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Surely the Northeastern States can fairly claim some help from the Federal Government to meet part of the costs of disaster. Especially relevant here is the fact that under flood control

and I think these are very impressive figures both for New England and for New York and certain of the other Northeastern States

New England received 3 percent of the $10 billion authorized, one-third of 1 percent of the $1.8 billion appropriated in the last 5 years, as Senator Kennedy noted. My survey of the years 1953-54 shows $666 million spent by the Army engineers in 1953 and $533 million in 1954 and $393 million for reclamation in these 2 years. But New England received but $7 million in all, or less than one-half of 1 percent. Her share of income, however, is 62 percent, of Federal taxes borne 7% percent, of manufacturing employment 9-plus percent, and of vulnerability to floods an even greater percentage.

It shows the great discrepancy that has been allotted to the Northeastern States in relation to their share of the support of the Nation as compared to many of the other States. That is why I have made plea after plea that the other States recognize their responsibility to the States that have helped them so much and are getting very, very little help from them.

Before I ask you this question, I asked General Sturgis what he estimated the damage done by the August flood to be. The original estimate that he made was $1.6 billion. That, however, was, I understand, not based on an official survey by the Corps of Engineers. The answer he gave me was based at that time on a statement made I believe by the Department of Commerce showing the direct damage was about $457 million. That did not, however, include the damage done to some of the Southern States, like South and North Carolina, which would have brought the damage up to about $600 million. That is, as I say, only direct losses, not indirect losses, which, of course, would run into very great additional figures.

The discrepancy between the figures that were first issued by the Corps of Engineers of $1.6 billion and the later figures, including South Carolina and North Carolina of approximately $600 million, is very difficult for me to understand. I wonder whether you have any personal knowledge or any personal opinion with regard to the losses.

I do want to again say to you that I have the testimony of General Sturgis which reduces the original estimate from $1.6 billion to a much lower figure.

General FLEMING. Well, Senator, I contributed, of course, to that $1.6 billion estimate that General Sturgis released. At that particular time it was labeled very preliminary. It was made up by taking the estimates which various people in the States and various towns got and adding them together. I do not remember what my proportion of the figure was right now. What he did was add up mine and other people's involved and came up with $1.6 billion. It was in no way an engineering estimate, sir. It was just a first shot at it.

I really cannot comment now, sir, on what the total bill for this thing is. We have our damage-survey teams out in the field now; have had them out ever since the August flood. They have fairly well completed their compilations of their figures for the actual physical damage. We are nowhere near complete on the compilations which are going to end up with the indirect damages which the floods did.

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I do not know. I think it will probably be somewhere in the neighborhood of 3 months before we really are able to add up the bill on it. Senator LEHMAN. Thank you very much, General.

General FLEMING. Yes, sir.

Senator LEHMAN. Senator, have you any questions?
Senator GREEN. No.

Senator LEHMAN. The next witness will be Mr. Hovey T. Freeman, president of the Manufacturers Mutual Fire Insurance Co.


Mr. FREEMAN. My name is Hovey T. Freeman, president, Manufacturers Mutual Fire Insurance Co. I appear here for my own


Some of my friends in the business probably want to skin me alive for what I am going to say. We have been trying for some 2 years to get the industry together to help the Atomic Energy Commission in its study of how to handle these new atomic hazards. We still are far apart in our views. We have also been trying for about as long to iron out this flood problem.

I don't like the insurance industry to have it said that they can't insure against floods. I think anything is insurable if we can get money enough and spread the risk. That is going to be quite a shock to some of my friends, and they probably won't like me for it.

Frequently in the past we have been asked, following floods such as we had in August 1955, "Why don't the insurance companies provide flood coverage?" The answer is simple. They would if they could without jeopardizing their assets.

We have just completed a survey of the damage to the mills we insure against fire which have been damaged by flood, and in this area of southern New England, New York, and Pennsylvania those mills, 134 in number, have suffered a flood loss of $85 million. This is about a third of our total assets. No company can, of course, withstand such a shock loss. As I will point out later, however, if we can have the benefit of reinsurance I believe we can grant the coverage.

I want to make it clear that my companies handle only large risks. so most of my remarks will have to do with the large policyholder. Our average policyholder carries in excess of $2 million, so I am not really speaking for the little householder. But I think the large property owner has just as much at stake and just as much is entitled to have insurance available to him as the small man.

The plants damaged by flood are located in southern New England. We had 15 plants where the loss exceeded a million dollars, 1 where it exceeded $11 million. There were 16 where the loss ran between $500,000 and $1 million, and 56 where the loss ran between $100,000 and $500,000, and 47 losses under $100,000.

Past experience has shown there are two factors which make the writing of flood insurance hazardous. One is that only those who have a real hazard want the coverage, with the result that the insurance companies get an immediate adverse selection against them. The

other factor is that when a flood comes it generally follows the length of one or more rivers, with the result you end up with not just one loss but hundreds of losses, and the total is catastrophic.

Following the flood in 1955 I took occasion to write to several thousand of our policyholders, just as we did in 1952, to see if they were any more interested in the flood hazard coverage. An analysis of these letters shows that only about 5 percent were willing to pay for flood coverage and then only if the price were low. Everybody stresses that. They want insurance at a very low cost.

In looking up the insurance plans for these plants, it was obvious every one of them had a real flood hazard. Most of them were located in States bordering on the eastern seaboard with a few along the Mississippi or its tributaries. Many of the replies stated that because of present-day high income taxes that in the long run they thought it would be cheaper to take the flood loss as an income-tax deduction than it would be to pay a substantial premium year in and year out. Because only 5 percent of our policyholders wanted the coverage, the rate naturally would have to be higher than if it could be spread over a much higher percentage.

Based on the replies received from our policyholders, it would appear, as a result of certain rough calculations and assumptions which I have made and which I do not want to be held to on this figure, that we would have to charge an annual rate of 1 percent, or, that is, $1 per hundred of coverage based on the sound value of the property, which is about 20 times what we are now charging for fire coverage, if we expect to break even.

The only way this could be done would be that certain safeguards would have to be established. One, the insurance companies would have to have the backing of the Federal Government through reinsurance, acting as a banker, and I would like to describe that later. The purpose being, of course, to get a broad spread and to level off the humps and smooth out the loss curve.

Each policy would have to be subject to a deductible of at least 1 percent. The reasons for this are two in number: (1) In order to make it to the advantage of the policyholder to try to protect his property from flood by moving what he could to a higher level and by barricading openings; (2) to keep out the small nuisance claims which add so terrifically to the cost in any type of catastrophe loss such as flood or windstorm.

The policy would have to be written on a noncancellable basisand that is very important-for a period of at least 5 years.

The insurance would have to be in force for 30 days before the coverage would be effective-this for the purpose of making it impossible for a person to purchase coverage just prior to the threat of flood.

The policy would have to contain a coinsurance clause to make sure that the amount of insurance was in proper relationship to the value. In the case of a corporation, it of course would get a tax deduction for the cost of insurance so its cost would only be about half of that of the individual who would get no tax benefit.

And, as I said before, there should be no ceiling. The big property owner should have just as much right to coverage as the small one.

It is questionable whether a corporation or an individual would be willing to pay such a high rate. Certainly in the case of a corporation

under present high taxes unless floods were anticipated more frequently than once in 5 years it would be better not to have insurance, and to take it as a tax deduction. In the case of an individual, it would probably depend upon the tax bracket which he is in.

My proposal is that I would like to see the Federal Government establish a Catastrophe or Disaster Reinsurance Company which would handle not only flood but also other catastrophies, such as war damage, the new hazard created by the development of atomic energy, contamination from radioactive fallout and third party liability.

The entire operation should be turned over to the insurance industry to run as was the War Damage Corporation. I served on that committee with our good friend, the Honorable Jesse Jones. We worked many nights almost through the night. We ended up by turning over to the Government some $200 million. So the program was successful. The insurance companies could handle it without question on a more economical basis. If they follow the scheme I have in mind, the cost to the Federal Government should be very little. I am not saying what might develop if we got involved in an atomic war or if a wide area was contaminated by radioactive fallout.

Under the plan I have in mind, the private companies would, through a pooling arrangement, pay the flood loss up to some specified amount for each occurrence, and what we have been talking about is to have the companies form a pool of 1 or 2 percent of their legal surpluses. That would provide a fund somewhere between speaking now for mutual companies-$10, $15, or $20 million. Then the Federal Catastrophe Reinsurance Company would come into play acting as a banker to the private insurance companies or pool. The private insurance companies or pool would then reimburse the Federal Catastrophe Reinsurance Compay over a period of 10 or 20 years plus a loading for interest and expenses.

In order to permit the companies to build up reserves, the income-tax laws should be amended to make this possible without taxing such contributions to reserves as profits until adequate reserves have been established.

The private insurance companies would pay annually part of the premium which they collect to the Federal Catastrophe Reinsurance Company to cover the normal expenses of operation and to build up a small reserve there.

There is nothing new about this scheme. London Lloyds has been doing it for years. We have such a contract with them now. What it does is takes your shock loss, spreads it out so you don't get these tremendous bumps that are so disturbing to your policyholder in his costs.

One thing is sure that no other source of credit is available which is great enough to permit the insurance companies to go into this coverage without Federal help. But, as stated previously, the flood part of the coverage does not have to be a drain on the Federal Treasury. Only with the help of the Federal Government can flood insurance be written.

We in our business have always emphasized the desirability of loss prevention rather than indemnity for loss. In my opinion, the Federal Government should follow the same principle and push to the greatest extent possible its present flood-protection program by constructing protective dams, dikes, reservoirs, and so forth, along the

more populated rivers. Many citizens have been benefited at the expense of the general taxpayer by this work, and those still subject to flooding are just as entitled to relief.

I want to add just a word to what I have said about the rate of $1 per hundred. Of course, it is obvious that the property owner who has all of his property at flood level constitutes a greater risk than the owner whose property is at a little higher level or in a multistory building. Therefore, considerable study would be necessary to work out a rate schedule which would evaluate the hazard in each case. Such a rate schedule would have to have factors for increasing rate in those areas along those rivers that are frequently flooded as opposed to those rivers that have floods only once or twice a century.

As a rather interesting sidelight on the problem, I sounded out a certain group of our larger policyholders to see whether or not we could broaden the spread of the risk so as to get the cost down. What I suggested was that everybody let us load them—their rates— to cover the flood hazard.

Some very interesting letters came in. The people in California, where they have a real earthquake hazard, said, "We have been paying for your windstorm losses in the East for years. We want you to pay for our earthquake losses." The people who were ready to pick up the tab, however, for flood coverage were very few.

And that is why it is so important to bring in the Federal Government to smooth this out, smooth out these big shock losses.

In closing, I would like to just say a word about our local situation here. I have been working with the Governor here and with Mayor Reynolds for several years on this flood problem. I was here at a meeting last night with the Army engineers, and a little group of us subscribed money to employ a well-known engineering firm to draw up plans for a dam that would protect Providence. We were told we could build a dam for under $7 million. Last night one of the reports that the Army engineers presented corroborated that and showed it could be done for about $6.7 million.

That is a very paltry sum compared to what Congress is in the habit of appropriating. I would like to see you gentlemen, Members of Congress, request the engineers to submit two reports. They told us it would be 13 months before they will have their report for this area. I would like to see you suggest that they turn in the Providence report immediately. The plans are practically ready. So that we can start work at once and have Congress find some way of appropriating sufficient money with the help of the money that will come from the State and the city and maybe the benefied taxpayers to put this program of local flood protection into effect in Providence without further delay and get this thing done now.

My building has lost $100,000 in the two floods of 1938 and again in 1954. It is hurting a lot of us.

We can't afford to wait for another hurricane or another flood. The sum which is required to take care of Providence is very small. Rather than wait for 13 months, I hope you gentlemen will do what you can to get us some money right away.

Thank you very much.

Senator LEHMAN. Thank you very much. May I ask you a few questions?

Mr. FREEMAN. Sure.

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