How much of the loss will be assumed by the insurance industry? Mr. GARLOCK. Senator Brooke, the insurance industry will assume loss in proportion to the chargeable premium to the total actuarial premium. This part of the premium paid by the policyholder would represent our share of the loss. And in a year of high loss it would represent actual loss to us with no profit. So we have a definite exposure to loss.

We are envisioning an industry pool that would develop a capacity of $50 million. This would relate to the term in the legislation of "risk capital." We use the term "capacity" to refer to this.

This would mean that, once the program is fully developed, once insurance is widespread, we could have actual loss to the industry of $50 million in a given year.

Naturally, as the program is beginning, when premiums are limited to a relatively small number of insureds, we would not expect to expose our full capacity at this time. We would gradually increase our capacity to the maximum of $50 million as the total premiums from policyholders increased.

Senator BROOKE. Your loss potential under this program is much less than it is under any other of your insurance writings? Is that correct?

Mr. GARLOCK. That would be true, Senator Brooke, yes.

Senator WILLIAMS. On all the others you go it alone. You don't have a partner.

Mr. THOMAS. Yes.

Mr. BAILEY. I would qualify that, Senator Brooke, by saying this $50 million is in addition to the full expenditure of the premium income that we derive from this program.

We first spend the premium income and then will risk an additional $50 million of our money, if you will, other than premium moneys in this venture.

Senator WILLIAMS. Are you talking for the pool now?

Mr. BAILEY. Yes.

Senator WILLIAMS. That is the risk capital involved here?

Mr. BAILEY. Yes. We will seek and are seeking to form a pool with a total annual capacity of $50 million, which means a $50 million potential loss to the industry in any 1 year.

Senator BROOKE. But the industry is in a much better position under this program that it is under any other?

Mr. THOMAS. And essentially so we think too, Senator.

Senator BROOKE. Why is it you have not been able to get a substantial number of companies, or why is it there are still outstanding a substantial number of companies who have not cooperated with the program?

I think you referred on your last page to "many companies" which are potential risk-bearing members of the proposed syndicate who have not participated nor have they seen the bill.

Is there reluctance on their part? Is it limitation of profits? Or is there some particular part of the program which is not attractive to them?

Mr. GARLOCK. Senator Brooke, the companies that we list-and there are some others as well that have already evidenced an interest in this association-while relatively small in number, represent in

excess of 50 percent of the property insurance written in this country. So we are talking about a fairly substantial portion of the market.

Up to this point many other companies have not had an opportunity to discuss the details of this program.

By its very nature it is somewhat complicated. And we felt we should have the accomplished legislation and a formalized program to present to these companies.

The companies you see listed, in effect, are taking a leadership position for the insurance industry.

Senator BROOKE. Are you optimistic about having other companies join in the program?

Mr. GARLOCK. Yes, sir: I am.

Senator BROOKE. Mr. Wood said yesterday that so far as HUD was concerned they were ready to put the program into operation, and if the legislation passed they would have a program within a year I believe in operation. Is this also the position of the industry at this time?

Mr. GARLOCK. Yes, sir.

Senator BROOKE. Is there much more still to be done? Or do you feel that the program is ready to be put into operation within a very reasonable period of time?

Mr. GARLOCK. We would have details to work out, primarily the provisions of a contract with HUD.

Following the completion of this contract, we do not believe we would have any difficulty meeting the deadline established by the bill. Senator BROOKE. Do you foresee any problem areas in the contract with HUD, serious problem areas that could forestall the program for a long period of time, say beyond a year?

Mr. GARLOCK. We do not know of any serious problems that would forestall the implementation of this program.

Senator BROOKE. Are you concerned with the possibility that Government might be going into the insurance business, as was brought out yesterday by Mr. Wood, for instance, that HUD might end up in the insurance business itself? Do you recall that colloquy yesterday? Is that a concern to the industry at all?

Mr. THOMAS. I think

Mr. GARLOCK. We believe that the insurance industry performs a valuable function in this country and that it meets in most respects the needs of the insuring public. We are concerned when the Federal Government ventures into the insurance field, yes.

Senator BROOKE. You do not want the Federal Government as a competitor, do you, in the insurance industry?

Mr. GARLOCK. We certainly do not.

Senator BROOKE. Do you believe that you have got safeguards in this legislation?

Mr. BAILEY. We believe that the burden is on us to cooperate with HUD and develop a partnership program, as we are prepared to do. And if we do that, then we would consider the alternative of a Federal Government program alone as being unnecessary.

Senator BROOKE. And you do not believe then that the fear that HUD might have to take over the actual underwriting of some of the insurance is a very real fear?

Mr. GARLOCK. I don't believe this will ever happen.

Senator BROOKE. Even though under this legislation they do have the authority, because the authority is spelled out in the legislation, as you are well aware?

Mr. GARLOCK. Yes.

Senator BROOKE. You do not believe it would ever happen?
Mr. GARLOCK. No, sir.

Mr. BAILEY. Their testimony indicated a preference for a partnership arrangement. Our testimony indicates a preparedness on the part of the private industry to engage in that. And hopefully those two come together.

Senator BROOKE. Isn't that the way it usually starts off-with a partnership arrangement at first-and before long

Mr. BAILEY. This program offers the opportunity of increasing steadily the percentage of the risk borne by private industry and correspondingly reducing, over time, the necessary participation of the Federal Government.

We would support this tendency and trend as being adequate safeguard in this case.

Senator BROOKE. In your discussions have you ever discussed how much money the Federal Government would, say, be called upon to spend in any given year, say in a year where the flood damage is not great? What are we talking about in terms of money as far as the Federal Government would be obligated to pay?

I know it is difficult for you to pin it down, but what are we talking about?

Mr. BAILEY. We have not tried-perhaps HUD has to project this. The bill provides for a maximum of $2.5 billion of coverage outstanding. This projected into number of homes would suggest 200,000, perhaps each insured for from $10,000 to $15,000.

Depending on whether those homes were predominantly in highhazard areas where the proportion of premium equalization to the total premium was high or distributed more generally, as we would hope and expect that our production forces could accomplish reasonably soon, the expenditure to the Government would be heavily influenced by this consideration.

Senator BROOKE. Even if there is no loss, the Federal Government is still obligated to pay a portion of the administrative cost, is it not? Mr. THOMAS. Yes.

Senator BROOKE. There are other expenses the Federal Government would have to pay proportionately. So if there were no loss at all, the Federal Government would still have a rather sizable obligation, would it not?

Mr. BAILEY. Well, the proportion of the total premium for losses will be the dominant part. As Secretary Wood indicated yesterday, we have not been able to make a definitive determination of the expenses of administering this program.

Senator BROOKE. The dominant part, of course. But there is also a substantial sum of money that would be spent for administrative costs. Mr. GARLOCK. Senator Brooke

Senator BROOKE. I am talking of substantial compared to dominant. The dominant I am sure, if you have losses, is going to be greater, much greater, than the administrative cost.

But the Government is still obligated to pay administrative costs under this program if there is no loss at all.

Mr. GARLOCK. That is right, sir. But in a year of very low flood losses and here we must assume, as we have in our testimony, the establishment of actuarily sound rates, rates that will support the losses over a long period of years.

So that in low-loss years any excesses would be paid to the Government in terms of a reinsurance premium for the protection they are providing. This would mean, as to the reinsurance or the excess of loss protection, that this over a period of years should be a washout. It should be a balance point as to reinsurance.

Now, if we consider the premium equalization payments, this is a decision by the Government that persons exposed to the hazards of flood are either unable or unwilling to pay for this protection to its full cost and yet must have the protection. It is here in the premium equalization payment that the expenses arise, because here the Government has made a decision to assist its taxpayers exposed to the peril and will be contributing to the expense of operation of the program. Senator BROOKE. Will the Federal Government ever get out of this business do you foresee? Will the industry ever be able, say, to absorb this risk? Or is this something where the Federal Government, once entering into it, will henceforth and forevermore be a partner?

Will this be an annual appropriation every year? I understand it would depend upon whether we have great flood loss or whether we have less people living in flooded areas and all these imponderables. But, on the other hand, does the industry foresee the Federal Government ever getting out of this business, or will it be more and more involved in it?

Mr. GARLOCK. We would certainly hope that the insurance industry would be able to eventually undertake the entire program as we develop experience.

Our aim would be to work toward removing the Federal Government from the program as fast as we could.

I think realistically we must assume that the Federal Government would be involved in the program for quite a number of years.

Senator BROOKE. There is no limitation on the contract with the Fed. eral Government. There is no term here involved at all. There is annu. ally by appropriation I am sure, but, generally speaking, you have not said, "Let's try this for 5 to 10 years," or anything of that nature.

But it is in the mind of the industry that at some time the industry through experience, and hopefully through infrequent floods and disaster, will be able to work its way around to taking this on itself as a private matter and not having the Federal Government involved? Is that right?

Mr. GARLOCK. We would certainly hope to.

Mr. BAILEY. The most likely continuing involvement of the Government would be the decision not to have the policyholder bear the full cost of insurance but through the premium equalization payment put a ceiling on how much the policyholder would pay, with a proportion. ate share contributed to it by the Government.

This is really not an insurance industry involvement with the Gov. ernment. This is a Government decision on behalf of the policyholder not on behalf of the insurance industry.

Senator BROOKE. Yes; I understand that. The Government benefit is for the policyholder rather than for the insurance company.

Counsel, were you present yesterday in the hearing?
Mr. THOMAS. Yes, I was.

Senator BROOKE. On the question of the constitutionality that I raised with Mr. McGrath and Mr. Wood, do you have any suggestions? Have you looked into the possible constitutional problem so far as class is concerned-new home ownership in these areas?

Mr. THOMAS. To be perfectly honest about it, we have not, since we will have no part in these provisions really. They go primarily to the land use provisions in the bill. And we thought perhaps it might be a touch presumptuous for us to advise the Government on its rights and obligations here.

Senator BROOKE. I just thought since you were a partner that you would be interested as well.

Mr. THOMAS. This is a portion of the partnership that we hope they will assume, because, frankly, we think that if there are prerogatives here, they rest with the Government and not with us.

Senator BROOKE. Of course, Mr. McGrath said he had looked into it, and I just wondered if the industry had been concerned about it. All right. I have no further questions. Thank you very much. Thank you, gentlemen.

The next witness will be Wallace M. Smith, American Mutual Insurance Alliance, and Mr. Harold W. Walters, executive secretary of the National Association of Mutual Insurance Companies.

In the absence of the chairman, Mr. Smith, may I welcome you to our hearing.

I know Mr. Walters is with you. Would you introduce your other associate?

STATEMENT OF WALLACE M. SMITH, AMERICAN MUTUAL INSURANCE ALLIANCE; ACCOMPANIED BY HAROLD W. WALTERS, EXECUTIVE SECRETARY, NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES; AND F. A. HOLDERMAN, MANAGER, LEGISLATIVE BUREAU

Mr. SMITH. Thank you, Mr. Chairman.

My name is Wallace M. Smith, and I am manager of the midAtlantic office of the American Mutual Insurance Alliance.

On my left is Mr. F. A. Holderman, manager of the legislative bureau of the American Mutual Insurance Alliance.

I think that you stated that Mr. Harold W. Walters is executive secretary of the National Association of Mutual Insurance Companies. We thought in the interest of saving time that we could combine our statement, and we have done so.

Senator BROOKE. Thank you very much.

Mr. SMITH. The American Mutual Insurance Alliance (AMIA) is a voluntary trade organization consisting of 120 mutual fire and casualty insurance companies. The Alliance's principal office is located in Chicago and it has branch offices in New York City, Boston, Atlanta, Denver, San Francisco, and Washington, D.C.

The National Association of Mutual Insurance Companies (NAMIC) is a trade association consisting of more than 1.100 mutual insurance companies whose office is in Indianapolis, Ind. We appear in support of the flood insurance proposal encompassed by S. 1985.