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to recommend the creation of some kind of an insurance system, but we are not yet at that point.
Is the committee staff knows, there was a general consensus among Federal agencies that the most feasible way to focus the problems of disaster insurance, with particular reference to floods, was to attempt to establish sound criteria to govern establishment of a flood-insurance system. As is often the case when there are many and serious imponderable factors, it seemed best to attempt to do this by drafting a series of legislative provisions which could provide a working basis for continuing study. By this device it appeared feasible to establish a common line of departure for the work of the several agencies concerned.
There has been consultation with representatives of the insurance industry and the first and undoubtedly the most critical hurdle to be got over is the fact that, generally speaking, the insurance companies do not today write flood insurance. There is a strong and responsible body of opinion that floods do not represent an insurable risk at premium rates which it is possible for most persons to pay. I do not know whether representatives of the industry are prepared to testify in the course of these preliminary hearings or whether they are now prepared to take a firm position on the feasibility of any system of flood insurance, whether public or private. Nevertheless, the executive branch believes that we must accept the fact that flood insurance is not now available.
Therefore, if a system of insurance is undertaken, it seems to follow that the leadership must come from the Federal Government. If it proves feasible, it should become a private system as rapidly as circumstances permit.
Starting from these premises, it then seems to us that any public program of flood insurance must be governed by six additional criteria, as follows. May I say at this point, Senator Lehman, as I go through these six points, if you or your colleagues or, for that matter, if you wish to have the staff interrupt with questions, please do so. I do not insist on following them all the way through.
Senator LEHMAN. Thank you.
Mr. JONES. 1. The program must be experimental, that is, limited to a fixed period of years and kept flexible enough in authorization to permit experimentation, continuing study of the problems involved, and reviewed by the Congress within a reasonable period of time.
2. There must be a modest overall limit to the amount of insurance which can be issued in the experimental period. In this connection, it appears that there is no way of knowing whether, assuming premium rates are reasonable, there will be a wide demand for such insurance or whether it will meet with little popular response. Opinions on this score differ widely. Hence, a fixed limitation seems a wise precaution.
3. Since there are no actuarial data whatsoever to provide a basis for establishment of premium rates, wide administrative authority will probably be necessary to any agency charged with the insurance responsibility to set premium rates. Ideally, of course, the premium intake should be sufficient to establish reserves adequate to cover losses and to pay administrative costs. If reserves are not adequate, then it stands to reason that the most careful assessment must be made of the extent to which a subsidy element is needed to make the program feasible on a continuing basis.
4. There must be a limit on the overall amount of insurance which can be written for any individual or any firm and the insurance should be limited in coverage. From the discussions thus far held, it seems most feasible to consider coverage on real property and what, for lack of a better term, may be referred to as business inventories, including agricultural commodities and growing crops, and the property of State and local governments. The problems of insurance of all kinds of private personal property appear to present so many difficulties that for the moment at least serious consideration is not being given to the inclusion of private property.
5. As a device for holding down premium rates, the principle of coinsurance should be considered. The best device for this purpose
. appears to be either a flat amount or a percentage amount deductible. This is a common feature in automobile collision insurance, and it is thought to be worthy of most careful consideration.
6. In order to obtain the help of the insurance industry and the kind of judgment which only private insurance companies can develop, the system should contemplate use of the companies as agents in selling the insurance, in settling claims, and in evaluating the administrative and actuarial problems involved. Through such cooperative arrangements, it will become possible to decide whether the system can become a nonpublic enterprise, successfully handled by the private companies.
These are the tentative conclusions we have reached as to criteria which are inclusive enough to permit development of a sound and workable system. Other possible alternatives to an insurance system also are being studied. These other possibilities would include an extension of the scope of natural disaster relief as hitherto handled by the Federal Government under provisions of Public Law 875 of the 81st Congress, but with strengthened provisions for State and local financial participation.
Another possibility would be the creation of an entirely new Federal grant-in-aid program for the alleviation of personal loss in disasters. Under such a program the Federal Government might share with the States and local governments the cost of rehabilitation and restoration grants to individuals who had suffered severe property loss in disasters important enough to be considered national in their scope and impact.
The problems of constitutional limitations on this possibility in a number of States will require very careful investigation. Some States apparently cannot use general tax revenues as grants for disaster relief, that is, without constitutional revision.
At this point, if I may stop for just a moment, I would like to say that with respect to this idea it has been advanced recently by a good many people, partly I believe because they feel that the insurance companies have taken so firm a stand against the concept of insurable risk in most of the kind of disasters with which the committee is concerned that they fear the element of subsidy will be very large from the beginning and that therefore it would be well to consider immediately the possibility of a grant-in-aid program.
We feel, from the amount of work that has been done on it, that there are very serious problems not only from this point of view of the limitations of State constitutions but also from the point of view of the establishment of necessary formulas for Federal participation. Furthermore, we wonder whether under any system that the committee may wish to consider seriously there should not be some kind of a requirement that the individual assume some responsibility himself to provide some of the protection which obviously is necessary.
The final possible alternative that has been suggested in these recent weeks is a cooperative Federal-State insurance system. On this may I say that we have hardly known even how to begin to approach that. The variety of laws governing the participation of the States in such a system seem to present very considerable handicaps, but there are advocates of this point of view who believe that we might be able to get somewhere with it if we could take it up in a serious way with the governors' conference and with the insurance agencies of the several States.
That concludes this little outline, Mr. Chairman, which I was asked to make this morning. I should be glad to answer any questions if you wish to ask them or turn forth with back to my place and let the other witnesses come forward.
Senator LEHMAN. Thank you very much, Mr. Jones. There are a few questions that I would like to ask you.
You refer to the advisability of setting this up on an experimental basis. I suppose when you say that, you want to limit the time during which the Federal Government would be committed to carry on this work?
Mr. Jones. Primarily limited in time. Senator LEHMAN. Have you any idea or thought as to what period of time that experimental phase should cover?
Mr. JONES. Perhaps 3 years. Something of that kind.
Senator LEHMAN. Have you looked into the question as to what Government agency should administer the program if such a bill is enacted?
Mr. Jones. Yes; we have, Senator Lehman. There are several possibilities. There is, of course, first off, the possibility that the Federal Civil Defense Agency might do it since they are now concerned with the coordination of disaster relief under Public Law 875. It has been suggested, however, that Civil Defense has not had insurance experience and that, therefore, it would be better to turn to an agency which has had extensive insurance experience, particularly since housing is one of the chief things that would be covered. Therefore, the Housing and Home Finance Agency has been suggested. In the Bureau of the Budget, which has some responsibility for Government. organization matters, we are inclined to favor that idea rather strongly.
Still another suggestion has been the Small Business Administration, which has done, we think, a magnificent job in the last few months in its handling of the small-business loans and the housing loans which they can make under their program in this most recent series of disasters in New England and New York, New Jersey, and Pennsylvania. Those, I think, would be the three chief candidates.
There are some people who say that this thing is ultimately going to assume such proportions that we should from the beginning contemplate the establishment of a new Federal agency into which there could be placed not only this new program, if it is authorized, but also some of the existing programs like Federal crop insurance, for example.
I have not though that through. Our organizational people have not thought it through. But there are many people, of course, who would say that you should not separate these things from the agencies which have the chief program responsibility and that to take crop insurance out of Agriculture would be a serious mistake. We have no fixed conclusions.
Senator LEHMAN. Have you any fixed views as yet as to whether the coverage of the program should be limited to flood losses or include all natural disasters?
Mr. JONES. No; I do not think we have, Senator Lehman. The situation, of course, has been one in which the focus of attention has been on floods. There are undoubtedly, equally serious problems, all deserving of very sympathetic consideration at both ends of Pennsylvania Avenue. But there are, as you said in your opening remarks, so many uncharted paths that have been laid out that how these things may ultimately be made to interknit and whether it would be well to put them into a common system we are not sure.
Senator LEHMAN. Are you making a study of that now?
Mr. JONES. To date the attention in the executive branch has been largely given over to floods. Of course, there is some thinking going on all the time with respect to related problems.
For example, the Office of Defense Mobilization has been concerned for a rather considerable time with the whole problem of what you might call war-risk insurance or indemnification for war losses, some of which might be contemplated under your draft bill which runs to the fall-out problem of atomic radiation and things of that kind.
There are other problems in the agricultural field on how you mesh drought insurance, for example, together with the other natural disasters.
And then when you get into the field of man-made disasters, if we may consider smog, for example, a man-made disaster, and most authorities seem to, I think the problems are those of possible private insurance company coverage from the beginning. It could be of the same kind that you can now get on windstorm and hail and tornado and earthquake, things of that sort, this set of problems just has not been examined carefully enough from the executive branch point of view to make us feel sure.
We see many facets to this problem, and we do not know whether they will blend or whether they won't. If they won't blend, then we would try—at least our recommendation would be to the Congress—to keep them separate.
Senator LEHMAN. Am I right in believing that during the last war the Government did provide war-risk insurance !
Mr. Jones. Yes; the Government did. It was not a big program. I do not have the actual figures at my fingertips. Of course, we weren't invaded and we weren't bombed, and my recollection is, I think the Small Business Administrator has the actual figures, that there were less than $2 million in claims paid and many, many times that in premiums taken in, so it was not a very big program.
Senator LEHMAN. You in your statement suggested that the coverage in the case of floods should be limited to real property and to what I believe you described as
Mr. Jones. Business inventories.
Senator LEHMAN. Business inventories. Why do you limit it to real property in the case of private ownership? My experience has been--we had floods in New York State while I was governor-that there were tremendous losses to homeowners by reason of the flooding of their cellars or even 1 or 2 floors of their houses where their furniture and equipment were so badly damaged that it couldn't be used. I was wondering why you excluded those.
Mr. Jones. I think so far, Senator, the reason for exclusion has been lack of any conviction that we could solve the problems on any other basis.
If I may illustrate just very briefly, sir, when you get into the question of household goods, the problems of valuation and depreciation, the problems of current maintenance of inventory figures as to what is in the house on a basis which would be acceptable to anyone who was adjusting or settling claims present some very real difficulties,
Then when you move over into the field of nonbusiness inventories of the manufacturer or, for that matter, the retailer or the wholesa ler, you run into something of the same kind of a problem by virtue of differing laws in differing jurisdictions as to when something becomes part of the realty and when it remains personal property.
We have not found any easy answer to the method of handling depreciation factors. Would you depreciate on a straight-line basis as some jurisdictions do for taxes, thus affecting your insurance coverage year by year, or should allowances be made in the insurance because a man's problem is the replacement cost. It has been argued that if he is wiped out he should be insured on a basis which would permit him to replace, that it isn't enough to cover him on what the remaining net worth of his property may be.
Senator LEHMAN. Of course, in fire insurance, privately administered fire insurance, they do recognize losses caused by damage from water.
Mr. Jones. Yes,
Mr. Jones. Well, if we could make an educated guess as to what our coverage will be, I would think we could factor it very quickly. But from my own experience, I happen to come from Connecticut, and we were in one of the worst hit parts of the State-people I have known all my life are very much of two minds as to whether there would be any appeal in this kind of an insurance program. These are people who lost their homes; lost their businesses.
They see many, many problems, and, of course, not the least is the fact that people don't think in terms of disaster striking—this kind of disaster. They will consider, because they have been conditioned to consider, the possibility of fire. But three of our rivers up there, the Farmington, the Mad, and the Housatonic, did things they have never done before in recorded history, and some of those streams have been gaged for a long time.
In my own town the Farmington River at one point was over 900 feet out of its banks. Now, the men who lost houses that far away from the bed of the river just don't think it will happen again.
Senator LEHMAN. Mr. Jones, I have a memorandum that there apparently is some confusion on the part of some of the members of the press here with regard to your fourth criterion. I think you may