INDUSTRY INSURANCE POOL

The insurance pool authorized by the bill could be an association of private insurance carriers formed to provide flood insurance. It would be open to all qualified companies which are licensed to write property insurance under the laws of the separate States. Relations between the Government and the insurance pool would be governed by a syndicate. agreement setting forth the conditions of operation.

Participation in the pool by private companies could take the form of risk capital participation, in which case the companies would agree to meet the minimum requirements or more for a risk capital commitment. Or, some companies could elect to operate as fiscal agents for risk-taking members of the pool. From a public policy point of view, the significance of this arrangement is that small companies with limited capital resources would not be prevented from participating.

OPERATION OF THE POOL

Participating member companies of the pool, either as risk takers or as fiscal agents, will sell and service policies in much the same way as they now sell insurance against fire and other perils. Their relationship with the pool would be governed by agreement. As fiscal agents they will be paid fees for the selling and servicing of policies. As risk takers, they will share in the aggregate profits or losses of the pool's operation for an accounting period. Risk-taking member companies will be jointly liable for the payment of claims by insolvent members. It is worth noting here that the pool is a "pass-through" organization. From the point of view of Federal income taxes, companies participating in the pool will be taxed on the same basis as they are now. No exemptions from Federal income taxes are contemplated by the bill for individual companies.

As I indicated earlier, the Government-pool relationship will be governed by an agreement setting forth the financial and other arrangements. The Government will be dealing with the pool in a venture which might be described as part partner and part reinsurer.

FINANCIAL ARRANGEMENTS WITH GOVERNMENT

For several months, discussions have been going on between Government and industry on the financial arrangements which could be made for operating the proposed joint venture in a flood insurance program. An understanding has been reached on the broad features of expenses, losses, and profits. The details have yet to be worked out and these details would be the substance of the negotiation authority provided for in the bill between the Secretary and the industry.

It is these broad features of the financial arrangements that I would now like to discuss.

One key feature of the financial arrangements is that Government and industry will both share in expenses and losses of the insurance operation. The basis for this sharing will be the same as the sharing in the risk.

The sharing in risk is measured by the relationship between chargeable premiums-that is the subsidized premiums which policyholders pay and the estimated premiums-that is the premium needed to

cover the actuarial risk plus operating costs and allowances. The Government assumes that proportion of the risk represented by the difference between the chargeable premiums collected and the estimated (actuarial) premium amounts needed to cover the actuarial risk plus operating costs and allowances for all policies written and in force under the program.

If chargeable premiums written in a calendar year equal a high proportion of the estimated premiums, then the Government assumes a low share of the cost of expenses and losses. By the same token, if chargeable premiums equal a low proportion of the estimated premiums then the Government assumes a high share in expenses and losses. This exact proportion established for annual periods with respect to the relationship of chargeable to estimated premiums governs the split in expenses and losses for the annual period.

What this proportion will be for any period will depend on two things: (1) The minimum premium policyholders will be expected to pay and (2) the distribution of premiums written among the various flood-risk zones. If most of the premiums written are for coverage on existing structures and in high flood risk zones, the Government's share of the split will be high. This will very likely be the case in the early years of operation. It is fair to expect those with a greater awareness of the flood peril to be the more numerous among the first customers for flood insurance. As the program develops and homeowners in less hazardous zones begin buying insurance, or as new or substantially improved properties come in, the Government's share of the risk will decline.

A second feature of the contemplated arrangement is that the pool. will be entitled to profits. There should normally be profits in years when there are no flood losses or only small losses. In years of large flood losses, there will be no net income and consequently no profits to be distributed by the pool to risk participating members. Profits, however, will be limited to a reasonable level and will not consume all of net income. A significant share of this net income will go for reinsurance.

This reinsurance is the third feature of the arrangement.

In years of low flood losses, the residual income after profits will be paid to the Government to purchase reinsurance for the pool in those years in which there are large flood losses. In such years, it is most unlikely that the chargeable premiums of an annual period will be sufficient to cover the pool's share of the losses. It will be recalled from my earlier discussion of the first feature of the contemplated arrangement that Government and industry will share in expenses and losses. To the extent that the industry's share of losses cannot be covered by premium income and risk capital, reinsurance payments will be available from the Government.

The final feature of this arrangement is the risk capital committed to the pool by risk-taking members. These pool members will commit their own resources for losses up to a specific stop loss limit which the pool may sustain. Subject to this specific stop loss limit, the amount the pool may lose in any year will be determined on essentially the same basis as losses and expenses are shared between the Government and the industry.

As the program develops, it can be expected that the industry's risk and share of losses will become greater as existing properties are sub

stantially improved or replaced by new properties and as more and more of the chargeable premiums become full-cost premiums. At some time in the future, it is possible for the chargeable premiums to equal the estimated premiums. At that time, the Government will have no liability for expenses or losses, except with respect to reinsurance that may be needed against catastrophic losses.

At this point, with your permission, Mr. Chairman, I should like to have Mr. Kaplan detail for you the method by which actuarial rates are determined in a community exposed to flood peril. He will also spell out the details on the actuarial arrangements being considered for the sharing of risk between Government and industry in our proposed joint venture program.

Mr. Chairman, I believe the national flood insurance program which would be authorized by S. 1985 will make possible fuller and more equitable compensation of the losses sustained by those injured by floods. It will allow greater contribution to the cost of maintaining property in flood-prone areas as a site for new construction. For all these reasons, I urge the committee to consider favorably this legislation.

Senator WILLIAMS. Well, my preliminary comment is that it is very obvious from your statement and from all that I know prior to your statement, that the Department has considered this in considerable depth, and, I would say, come up with a complicated answer, but a workable result.

Mr. WOOD. I appreciate that, Mr. Chairman. It is a complicated program, but it has been a complicated problem.

Senator WILLIAMS. I wonder if you gentlemen, if you have no time problems, would pause a moment so that we can hear from the Representative from Alaska, whom I know has to get back to the House floor-Congressman Howard Pollock. And I will say that I do not know whether he was in Congress at the time.

Mr. POLLOCK. I am the Congressman.

Senator WILLIAMS. One of your predecessors, Bob Bartlett, was very helpful in the early stages of the program. You are here to support this program, are you not?

Mr. POLLOCK. Yes, I certainly am.

STATEMENT OF HOWARD W. POLLOCK, U.S. REPRESENTATIVE FROM THE STATE OF ALASKA

Mr. POLLOCK. Mr. Chairman, Mr. Brooke, members of the committee. I would like to very briefly indicate to you that but from the preliminary information that I have heard I think it may be the proper direction to go. I have not read S. 1985 and have only heard part of the testimony this morning.

The only comment that I had was that I feel that maybe we are not being imaginative enough, we are not looking at the whole picture. The thing that bothers me is this: I feel that there has been a compelling need for many years for a Natural Disaster Insurance Act, not a flood disaster, not a tornado disaster, not a hurricane disaster. not a tsunami disaster, but disaster insurance that would cover all of these. I realize that it will be a complicated solution, but this is the only answer. There is nothing I would like better than to see a risk

sharing proposal for a Natural Disaster Insurance Act during this year. If we do not do it now, I think we are going to be compelled to do it at some point.

We have, year after year and every year, disasters of one kind or another. There will be others the next year, the next year or the year following. If we do not have floods, then we might have hurricanes or the seismic waves or tsunamis or massive earthquakes or earthslides. I had the experience of being in the 1947 hurricane in New Orleans, and I saw many homes destroyed, badly damaged, and many others completely destroyed. I noted with interest at that time that the insurance the homeowners carried covered the damage that was caused by the hurricane, but it did not cover the damage caused by the flood that followed the hurricane.

So the adjusters had to go in and look at one part of the damage and say: "Well, this was caused by the hurricane and we can cover that, but that was caused by the flood, and we cannot cover it." This was ridiculous.

I was in the 1964 earthquake in Anchorage. It was a horrible experience. And I would like to say parenthetically Mr. Chairman, that it was a wonderful thing that the U.S. Government did, that you and the other Members of Congress did, in helping us. In 1964 we were knocked down flat on our backs, and it was hard to get back just to our knees and then back to our feet and start moving again. You helped us to do that.

I am not going to take too much more of your time. I know you have a great deal of testimony to hear.

I am very interested in the provisions of S. 1985. I would urge that you give serious consideration to expanding the bill to these other areas. I feel it is inevitable that we do this because each year the Government is faced with the problem of trying to help disaster-stricken people who are absolutely incapable of helping themselves. In many cases, such as Alaska's, the entire economy was knocked out. Alaska was given many opportunities to recover. But there was a great deal of money, time, and effort that had to be expended by the Congress, by the administration, by the entire Federal Government, which I think could have been avoided if we had had a natural disaster insurance program.

If there are any questions, I would be very pleased to answer them. I hope that some thought will be given to expanding the program and not keeping it too restricted.

Senator WILLIAMS. My observation is that when we resolved that there should be a study, it would include all natural disasters, and this was done at the particular request of Senator Bartlett from your State. And as I understand it, the continuing study of other natural disasters is in this bill. Am I right?

Mr. KAPLAN. That is correct.

Senator WILLIAMS. I certainly agree with you in your conclusion. I will say probably in the actuarial mechanism and the actuarial finding it might be a little harder to come to a reasonable pooling of Federal and private responsibility in this area. We sure agree with you. Mr. POLLOCK. Well, Mr. Chairman, I have in preparation-a bill which would expand this bill and provide for insurance for all types of disasters. And before I introduce it, I am going to study S. 1985

carefully to see if my ideas cannot be tied in with it. It seems to me that we have actuarial statistics that go back at least half a century. Statistics are readily available on the annual losses in each one of these areas I am concerned with-hurricane losses, flood losses, tornado losses, earthquake losses.

Senator WILLIAMS. Agreeing as I do with you, you would not suggest that we hold up consideration of this, tying in the total comprehensive natural disasters?

Mr. POLLOCK. Mr. Chairman, I would not want to hold up the bill, and not get anything at all passed. Not having read S. 1985, which was just introduced, I am not sure of all of its provisions. I listened to a part of the testimony just now. I am delighted with what I hear. But I think this is the time to consider the total problem. If the total problem is something that could not be solved this year, then certainly I would say that we should pass the flood bill even though it is restricted. If it can be expanded, I would like very much to have it expanded to include the total problem.

I have nothing further, Mr. Chairman.

Senator WILLIAMS. You certainly have authority on the problems of natural disasters. Do you have any further comments or perhaps questions of the witnesses?

Mr. POLLOCK. Well, again, if I had time to do some preliminary work, I am sure I would have had some questions, but I do not have anything further now. And I certainly appreciate the opportunity to testify.

Senator WILLIAMS. We are grateful to you.

Mr. POLLOCK. As a matter of fact, I had to leave House Interior and Insular Affairs Committee, and I have to go back to the committee now.

Senator WILLIAMS. All right, Mr. Kaplan.

Senator BROOKE. Before we get to the charts, Mr. Chairman, may I ask a question?

Senator WILLIAMS. Yes.

Senator BROOKE. I was tempted to say "Professor."

Mr. WOOD. That is an obsolete term.

Senator WILLIAMS. You are from Jacksonville, Fla., but you have more recently lived in Massachusetts.

Mr. WOOD. I am a resident of the Commonwealth.

Senator BROOKE. Professor, how much consideration have you given to the constitutionality of the provision of the bill whereby new property owners are excluded?

Mr. WOOD. I believe, Senator, the constitutionality was reviewed by counsel. I believe you can ask Mr. McGrath to comment on that. Senator BROOKE. Mr. McGrath?

Mr. McGRATH. Yes. Senator, we reviewed that, and we do believe it would be constitutional. The constitutionality of these provisions would be upheld as a proper action of the Congress in distinguishing between existing developed properties and presently undeveloped properties in the flood plain for a public purpose in the general welfare; that is, to encourage development where it will not be exposed to the flood hazard.

(The following letter and memorandum was subsequently received from the Department of Housing and Urban Development.)