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Senator LEHMAN. We are all very much interested in your statement. A good many of your proposals are included in the bill which I have drafted, but I am not quite sure of all the details which you propose.

Under your plan am I correct in assuming that the Government would work in close cooperation with the insurance companies, would allow the active work to be done by the insurance companies?

Mr. FREEMAN. That is right, sir.
Senator LEHMAN. On a fee basis?

Mr. FREEMAN. That's right, sir. We know the values. We know the properties. We know the description of the risk.

Senator LEHMAN. The insurance companies would, therefore, be utilized to write the insurance, to make estimates, survey the damage, and various things of that sort?

Mr. FREEMAN. That is quite right.

Senator LEHMAN. That is such an important part of their work. I understand furthermore that the Federal Government would set the rates for this insurance, notably in consultation with an advisory committee of the insurance companies.

Mr. FREEMAN. Yes, sir. I would not put it just that way. I think the Federal Government would need our help. If I might tell a little story on the War Damage Corporation, I think you would get a kick out of.

We sat around there with Mr. Jesse Jones for hours, and none of my associates in the industry would name a rate. I happened to have known Mr. Jones for some years, and he said, "Mr. Freeman, what do you think the rate ought to be?” It was 2:30 in the morning. I simply said, “A base rate of 5 cents.” Everybody said I was crazy, that it was going to wreck the business. But it didn't. We ended up with a very nice profit for the Government.

There was one little thing that you will get a kick out of, Senator. We began talking about policy forms, and Mr. Jones said, "What is your intent?” I said, “We will insure everything. What we want is dollars to pay losses."

" He said, "Are you going to insure million-dollar paintings in the Chicago Museum"

I said, "Certainly."

He said, “The hell you are. I'm not going to go before Congress and explain paying a million dollars for a 3-foot by 3-foot piece of canvas.

So we could not and were not allowed to insure works of art.
Senator LEHMAN. Well, some insurance companies
Mr. FREEMAN. Some did; yes, sir.
Senator LEHMAN. Will you inform me further on this

Mr. FREEMAN. Senator, this scheme of the Government acting as banker is really just a loan of funds and you pay a loading. Now, this may be a trade secret, but Lloyds charges us roughly 40 percent. We pay the loss and then we pay it back to them plus a loading of 40 percent over the next 10 years, so they make a nice thing out of it. I think it's too much, of course, but I hope the Federal Government won't want a 40 percent loading.

But that is the scheme, and they can't lose. The Federal Government can't lose. So to me it's a perfectly sound proposition if it is done on this basis.

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Senator LEHMAN. I want to reduce this proposal to its simplest terms if I may so that members of the committee and I and others will understand it. Your proposal is, I understand, based on a recognition of the expectation that if a reasonable rate is set—and this thing would not be a success unless a reasonable rate were set—that there would probably be a loss?

Mr. FREEMAN. Oh, yes.

Senator LEHMAN. Which ultimately would have to be borne by the Federal Government?

Mr. FREEMAN. Quite right.
Senator LEHMAN. That is a form of reinsurance, is it not?
Mr. FREEMAN. Yes.

Senator LEHMAN. In other words, whatever loss was sustained because of the writing of this insurance at a reasonable rate would be borne by the Federal Government!

Mr. FREEMAN. I wish you would add "reasonable and adequate

rate."

Senator LEHMAN. Well, I am not quite sure whether I understand the difference.

Mr. FREEMAN. You say "reasonable," but reasonable might not be adequate. Some people want their insurance for nothing, you know.

Senator LEHMAN. Well, then, I will stick to "reasonable," but I mean the Federal Government would reimburse the insurance companies for the loss that was sustained ?

Mr. FREEMAN. They would temporarily. Then they would get paid back.

Senator LEHMAN. That would be a form of subsidy or subvention or reinsurance?

Mr. FREEMAN. No, it is really nothing more than a temporary loan of funds which they collect back out of future premiums over the next 10 years.

Senator LEHMAN. My administrative assistant interprets your proposal to include a proposal by which the Federal Government would receive an annual loading charge set by the insurance companies.

Mr. FREEMAN. That is right.
Senator LEHMAN. Is that a fact?
Mr. FREEMAN. That is right.
Senator LEHMAN. What do you mean by that?

Mr. FREEMAN. Well, that is to cover the cost of what would be the equivalent of interest plus any expenses that are involved, and, of course, the Government would not have taxes.

Senator LEHMAN. Well, if they sustained a loss by virtue of the fact that they have written this insurance on a reasonable and adequate basis, there would always be a loss, would there not?

Mr. FREEMAN. No, because eventually that would be paid back by the collection of premiums which the insurance company would use in liquidating the loan they got from the Government.

Senator LEHMAN. I am sure I appear very stupid

Mr. FREEMAN. Apparently I am at fault in the way I am explaining it.

Senator LEHMAN. Not at all. But I have recognized from the start that if we are going to do this thing you have got to have Federal assistance.

Mr. FREEMAN. That is right.

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Senator LEHMAN. The Federal Government has got to be willing to assume certain losses in this thing. I favor that very definitely. My bill provides for that. But if that is the case I don't see—and I have got to be able to explain this thing and my colleagues have got to be able to explain it-how you are ever going to make up the losses which the Government would have to accept.

Mr. FREEMAN. All the Government is doing, sir, is loaning money which is eventually paid back by premium collections.

Senator LEHMAN. But supposing the premiums are not sufficient?

Mr. FREEMAN. Well, that could happen, but I don't think it will happen.

Senator LEHMAN. Why won't it happen if you think the Government has got to reduce these premiums to a base so low as to be reasonable and adequate?

Mr. FREEMAN. I am hoping that you will get enough people who will want the coverage that the income will be sufficient to do that.

Senator LEHMAN. All right. I think maybe the next question will clear it up. Is this a proposal that you favor only for flood insurance or for general disaster?

Mr. FREEMAN. I feel much surer that it will work for flood. When it comes to atomic radioactive fallout, then I begin to get scared, because the Atomic Energy boys have thoroughly scared the insurance industry. They tell us that we could have a fallout covering an area 300 miles long and 50 miles wide. My companies have probably 10 billions in the area between Philadelphia and Providence along the seacoast, in this highly industrialized area. Well, if the Atomic Energy boys are right in saying that a fallout could cover an area that big, that creates a tremendous problem for the insurance companies and for the Federal Government.

That is why we are all going very slow in committing ourselves to any pool. The Atomic Energy Commission is pushing us terribly to give our answer. My group has an answer for it. Some of the others have not as yet. But there again we have got to have Federal help. And I am not saying this plan would pay out in the case of a major disaster under radioactive fallout.

Senator LEHMAN. I understand that.
Mr. FREEMAN. I say

I am sure we can make it work in connection with floods.

Senator LEHMAN. Well, your proposal is for flood insurance
Mr. FREEMAN. No.
Senator LEHMAN. Other natural disasters?

Mr. FREEMAN. I think you ought to have the act take care of all disasters and then run it as three separate pools. It is perfectly easy to classify your business and have 1 pool handle the atomic hazard, 1 pool handle the flood hazard, 1 pool handle the war-damage hazard.

Senator LEHMAN. The only difference between us I think is this. A great many of these things are provided in my bill. Whether the committee will accept them or the Congress will accept them I do not know. But in advocating it I want to have my facts. The only difference between you and me I think is this: "That I recognize very frankly that this is going to mean a loss to the Government which they may or may not be able to recoup, dependent on the density of the coverage, the width of the coverage.

Mr. FREEMAN. It is true the Government temporarily would loan its funds to pay these losses, but if the scheme is as sound as I think it is, the Government eventually would be bailed out without loss and with something for their bother.

Senator LEHMAN. Would you include any other-well, you would include all disasters?

Mr. FREEMAN. Yes,
Senator LEHMAN. Both man-made and natural?

Mr. FREEMAN. Of course, I don't need to tell you that I and a lot of my associates don't like to see the Government getting into the insurance business. Some of my associates are dead against any Federal reinsurance program, and that is what is holding them back. We have to pay out the dollars in the first place and we have got to be sure that the Federal Government is going to be right there behind us, shoveling out their money with us and at the time it is due, because the policyholders are going to want the money. And some of the boys are a little bit afraid to put themselves in the hands of the Government to that extent.

Senator LEHMAN. May I say this to you, Mr. Freeman: While you expressed your great interest in the larger corporations, you have emphasized what I tried to emphasize at all these hearings and that others have emphasized—that it is the little fellow who really needs protection much more than big business.

Mr. FREEMAN. That is true.

Senator LEHMAN. Although I do not belittle or minimize the need of protection for the larger corporations

Nr. FREEMAN. Whether the little man with a property worth $10,000 could pay under my scheme $1 per $100, which would cost him $100 a year, I don't know. I don't know whether he could afford it or not. It doesn't seem like much to some of us. To some people it might seem like an awful amount of money.

Senator LEHMAN. I realize that. But the big fellow, assuming now that his corporation has a large income, is able to write the loss off in most cases and deduct 52 percent on his corporate tax. The wealthy man who owns a home, a man with a large income, if his $50,000 home is destroyed, probably can write it off from his high bracket and pay for his loss virtually nothing except sentimental attachment to his home. That is a fact; is it not?

Mr. FREEMAN. That is a fact; yes, sir.

Senator LEHMAN. That is why, while I am interested, of course, in protecting industry in every way possible, I do think it is the little man who really needs our protection more than anybody else.

Mr. FREEMAN. Well, I agree with you, Senator, that is true. But I don't like class legislation. For me, that smells of class legislation.

Senator LEHMAN. I realize that.

Mr. FREEMAN. We are all citizens. We are all taxpayers. I think everybody is entitled to equal treatment.

Senator LEHMAN. Well, there would be no question about equal treatment at all. It is only that the big man can protect himself and the little fellow can't. That is the only difference I mean, He can protect himself under the laws as they now exist.

Let me ask you-Does your company write any damage insurance ?
Mr. FREEMAN. What type of damage?
Senator LEHMAN. Flood.

Mr. FREEMAN. No, sir; some companies do under these floater policies.

Incidentally, somebody said here this morning, I think Mr. Finkelstein—that flood coverage was not available. Well, that is generally true. Lloyds has just quoted on a plant in Fall River for me where they wanted flood coverage-$100,000 with deductible of 10 percent at an annual rate of 10 percent. So they don't get much for their money, and I certainly would not recommend any corporation paying such a price as that. That isn't going to make my friends in London feel happy, I think they would be very foolish to pay that rate, they had better take it as tax deduction. But if you want to pay through the nose you can get flood insurance.

Senator LEHMAN. Does Lloyds write any, any more! I am told they do not.

Mr. FREEMAN. I have a quotation on my desk now for that amount, so they apparently are willing to write it.

Senator LEHMAN. Are they writing in this country?
Mr. FREEMAN. Yes, sir.

Senator LEHMAN. In my bill I cover both real property, inventories, and personal property, such as furniture and other things. In your proposal would personal property and inventory be covered just the same as real estate?

Mr. FREEMAN. Yes; indeed. Senator, I wonder if I can call on our general counsel, Ambrose Kelly? He says I have forgotten something

Mr. KELLY. Mr. Chairman, just one comment.
Senator LEHMAN. Will you identify yourself?

Mr. KELLY. Ambrose B. Kelly, general counsel, Associated Factory Mutual Company's.

I noted your discussion with Mr. Freeman on this question of reimbursement for reinsurance and who was going to suffer the loss. What is involved here is basically a question of rate, as I think you have realized.

You have had in mind, I feel, that this cannot be afforded unless the rate charged is below the actual cost of doing business so that a loss is inevitable. Mr. Freeman's plan contemplates that those people who are purchasing flood insurance will in the long run, without paying an unreasonable amount, be able to pay the full cost of the program, and I think there is that basic difference.

You are thinking in terms of a subsidy in that you do not feel that the rate which people will be able to pay will be sufficient to pay the flood losses sustained, while Mr. Freeman's study leads him to the conclusion that, taking it over a long period of time and particularly coupled with the type of flood-prevention program which General Fleming was discussing today which should in time reduce the losses, that if there was a mechanism through which the shock, catastrophic losses could be reinsured with the Federal Government so they would take the load off the private companies and then they would be repaid in the form of reinsurance premiums over a long period of time, it would be possible as we see it for the program to be fully selfsupporting

I think you were looking for a loss which you felt the Federal Government had to bear, which Mr. Freeman in his plan did not think would necessarily happen.

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