much. And I appreciate that spirit.

    Mr. Borski.

    Mr. BORSKI. Thank you, Mr. Chairman.

    Mr. Weber, if you will, I notice in your opening remarks you talk about who the coalition is comprised of in a broad sense. Could you give the subcommittee an actual list of who the coalition is?

    Mr. WEBER. Certainly.

    Mr. BORSKI. Not necessarily now, but if you could provide that in writing I would appreciate it.

    Mr. WEBER. Absolutely.

    Mr. BORSKI. Can you tell us a little bit about how the coalition does business? Is it on a consensus basis? Are there people in the coalition who are opposed to this bill?
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    Mr. WEBER. The coalition operates on a consensus basis. We have a board of directors that decides policy. In terms of the insurance issues, those matters are debated and discussed at these meetings. The board of directors is comprised of every insurance trade association that represents the industry, most of the major companies, in terms of the market share, representatives of small companies, mutual companies, stock owned companies. I believe that the board probably has about 18 members, something like that.

    Mr. BORSKI. And could you give us an idea, of the 18 members, could you tell us what the outcome of the vote would be? Has there been such a vote?

    Mr. WEBER. Oh, there are votes on every issue. And I think one of the things that needs to be kept in mind is that the insurance industry is not a monolith, and there are various different forces and groups working constantly both for their good and perhaps to see whether or not they can do in their competitors, if you will. So that dynamic is always there.

    I will tell you that the legislation that has been put forth was approved by our board of directors, and is supported by the vast majority of the group. In fact, I would say that I would be hard pressed to identify more than one or two members that are opposed to this approach.

    Mr. BORSKI. Good. Thank you, sir.

    I want to follow up on something that Chairman Boehlert was asking about, and that's about the risk. If the risk is spread through increased participation, doesn't such an expanded program also include a similar increase in exposure of the insurance company, if you're only insuring 5 percent of the homes or businesses now, and you get up to 90 percent, doesn't that just——
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    Mr. WEBER. Well, if the question that you're asking is, if you're insuring more people, do you face larger risks, the answer is yes. But you are also generating more premium to cover those risks. And I think that is the countervailing point to be made. One of the problems that you have today is that in many parts of the country you have what we call adverse selection, meaning that the worst risks, the people that are most likely to have claims, are the only ones that are buying the coverage. When everybody that's buying it is putting in their dollars, you have more dollars to cover the events wherever they occur.

    The last thing I would say is that I think there is a misnomer that we are not insuring people without insurance today. The fact of the matter is that because we have such poor participation in many parts of the country, the de facto insurer of last resort is the taxpayer. And so are we increasing the risks? Yes. But we are also increasing the premiums and the revenue to hopefully prefund those events.

    Mr. BORSKI. I want to follow up with another question that the Chairman talked about. Under this bill, if the homeowner files a claim, and the NDIC refuses to pay, what is the recourse?

    Mr. WEBER. There is a provision, in fact, I want to follow up on one of the things Mr. Boehlert said, we have been having conversations with various insurance commissioners about several of these provisions. And we have already indicated that the issue of state regulation over claims practices and such should be a part of the bill, and needs to be inserted.

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    Mr. BORSKI. Thank you very much, sir.

    I have no further questions, Mr. Chairman.

    Mr. EMERSON [assuming Chair]. I think this is an appropriate time, if the members of the panel have no further statements and there's no one asking further questions, that the committee will stand in recess pending this vote. It's a final passage vote. And we'll stand in recess subject to the call of the Chair. Either the Chairman or I will be back as quickly as either one of us can get here. I think all questions have been asked. Unless anyone has any further questions, this panel is excused.


    Mr. BOEHLERT. And now our final panel. Let me first thank you for your patience and indulgence. We'll begin with Mr. Keating.


    Mr. KEATING. Mr. Chairman and members of the committee, thank you for the opportunity to present our views on the Natural Disaster legislation. Mr. Chairman, we sincerely appreciate your remarks pledging your commitment to craft a fiscally responsible approach. The 300,000 member National Taxpayers Union strongly opposes this legislation in its current form, which we believe would greatly increase the potential liabilities of the Federal Government, making a savings and loan-sized fiscal disaster a realistic possibility.
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    Creation of the Natural Disaster Insurance Corporation is the heart of the legislation, and most fiscally dangerous portion of the bill. As drafted, this bill creates many disincentives for the insurance industry to properly assume risks in a disciplined fashion at the right price. It does nothing to encourage insurance companies to manage their disaster insurance risks well, and it rewards companies that have been the least disciplined and the least professional in their accumulation of risk.

    The NDIC has overwhelming incentives to not set actuarially sound rates. Despite the bill's language to the contrary, the rates will not be actuarially sound for several reasons. The NDIC corporate members are specifically excluded from any liability for the NDIC's debts; the board and actuaries will be subject to strong political pressures to minimize rates; and the NDIC rates may not reflect risk capital charges.

    Section 901 explicitly says that insurance companies ''shall not be liable, or in any responsible, for the obligations of the corporation.'' Section 906 makes it clear who is: the American taxpayer. If losses are such that the NDIC funds ''are insufficient to pay claims and expenses resulting from the insurance, the Secretary of Treasury shall provide direct loans.''

    We are concerned about the NDIC board, which is likely to become a revolving door with little accountability. Such a board would probably develop into a revolving door for property and casualty insurance interests to move in and out of the NDIC board, making decisions with respect to the disaster insurance market. When losses are incurred as a result of board decisions, many will be back in the private sector.
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    The board of actuaries will not be independent. Proponents will claim that such rates must be approved by the ''independent'' board of actuaries. We believe this board would be a lap dog, not a watch dog. There are many reasons for this. One is, the actuaries themselves are dependent on work for the Nation's largest insurance companies, which are represented by the NDIC board. It's hard for me to imagine them being truly independent of the people they are going to have to work for in some capacity.

    We also think they will be subject to political control, as my written statement suggests.

    Finally, and the most outrageous portion of the provision is that the bill makes it extremely difficult for the actuaries to stand up and say, ''no, these rates are wrong.''

    I'm not going to quote the standard, which is ridiculous. I can summarize it as, if in doubt, approve the rates. That's what it is.

    We also believe the legislation would lead to cross subsidies. One way of avoiding the imposition of politically unpopular but actuarially sound rates is to cross subsidize. For example, it's quite likely that New York State will be designated as a disaster-prone area because of Long Island's vulnerability to hurricanes. Yet a homeowner in Albany or Schenectady is unlikely to see serious damage from a hurricane.

    Mr. BOEHLERT. You're getting close.
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    Mr. KEATING. So the opportunity to slightly overcharge upstate homeowners to subsidize the beachfront of Long Island homeowners will be quite tempting for the NDIC board.

    Also, I'd like to point out that if the legislation does not bar private insurers from underselling the NDIC, the NDIC will be vulnerable to cherry picking. The NDIC would be left with the worst risks and less premium income to pay claims for these bad risks.

    Poor rate setting could also cause enormous increases in rates after a disaster, because of the way the bill is structured.

    We also are very concerned about claims payments being efficiently made by the NDIC. We think they could be subject to very high levels of waste, fraud and abuse. That is simply because, when paying claims, the insurers who have sold the policies are not those who are necessarily going to pay all the claims from their own funds . It's easy to keep your customers happy when in some cases 90 percent or more of the money to pay claims is coming from the NDIC. What incentive do you have to ensure that the claims are being properly paid? I suggest, and submit, there is very little incentive.

    There are just a few concluding points I'd like to make. The Federal Government could be liable for massive losses by the NDIC, which is not subject to Federal regulation. Not that Federal regulation is any guarantee of solvency. We certainly saw that it did not prevent financial losses with the savings and loans and banks and many other programs.
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    The reinsurance coverage in the bill is also, we think, very poorly designed. Many criticisms were levied against the reinsurance section of the bill by the GAO in the last Congress. That portion of the bill has essentially been unchanged. In fact, a new trigger has been added for state reinsurance pools that we also have very serious concerns about.

    My final point is, at least as the bill is written right now, it should be called the mismanaged insurance companies protection act. We fear that support for this legislation among special interests outside the Congress is being driven by insurance companies that have mismanaged their underwriting. We think there's a real danger the way this bill is written right now that the NDIC will become a dumping ground for these poorly run insurers who wish to clean up their underwriting and leave the exposure to the American taxpayer.

    In conclusion, we strongly urge the committee to remember that even the best-intentioned programs can have budget-busting consequences. While legislation may be needed to reduce the impact of natural disasters, Congress has to move very, very carefully in this area.

    Thank you very much for the opportunity to speak before you today.

    Mr. BOEHLERT. Thank you, Mr. Keating. And because of scheduling conflicts, I'm going to ask Mr. Hoffman if we might defer and go to Mr. Hunter next.

    Mr. HUNTER. Thank you, Mr. Chairman. I appreciate it very much.

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    My name is Bob Hunter. I'm the Director of Insurance with the Consumer Federation of America. I was formerly Texas Insurance Commissioner and before that, some years before, under the Ford and Carter Administrations, I ran the National Flood Insurance program as Federal Insurance Administrator. So I've been involved in this a long time, and I've testified many times about these bills.

    No one, I think, more than I, maybe, wants to see the Federal Government get involved in this, in a way that is sound and proper, that would maximize private sector responsibilities and minimize taxpayer liabilities over the long run. Because the current ad hoc disaster assistance approach and so on does not work and is a disincentive to sound construction, is a disincentive to people taking responsibility for their own risk.

    So my heart is with you in terms of what you're trying to do, and I really congratulate you, Mr. Chairman, for making that effort. I do have problems with the bill that are listed in my testimony. I hope my testimony can be made part of the record at this point, if that's okay.

    The problems with the bill are that I think the insurance companies are too protected and the taxpayers and consumers and perhaps some of the smaller insurance companies and reinsurers are not protected sufficiently. For example, I believe we've talked about this, state authority for rate regulation and other regulations are being preempted as a concern. I'm worried about politicizing, but I'm worried about having no authority for anybody to look at this basic cartel that's being created with no regulatory oversight. I think that's a dangerous situation, to have a cartel setting rates with no regulatory oversight.

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    The bill also imposes unfunded mandates, $5 a person is required, if a disaster occurs. And there are other mandates that it seems to me are unfunded. The only state regulation that the bill clearly calls for is the regulation of any insurer who would try to compete with the cartel by lowering its price. Now, that strikes me as odd. If someone wants to come in with a lower price, why not? Why not allow some competition? The bill destroys any hope for a free market response to natural disaster insurance. A free market response is possible. I encourage you to look at the very important study done by the academic task force in Florida that says a free market response to the Florida problem is possible. It needs some help over time, would like some Federal backup for a time, but believes that a free market response is possible. The current bill does not allow a free market to function in a disaster area.

    The bill does not guarantee insurance, because the bill says that insurers don't have to offer it, although the insurance buyer has to buy it. And also, if I do buy it and there is a major storm that exceeds the 20 year payback authority, do I get paid? Do I ever get paid? If I don't, what kind of insurance is it?

    Plus, the insurance requirement coupled with an unregulated cartel rate strikes me as something very concerning. If I own a home, say, on the Keys, now, and I want to sell it, and the fair rate calculated by this cartel is $10,000 when it should have only been $1,000, let's say, can I actually sell my house? What will happen?

    We've talked about claimants having no recourse to state or Federal agencies. That's a concern.

    The taxpayers are at very great risk. I agree with what I've just heard. There's an additional, I think, time bomb in the bill, which is unlimited tax carrybacks. Unlimited tax carrybacks in this bill. So if you have one of these $75 billion storms, immediately the taxpayer is on the hook for most of it, not only the reinsurance part, but the part that will then be carried back by the insurers. Unlimited, not 3 years like you and I. So that's a real danger.
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    I'm worried about cherry picking. I've heard arguments that maybe that isn't fair. But when I read the bill, I saw the possibility of the insurers cherry picking and leaving the Federal Government with the higher risks and maintaining their risks at the lower risk level. Now, I think there are areas that need, very much need the Federal Government's involvement. Mitigation is one. There needs to be some Federal standards for mitigation. The national flood insurance program, to its credit, did have a careful analysis in advance by the National Academy of Sciences, and linked mitigation with the insurance and said, we're not going to sell insurance in a community that doesn't participate in the mitigation aspect. Very important linkage, and I encourage you to look at that as a possible way to link any kind of backup to the insurance industry to actual action on the ground to enforce land use and control measures, to make sure that the buildings meet these mitigation standards.

    I have come before this Congress now for about 10 years in response to these bills. And I have made one simple plea, and I make it again. I think you should pass a bill immediately that would empower someone like the National Academy of Sciences or somebody like that who did the study to do a full analysis of this, and to charge this independent scientific body with some charges, like maximize the private sector involvement under free market conditions. Maybe you can't get there immediately, but find a way to maximize it over time. Minimize the taxpayer liabilities with a 25 or 50 year horizon. It's going to take that long for some of these things to work their way through. Because you have existing structures in high risk zones. What are you going to do about them? Maybe some of them can't afford to do retrofitting right away. But maybe over time, there are ways to do that.

    And then to answer fundamental questions, I listed fundamental questions in my testimony. Questions like, who subsidizes who, and those kinds of questions. I want action. I want to see this Congress move this. I don't like the ad hoc approach of what we have. But I certainly believe the bill is flawed significantly. And I believe the kind of scientific analysis of mitigation, how insurance works together, do we even need it for windstorm, which has been handled for 200 years, even including Andrew, privately? Do we really need a Federal program? I think we do for places like Virgin Islands and Hawaii. But for everywhere, I'm not sure.
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    So I encourage you, please, to take the time to do it right. It's important, because this is a bill that will affect us for 100 years.

    Mr. BOEHLERT. Well, thank you very much. And we'll look on you as a resource, if we have some more questions.

    Mr. HUNTER. I would love to work with you, sir.

    Mr. BOEHLERT. And I know you have to depart. Just let me ask you one question. The National Academy of Sciences, are you aware of any activity over there, any studies or anything that might be underway in this area?

    Mr. HUNTER. No, I've suggested the National Academy of Sciences, although I'm not wedded to that. What I'm wedded to is an impartial scientific approach.

    Mr. BOEHLERT. Understand. I just thought you might be familiar with something going on.

    Mr. HUNTER. There was a representative here, and I believe they are looking at some of these issues, but how far along they are, and whether—I think you should go a little farther and charge them, maximize private role, minimize taxpayer and give them some guidelines, so that the study would fit into what you are looking for.

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    Mr. BOEHLERT. That's advice well taken. Thank you very much.

    Mr. Hoffman. And tell Mr. Norquist we miss him.

    Mr. HOFFMAN. I certainly will. He sends his regrets.

    Mr. BOEHLERT. Thank you.

    Mr. HOFFMAN. Thank you for the opportunity of letting me testify today. My name is Scott Hoffman, I'm the Director of Operations for Americans for Tax Reform, a coalition of state and local taxpayer groups whose common goal is lower taxes on all Americans.

    ATR works to inform all Americans of the full costs of taxation and believes that Congress must reduce deficit spending through fiscal restraint and downsizing Government.

    The issue of disasters and how the Nation responds to them is an important one to taxpayers. In the last 5 years, the Federal Government has spent more than $50 billion on disaster relief. If present trends continue, the funding of Government supported disaster assistance will be one of the clearest threats to a balanced budget.

    Americans for Tax Reform supports the principles upon which the Natural Disaster Protection Partnership Act is based. One, private insurance is preferable to Government handouts. Two, the people who live in areas prone to disaster should be more individual responsibility. And three, the share of disaster costs borne by taxpayers must be reduced, and if possible, eliminated altogether.
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    Our present system does none of the above. It encourages people to wait for a Government check instead of an insurance claim form. It subsidizes the true cost of living in earthquake, hurricane or flood area, and encourages elected representatives to play politics with the public's money by allowing Government spending on disasters to be hidden off budget.

    The Natural Disaster Protection Act will replace Government funding of disasters with more private funding. By requiring that anyone with a federally backed mortgage is adequate insured in risk-prone areas, the bill will reduce the number of uninsureds, which accounted for 90 percent of midwest flood victims and 75 percent of those impacted by the Northridge earthquake.

    The legislation also frees the private sector to do a better job of insuring disasters. It does so by improving the way rates are set for disaster coverage, and by providing a mechanism to pool the risk of mega-catastrophes as efficiently as possible.

    The National Disaster Insurance Corporation is a reasonable approach to dealing with the consequences of mega-catastrophes that cannot be adequately handled under current market and regulatory conditions. It also recognizes that the impact of these events does not stop at state borders.

    It is not another FDIC, and cannot be as presently drafted. If we thought it could be a bottomless pit for taxpayers, we would definitely oppose it.

    The NDIC is a private entity run by a private board of directors. It sets rates for disaster coverage which must be certified as actuarially sound by an independent board of actuaries. It can boost its financial capacity in the private financial markets, and it enjoys tax treatment that recognizes the long recurrence intervals of many types of disasters.
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    The Corporation may also seek a loan from the Federal Government under certain conditions. But we think that the following limits on this borrowing capacity are both reasonable and sufficient to protect taxpayers. First, any loan must be made at market interest rates. Second, the loan may not exceed the Corporation's capacity to repay it over a specified period. And third, the loan is subject to an appropriation by Congress.

    We think that if all these conditions are met, the Natural Disaster Protection Partnership Act is a boon to the American taxpayer. We urge you to study it more, to make the bill better if it can be. We don't want the perfect in this case to be the enemy of the good. We're not happy with the status quo, and we think that more can be done. We urge the committee to take action on this as soon as possible before it becomes a moot point.

    Thank you.

    Mr. BOEHLERT. Thank you very much.

    Mr. Clark.

    Mr. CLARK. Mr. Chairman, I want to thank you for inviting us once again to testify on this extremely important legislation. I don't know whether it's good or bad to be the last horse out of the gate. But I think that speaking for homeowners, which we do, that we have to be reminded that the buck really does stop here, with homeowners. And they are the ones that are going to, have suffered because of the lack of insurance, and will suffer as taxpayers, because homeowners pay 90 percent of the personal income tax in this country. So we have a dual reason for being here, to solve the problem with insurance and to make sure the drain on the Treasury is reduced substantially, which in fact is what the bill addresses.
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    We have been at this for about 5 years, not as long as Mr. Hunter, but a little bit longer than I guess Mr. Emerson, as far as trying to get passage of legislation through. I think the first bill we tried to get through was the earthquake bill. It's been so long ago, I'm not quite sure.

    But I want to thank the Chairman and the committee for pushing this bill. It's very much needed. We are behind it 100 percent. We think there are areas, as most of the witnesses do today, that it can be made more perfect, and have some questions which we think should be answered before passage. But most of those have been brought up.

    But there are some areas which I would suggest strongly that the committee look at, which would, as I said, make the bill more perfect. So in the interest of time, I will mention some of those areas.

    There is obviously coverage protection in the bill, and the coverage as we read it at least is for residential property of one to four units. We would suggest to the committee that because of the acute insurance problems as a result of Northridge, with multi-family units, condominiums, co-ops, etc., and even to a certain extent rental properties, that that definition be expanded to basically any home in disaster-prone areas. If you go through Northridge today, I haven't been there in 6 months, but when I was out there last, there were still multi-family units with chain link fences around them that were right in the middle of single family neighborhoods. And it does a couple of things, it brings down that neighborhood, obviously, reduces the tax base, and it makes it much more difficult for anybody to sell the home, not to mention the fact that those people whose homes were destroyed, condominium, co-op or even rental properties, have no place to live. And a lot of them lost much because they were not properly insured.
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    So we would ask the committee to consider expanding that definition of coverage to include all homeowners, and even consider perhaps, and I don't know what the state of the property insurance business is with rental units, but I think that it should be considered and looked at.

    Mentioning one thing which I think has to be noted as far as the Government's culpability, I don't think it's been brought up yet, but it goes far beyond paying $70 billion for disasters over the last 15 years, as Mr. Emerson said. There are other areas where the Government is now responsible for rebuilding or not rebuilding, as the case may be. FHA and VA homes, as you well know, constitute about, at least the mortgage guarantee does, about 11 or 12 percent of the marketplace. If those homes are not insured for earthquakes or not properly insured against wind damage or whatever the case may be, the Government is going to be caught holding that bag, or the lender, whichever the case may be. And no matter what, it's difficult. And in great numbers, it's going to cause a severe problem with the Government loan guarantees.

    The secondary market, which controls about 52 percent of the market out there, namely Fannie and Freddie, really would have problems if a major earthquake hit California and took down just about 10,000 homes, which would be in their portfolio, which do not have earthquake insurance. I think they would go through their reserves very quickly. They are Government-sponsored enterprises, and some feel that the Government would be holding the bag if there were problems.

    There are other problems also, that the repercussions of such a disaster would spread back to the east coast, anywhere where anybody is trying to get a loan on a home. Because rates would increase and I think it would cause extraordinary problems in the secondary mortgage market. And those are questions I think the committee should consider. Obviously, also more reason to pass this bill, because it will get the secondary market off the hook.
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    There are provisions for insurance purchase requirements in the bill. And under coverage, it covers federally-related mortgages. I think that's a good start, but you're going to miss about half the target. Because 30 percent of our homes don't have a mortgage. And the rest that do, only about 60 percent have some Federal relationship. So if the premise is to spread the base out as much as possible, which we think it is, and bring the premiums down where they're reasonable, I think we have to hit all targets.

    There's an area covering enforcement, and the enforcement is handed to the lending industry. I would say that's like putting Inspector Clouseau on the job, not that I don't respect the leading industry, but the way paper is bought and sold in the market today, mortgages, it would be a paperwork nightmare. I don't think you could track it. And secondly, the lending industry is responsible for enforcement of the flood insurance program. And only 20 percent of those who have flood insurance have it today. So I think there's precedent for not putting it in the lending industry. Not to bring up a problem without a solution, we think the perfect place for enforcement would be with the local tax collector. Everyone hears form the tax collector at least once a year, the property tax collector. And they have to keep track of the properties in the territories. And who has more to win or lose than the local community, rebuilding their community, if people are properly insured, and we get into mitigation. And we can punish or reward local communities for mitigation. Why can't we punish or reward, whatever terms we want to use, for enforcement of insurance itself.

    So we would suggest that the committee look at enforcement being put on the local community in a system that already works, and that is the local tax collector.

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    I see that my time is running out. I would ask for two more minutes, Mr. Chairman.

    The analogy of course is when you buy a car, get a license, you have to attest that you have insurance. And the enforcement of that is with the motor vehicle administration, not your credit union or bank where you borrow the money from.

    Universal coverage, we think enforcement should lie with the tax collector.

    We have some questions, the Natural Disaster Insurance Corporation, I think these questions have been covered pretty well. We think that there is sufficient safeguards for the public, and certainly the insurance commissioner brought it up today, as questions they have. One of the questions we would have is to make sure we understand what we're getting into in that we do have a good assumption of what the cost would be for the homeowner. We can set actuarially sound rates, but that doesn't mean they're going to be reachable by the homeowner. And you look at California today, 75 percent of the people don't have insurance. It's not because of the premium, it's basically because of the deductible, 15 percent deductible means that the average Californian has to have $32,000 in the bank before he receives a penny for insurance coverage.

    So we would ask to make sure that those rates are sound and reachable, and we will do everything we can to help the committee to solve that problem. I think we have enough people in this room to do it. I'm not here as a naysayer, I don't like the naysayers. If we have a problem, let's solve it. And let's go out and do it.
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    And I don't think we need any further studies. We can study this to death. I think it's like studying a malignant tumor, pretty soon the patient's going to die, so the problem's going to solve itself. I would encourage the committee to continue to pursue an aggressive passage of this legislation. As I said, we are here to help, and look forward to doing that, and look forward to the day that this bill gets through the House and Senate and over to the White House.

    Thank you very much.

    Mr. BOEHLERT. Thank you, Mr. Clark.

    Mr. Keating, you strongly oppose this bill. Is it salvageable, or is it beyond redemption? Do you have any features in it that you——

    Mr. KEATING. I think it might be salvageable, but it needs a lot of work. I think the key principles and these principles, I think, are more understood now in the Congress than they have been in the past. One key principle is that insurance risk should be underwritten to the extent possible by people who have their own money at risk, directly at risk. I think it's very important to put private money up front in this type of approach. It's just not in the bill right now, Which is necessary to ensure that this is done in a financially sound way.

    Mr. BOEHLERT. You don't seem to have much confidence that we can find independent actuaries, because the Secretary of the Treasury would appoint the actuaries, the independent actuaries, for the NDIC. Don't you think it's possible to find people that are independent of mind that would give an objective——
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    Mr. KEATING. I think it's entirely possible. But there are a lot of questions raised by the bill about whether these people would have the gumption to actually be independent. One is what is the length of their term. The bill seems to indicate it's 6 years, although I think you could read it for a shorter term. But even at 6 years, the President, and there are some Presidents who are known to want to win the California vote. He might have concerns about rates that would be set at an actuarially sound level in California. If that's the case, within the President's term, it's rather easy to get a majority of the board of actuaries.His actuaries could keep rates too low, which would be popular with California homeowners.

    I also think there are other problems such as the burden of proof, and I'll read directly from the legislation here. I didn't quote it in my testimony, because it was a bit long. It says, the independent board may disapprove the rates or methodologies only ''if compelling and substantial actuarial evidence is presented on the record that the rates or methodologies are materially inconsistent with the actuarial soundness requirement.''

    Now, it also gives the board of actuaries only 90 days to review the business plan or any of the rate changes. I think 90 days is a pretty short period of time, especially when you consider NDIC is given 90 days to pay a claim. Now, paying a claim is a lot simpler than deciding if actuarially proper rates have been set.

    So I think it may be possible to come up with an independent board. But the way it's structured under this bill doesn't do the job.

    Mr. BOEHLERT. Mr. Borski.
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    Mr. BORSKI. Thank you, Mr. Chairman.

    Mr. Keating, based on your analysis of this bill, is it possible to estimate the potential cost to the Federal Government?

    Mr. KEATING. That's one of the things that I hope this committee, the Budget Committee and CBO will examine very carefully. There are several scenarios that I think should be projected by some highly qualified firms, working with CBO or perhaps the General Accounting Office, which expressed very strong reservations about this approach in the last Congress, and about the reinsurance, which has essentially been unchanged in this bill. I think serious cost modeling must be done by people who are independent and by people who have access to the full risk modeling tools that are now available in the industry.

    I'm not sure if the Congressional Budget Office has the expertise or even access to that knowledge and those tools. I hope CBO will work closely with some people who have developed those computer modeling techniques, and project what might actually happen. Because I believe that for some of the claims made by the Natural Disaster Coalition, the numbers just don't add up. The idea that everyone's going to be paying the same or less rates and making this actuarially sound at the same time, something here doesn't add up, and I'm not sure what it is.

    Mr. BOEHLERT. Mr. Keating, in all fairness, if I may interject here, that's not exactly what was said. We said some will pay more, some will pay less, and some will pay just level. I mean, I do want to be fair.

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    Mr. KEATING. Okay. Well, on the record today he was, I think, fairer and more complete in his descriptions. But other descriptions that I've heard from some of the outside supporters make it sound like that wouldn't necessarily be the case.

    Mr. BOEHLERT. Like the pot of gold at the end of the rainbow.

    Mr. BORSKI. Mr. Clark, I want to go right to you with that question. Some will pay more, some will pay less. How do we make this affordable while keeping the deductibles at a reasonable level? You say in your testimony that the reason most people give for not buying insurance is the high deductibles, not the higher premium or the cost of premiums.

    Does this bill solve that problem in your view, and if not, how do we solve that problem?

    Mr. CLARK. The bill certainly has the potential to solve the problem. It's based on spreading the risk. Californians would be spending, if they could get insurance, a lot less on a premium and probably deductible if everyone in California had earthquake insurance.

    So our premise always has been that you have to spread the risk out, which is why we suggested that we hit the whole target, not half of it. The taxpayer-homeowner ends up paying for it anyway. And I don't care if you are in Muskegon or Newport News, you're going to pay for a disaster.

    So we say spread the risk out and we believe, or we're not insurance experts, that those premiums and hopefully the deductibles will be reachable by the homeowner. I don't know. That's why I believe the committee has to determine that. If we create a bill that is not reachable, we really haven't solved the problem. But I have to think that we have enough intelligence in this town that we can solve this problem. So let's figure out how to do it. And this is the vehicle to do it, this bill. It's the only show in town, and as I said, I congratulate the Chairman for getting out in front and pushing so hard. We can't wait until another disaster. They're coming, we have five hurricanes in the Atlantic Ocean at one time. Those predictions are true.
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    So I'd hate to have to pass out three and a half by five cards in Florida or California or Texas or New York the next time a disaster hits, saying, thank you for your patience, we're still studying the problem.

    Mr. BORSKI. You also said in your testimony, however, that 30 percent of mortgages would not be covered by this, or 30 percent of homeowners don't have mortgages?

    Mr. CLARK. About 30 percent, depending on whose numbers you believe, but a good percentage do not have mortgages. So there's no way to reach them.

    Mr. BORSKI. And 60 or 70 percent, I'm not sure?

    Mr. CLARK. About 52 percent of those who do have mortgages are purchased by the secondary market, namely Fannie and Freddie. Fifty-two percent are purchased by Fannie and Freddie, which are Government-sponsored enterprises. About 11 to 12 percent are covered somehow by FHA or VA. So the Government does have a responsibility and a liability out there.

    Those portfolios are not covered for earthquake insurance. Thus you saw the problem in California that was recognized by Freddie Mac, when they mandated that condominiums be insured, or they're not going to buy the paper. That is a very small sliver. There is a much larger problem behind it. That will spread, we predict, after the next disaster, and you may have a mandate by the secondary market or lenders themselves that's really not enforceable. Because you can't mandate that people have insurance if they can't buy it. So we have extraordinary problems, and this bill concentrates on that problem.
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    Mr. BORSKI. Let me ask, this is the piece that I'm have the most difficulty with myself. As we spread the risk, you also spread the exposure. Does there have to be some kind of subsidization of this process?

    Mr. CLARK. I don't think so, because I understand, obviously that you spread the risk, you spread the exposure. But disasters aren't all encompassing. Northridge hit a specific area of the L.A. Basin. And the problem with a lot of the lending institutions is that they had a high concentration in those areas, probably the same problem with the insurance industry.

    So the assumption is that absent the entire State of California having an earthquake or the entire State of Virginia or New York or Florida getting hit with a category four or five, we think that spreading that base will indeed solve that problem, and maybe even to a certain extent reduce exposure, total exposure.

    Mr. BORSKI. Thank you, Mr. Chairman. Thank you, sir.

    Mr. BOEHLERT. Mr. Horn.

    Mr. HORN. Thank you very much, Mr. Chairman. I appreciate the opportunity to question these witnesses. I've listened to you gentlemen over the years. You do an effective job in particular in giving us some good advice on where economies can be found, and generally we've taken that advice.

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    Let me just ask you, in the thrust of the bill, is it doing more than simply improving the effectiveness with which money can be raised to solve these problems, so it is not emergency time here every few months or every year, whereas you know, things get tacked on to every train leaving the station. And sometimes these spending measures have nothing to do with solving natural disaster problems. So I think most of us agree we ought to have some kind of a fund that makes sense, that is collected in a rational way to solve these problems.

    One of the thrusts of this bill is not just the normal mitigation or restoration after the fact, but dissemination and education of the potential victim, if you will, of a disaster. And that could be any of us, anywhere, anytime, in this country. Very few states are immune from natural disasters. And I wondered what your thinking was on the preventive action aspect, where we are talking about dissemination and education as part of this picture. I think all of us who support this bill feel that it will ultimately reduce the cost to the Federal Government, the insurance industry, and so forth. People will be better informed, they will know how to turn off the gas, to use a few simple safety things, and of course, better building codes and other preventive measures.

    Do you have any feelings on that aspect of the bill?

    Mr. CLARK. I think it's necessary, because obviously the homeowner has an obligation to mitigate, not only for his own sake but for his community's sake. An example of course, there are two examples that come to mind, when Agnes hit, 35 percent of the damage didn't have to occur, if those codes were enforced, which means about $4 billion. I think homeowners have to be better educated as to what they're buying and make more demands that their homes that they're building are safe and sound. And so they will do the police work.
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    Going out to California, the same thing, there was a question I was asked by a homeowner, why should I retrofit my house, it's going to fall down anyway. It's not the case. The average claim was $20,000 as a result of Northridge. So we would encourage retrofitting. It saves money and it saves a lot of trouble and obviously a lot of time. It also saves the tax base in local municipalities. So I think that's something that has to be encouraged.

    Mr. HOFFMAN. I think it's great to take a proactive approach to educate homeowners in high risk areas as to what they can do to avoid personal losses. And also in the case of federally-backed mortgages, in order to let them know what they can do to avoid soaking taxpayers. If we can lower the damage to properties, either through better enforcement of building codes or through some other mechanism, and that by necessity takes the American taxpayer off the hook, then that's something that we think is a fabulous idea.

    Mr. HORN. Thank you.

    Mr. Keating.

    Mr. KEATING. Well, Congress, over the years has required all kinds of disclosures to people who take out loans to purchase homes. I don't know what disclosures are required, if any, about living in high hazard areas. If that's not something that's addressed, that's something that Congress should perhaps look at. Because it's quite possible that someone moving down from Illinois, to somewhere in Florida, doesn't know that they built their home, or are living in a home in a very high risk area. They may know nothing about how to deal with hurricanes or even the financial risks to their nest egg in the home.
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    There are all kinds of disclosures, as I said, on the annual percentage rate and so on and so forth. Perhaps there should be disclosures if there aren't some now about the types of risks involved in having a home in that area, and a loan, based on that home.

    Mr. HORN. How would you achieve that type of disclosure? What is your suggestion?

    Mr. KEATING. Well, I think some of the disclosures that the seller would be required to disclose as part of the normal selling process so the buyer knows what they are buying, in essence. I noticed an article in the Washington Post a few weeks ago, about people who bought property in the flight path of Dulles Airport. How can someone buy a house there and then move in and somehow claim that they don't understand planes come in for a landing, I think is remarkable. The people who sold the homes claim there were disclosures. One wonders how thorough they were.

    So you can imagine, if people don't know about airplanes landing over the house that they've bought, how much do they know about earthquakes, floods or hurricanes, and how often disasters might strike or what the risk might be to their home mortgage loan?

    Mr. HORN. Well, would you make that a national law in terms of——

    Mr. KEATING. Well, I'd prefer a local approach. But certainly, if Congress is going to require other disclosures, it might seem appropriate to do this kind of disclosure. So I'll leave it at that.
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    Mr. HORN. Sometimes you do not know, in good faith, and then the next earthquake reveals a new fault nobody knew existed. That happened within a mile of the university.

    Mr. KEATING. Or a volcano could blow, and it's been dormant for centuries.

    Mr. HORN. Exactly.

    Mr. KEATING. I have a friend of mine who was eating breakfast in Portland, Oregon, and there, up went Mount St. Helens. It was quite a sight. I think he was pleased to be in Portland rather than hiking on the mountain that day. Things can happen quite unexpectedly.

    Mr. HORN. Well, I thank you all for your fine testimony. Thank you very much.

    Mr. BOEHLERT. Thank you. Thank you, Mr. Horn, and thank the witnesses. And I know you will be available. We may be back to you with some more questions. Thank you.

    The next hearing will be Thursday, November 2, at 10 a.m., Room 2167. We'll hear from the Federal panel, consisting of GAO, FEMA and Treasury. We'll have a technical and mitigation panel, which will include state emergency managers and the Association of Flood Plain Managers. We'll have some additional testimony from stakeholders, homeowners and real estate interests and probably some more commentary from the insurance sector.
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    I thank you all. This hearing is adjourned.

    [Whereupon, at 3:30 p.m., the subcommittee was adjourned, to reconvene at the call of the Chair.]

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