report on Floods and Flood Damage by Parsons, Brenckerhoff, Hall & MacDonald, engineers, and may be summarized as follows:

1. Estimating for each basin the future flood occurrences of different intensities based on past experience (by charts or graphs).

(a) Modified by anticipated effects of expected changes in controlling conditions.

2. Mapping of river valleys into "damage reaches," subject to same degree of flooding.

Senator LEHMAN. What do you mean by damage reaches?

Mr. HOLZ. The areas that would be affected by the floods which would be included in a damaged area. In other words, you have to expand that to a point that may likely be affected by the waters coming through the floods. That would be called a damage reach.

3. Determining the rate for particular property, considering:

(a) Height-location in damage reach.

(b) Construction.

(c) Occupancy.

(d) Protective devices.

(e) Past or probable damage at various levels:

(1) Maximum loss.

(2) Average loss.

(f) Calculation of rates for varying percentages of maximum loss coverage.

It is evident that insurers cannot undertake the cost incident to a proper system of flood rating unless there is a wide market, even as practically every property rated for fire coverage is insured against that peril.

I might add here that one of the reasons why fire insurance has been reduced to a relatively small charge is the very fine system of rating that they have based upon the engineering reports. However, that has taken them many years of very careful study and a very expensive plant has been built over these many years. We have nothing like that in flood insurance at the present time and it would take not only many years to accomplish that but a tremendous sum of money.

The necessity for large initial reserves is a considerable obstacle in the path of flood insurance. A company writing in one flood area and receiving an average annual premium, would still have to be prepared to pay the maximum possible damage, since all of the insured properties are subject to one major flood.

That is in distinction to a fire loss, where it is very unusual that an entire area is covered by one catastrophe.

In other lines of insurance, the unearned premiums more or less measure the potential liability because of the wide spread of risk. Some spread may be obtained in flood insurance by countrywide writing. However, the acceptance of countrywide flood insurance is, to say the least, doubtful.

I make that statement because I can conceive of no way that we can get a countrywide acceptance on a voluntary basis, and I have my serious doubts as to whether or not we are ready to go into any compulsion, even if it could be done on a compulsory basis. And the moment we have a matter of freedom of choice on the part of the insured, we are bound to have those persons that live in areas that are never affected by floods seeking that type of insurance which would exclude flood damage, because the rate would be so much less. So I say the acceptance of countrywide flood insurance is really very doubtful.

My own personal feeling is that it is hardly possible we could effect that except through some compulsory measure and I doubt if we would want to do that.

But even so, the losses could initially amount to several times the premiums received-an inordinate charge on surplus and unfair to other policyholders.

It might be argued that a direct writing company could obtain reinsurance and minimize the effect on surplus. However, reinsurance is relatively unavailable for the same reasons that deter the primary underwriter. The reinsurer, too, wants to be confident of an adequate premium and a proper spread of risk, without the requirement of such reserves as to endanger its solvency and ability to write other business. It has been said that the underwriters at Lloyd's will insure or reinsure any hazard. From available data, it appears that very little flood insurance is written directly by Lloyd's, nor is there any widespread flood reinsurance offered.

I am confident that the insurance companies are not only aware of the problems presented by the recent floods but I am certain that if flood insurance could be written feasibly, the insurance companies would not only be willing but eager to provide such coverage.

The flood line might hold more attraction to insurer and reinsurer in the United States if it were not for the impact of Federal income taxes. Premiums apparently earned, but still subject to future actuarially predictable disasters, are taxable for any resulting underwriting profit at 52 percent. Reserves for future catastrophes are not recognized as true liabilities on the annual statement blank or by the Federal tax authorities. The carryback and carryforward of operating losses permitted under the tax statutes for 2 and 5 years, respectively, ameliorate this to some extent, but not sufficiently. The time allowed is not ad quate and there is still the immediate drain of taxes on premiums nominally earned but which do not yet belong in surplus. Mindful of the problems presented and the need for action, the president of the National Association of Insurance Commissioners has appointed a committee to study flood insurance. As you probably know this is an association made up of all the insurance commissioners in the United States. Every State is represented in that body. The committee is composed of the following insurance commissioners:

George A. Bisson, chairman, Rhode Island; Leffert Holz, vice chairman, New York; F. Britton McConnell, California; Charles F. Gold, North Carolina; Arch E. Northington, Tennessee; and Mark Wentz, Texas.

I might add that this committee was appointed in Chicago at a meeting of the executive committee last Tuesday, and the president gave us very explicit instructions to make this the No. 1 problem on our agenda, and we propose to proceed without delay.

It is the intention of this committee to consult with representatives of the insurance industry and all other persons interested in the subject matter under examination in order to ascertain if it is possible for flood insurance to be written by private insurance companies even though governmental aid in reaching that goal may be necessary during the initial period of operations.

Senator LEHMAN. Thank you very much, Mr. Holz. Senator Ives, have you any questions?

Senator IVES. Yes, I have a few. Mr. Holz, I really am impressed by your presentation this morning.

Mr. HOLZ. Thank you, Senator.

Senator IVES. Using very concise language, you have indicated what the chief problems of the insurance companies are in dealing with this matter. I am somewhat acquainted with them myself. However, we are faced with something with which we must have some action one way or another in the relatively near future, as you probably realize from the testimony you have listened to yesterday.

I take it from what you say that this committee, of which you are the vice chairman, will not have a report in the comparatively near future, will it?

Mr. HoLz. I think we will, sir. We are hoping to have a report prior to the time the Congress goes into session, so we can be of some use to you-otherwise it would be meaningless. We have every intention of having that report quickly. We are going to devote a great deal of time to the study. And as you might well imagine, the problem is nothing new with us. We have been giving a great deal of thought to it. The problem of finding a means of providing this insurance has reached a point now where it must have a solution. And we are not taking no for an answer. We have got to find the answer. I can say to you with some reasonable certainty that certainly within the month of January 1956 we ought to have some word in the way of a report from our committee.

Senator LEHMAN. Do you think it is possible to work out a rate structure? Your statement here would indicate to me that years and years are likely to elapse.

Mr. HOLZ. Let me indicate what the rate structure would be. It is almost impossible to work it out. But there would be some element of speculation as there is in all ratemaking.

I have repeatedly stated, and, I think, with some reason that there is no legal bookmaking I know of that compares with ratemaking in insurance. Until we have a good many years of experience, to a very large degree it must be in the nature of speculation.

Our ordinary fire losses indicate a ratio of something like 50 percent of premiums. So that if we took the basis of our present losses, which average $466 million a year, based upon the reports of the Engineering Corps, we would have to have premiums to cover that of twice that amount, or $392 million. That is a sheer guess.

Senator LEHMAN. What are those figures again?

Mr. Holz. The estimate of damage caused annually presently is in the neighborhood of $466 million.

Senator LEHMAN. By floods?

Mr. Holz. By floods.

Senator LEHMAN. You mean the last series?

Mr. Holz. No; this is the average over many years. This is furnished by the Army Engineer Corps. They have taken into consideration the losses over the last 10, 12, or maybe 15 years, and they average around $466 million. I think there was a report here recently that put it at $457 million.

Senator LEHMAN. That was not a report of the Army engineers. That was a report of the Department of Commerce.

Mr. HOLZ. Senator, I am advised by my associate it was the Army engineers, and it is a 25-year average.

Senator LEHMAN. They have no figures at all--and now I am quoting from the Chief of the Corps of Engineers.

Mr. HOLZ. Well, I may be in error, as to the figure I am quoting. Senator LEHMAN. They have no estimate of the losses that have occurred in the calendar year 1955.

Mr. HOLZ. That I can understand. I do not mean to include that. I think this would exclude 1955 completely. I do not think there is any question about that.

Senator LEHMAN. The figures also show that losses from flood damage have been considerably greater in recent years than they were on the average.

Mr. HOLZ. I think that is so, Senator. The figures I am giving merely are for the purpose of illustrating what the rating will be, notwithstanding the fact that the current losses may exceed that amount. The losses for 1955 might be greater for 1 year by many millions of dollars than the average indicated here. But using this merely as an illustration, if the loss was $466 million, we would have to have premiums which would be a minimum of twice that amount, or $932 million. That is computed on the basis of losses sustained in fire insurance, assuming it would be no greater. Therefore, the only rating feature they could start with would be on the basis of a premium which would be twice the amount of the loss. That is on the theory that the loss ratio to the premium is 50 percent.

I cannot say, not even as a guess, that that would hold true in flood insurance. But we would have to start from some base. We would use that as a base merely as a trial balloon. Only experience would indicate whether that is justified or not. Nobody could state at this period what it would be. That is why the companies would be very reluctant to undertake this without some sort of assistance from a governmental agency. There must be some indemnification. What the form of it should be, I am not prepared to say at this moment. But I think we are all in agreement that without some sort of indemnification from the governmental agencies, temporary though it may be, I doubt very much if the companies would write this.

One of the officials of a company in discussing the problem with me quite informally indicated that the estimate of valuable property to be insured in the Borough of Manhattan from Canal Street to the Battery, that small area-which takes in not only physical real estate, but personal property-they estimated the value there would be $25 billion-just for that little strip of land. It is not likely that Manhattan Island, from the Battery to Canal Street, will be inundated by floods so as to cause damage. But who is there here that can say it will not happen. You have got to estimate that in your computations. When you stop to analyze that little strip, you can see how staggering the situation is.

Here in the United States, the fire insurance coverage relates to an exposure of well over $400 billion. That is a lot of money. And I think the flood insurance would cover more than that if we actually took it into consideration.

But, gentlemen, we cannot give any concrete answers to the rating. It has to be a trial-and-error method. That is why we are hoping to come out with a report to you which will give you some concrete expressions and some recommendations and suggestions as to how this prob

lem may be met, being mindful that without some aid from the Federal Government, I do not see how this thing could be done.

Senator IVES. We are all assuming there is going to be a great need for Government aid. I think we all realize that insurance companies cannot enter into this, especially without any experience. On the other hand, the question arises as to what form that aid should take. I gather at this time you are not in a position to indicate what form. that aid should take.

Mr. HOLZ. Senator, I prefer not to make any comment until our committee has examined the matter thoroughly, because anything I may say now would not be the result of a complete study, and I do not think it would be fair to you or to my committee.

Senator IVES. There is one other question I would like to ask. There was the rather novel suggestion made yesterday by Mr. Crystal that this matter be taken care of by a tax to be added to the income tax, a certain small percentage, a very tiny percentage-to be added to the income tax itself. For instance, if you are in the top bracket, your percentage would be greater in dollars than it would be if you were in a bottom bracket. It would be percentagewise. His idea there was that in the final analysis the taxpayer is going to have to pay it anyway. It is for everybody. It is going to take care of everybody, theoretically. And everybody should bear the burden. It should not be left to a certain few, or it should not be left to ratemaking or anything of the kind.

Have you ever given that idea any thought?

Mr. HOLZ. May I be excused from expressing an opinion on the subject? I have one, but I prefer not to express it.

Senator IVES. All right. I have no further questions.

Senator LEHMAN. Mr. Commissioner, I am very much interested in your statement, which is very clear and very informative. I am not at this time criticizing the insurance companies for not writing this kind of insurance, because I know their difficulties, difficulties which have been very clearly expressed here. But the fact remains that there is no means of getting flood insurance from any source whatsoever. You can get fire insurance, you can get hurricane insurance, tornado insurance, earthquake insurance, and various other types of protection against man-made or natural disasters. But you cannot get flood insurance. That is perfectly clear.

Mr. HOLZ. That is right.

Senator LEHMAN. What we are trying to do is see whether we can work out some plan by which this flood insurance will be made available to people, either exclusively through the resources of the Federal Government, or an association of the Federal Government with private insurance companies.

May I point out this is certainly not in the slightest degree critical of you, because I understand your duties as superintendent of insurance. But it seems to me that in your testimony you really reflected the view of the private insurance companies in regard to the difficulty of writing private insurance and are not reflecting the social need of this kind of insurance from the Government viewpoint. I say the Government viewpoint, because the Government must protect, so far as possible, all its people. I think we lose sight of the fact that here we are dealing with human beings who would like to be protected and