Page images
PDF
EPUB

bility of paying that off. But the company has inquired about new insurance, and the rate has been upped, as Mr. Freeman pointed out, to the extent that this same company will not reinsure or at least has not done so at the present time.

I understand that there are several firms which had some coverage in a form of insurance policy that took care of optical goods and some photographic supplies that were flooded, but that was only a fraction of the loss of those particular firms. No others that I know of had any insurance whatsoever.

Senator LEHMAN. Have you any idea what the rate was on those companies that were covered ?

Mr. Ladd. I do not know what the rate is. I think it was in a general insurance coverage for the optical and photographic supply coverage. The rate as I understand it of Lloyds had been 1 percent with a certain deductible, and, as Mr. Freeman stated, it has been upped to 10 percent at the present time. I was told that. I do not know it first hand.

Senator LEHMAN. Well, that now completes I believe all the listed witnesses. Is there anybody else who wants to be heard.

Governor Roberts, do you want to say anything in conclusion?

Governor ROBERTS. No, I have nothing further, Senator, except once again to express the appreciation of the people of Rhode Island, the men and women who have had an opportunity to be here today, and my own personal appreciation for your kindness and your patience. We have a recognition of the thoroughness with which you are approaching this problem, and we have confidence that if it is within your power we will get some immediate relief.

Senator LEHMAN. Thank you very much.

I have a letter from the Firemen's Mutual Insurance Co. of Providence which will go into the record. (The letter referred to follows:)

FIREMEN'S MUTUAL INSURANCE CO.,

Providence, R. I., November 8, 1955. Hon. HERBERT H. LEHMAN,

Senate Office Building, Washington, D. C. MY DEAR SENATOR : In connection with your committee investigating the question of flood insurance, I have yet to see any intelligent suggestions by insurance representatives or anyone else. In the hope of contributing something to the situation I suggest the following program:

Provide for a compulsory surcharge of 5 percent on all insurance premiums written (only premiums covering property damage). In case of mutual companies, net premiums after dividends.

Surcharges so collected not to be subject to State premium taxes. Not available to the insurance companies as profits and therefore not subject to Federal income taxes.

Not permitted to be distributed as dividends to stockholders of stock companies or as dividends to policyholders in mutual companies. In other words, insurance companies to set up funds so obtained as a segregated item in their statements to be termed the "disaster reserve.” To be used only for payment of losses occurring from floods and other specifically designated losses now termed "disasters" and not now available for protection by existing insurance policies.

Premiums now written annually covering property damage in the United States are currently reported at approximately $4 billion.

A 5 percent charge would produce an annual disaster premium of $200 million to which would be added all premiums collected by the sale of flood insurance plus any investment income from the fund.

The Federal Government would set aside the sum of $1 billion to be used only as excess reinsurance after the funds obtained by surcharges and premiums had been exhausted.

In the beginning, amount of insurance available in any 1 location should he limited to, say, $250,000.

All policies should be written with a deductable clause whereby the assured assumed, say, $25,000 of liability, or 10 percent of the loss, whicherer is less.

Rates to be charged the policyholder to be determined by a competent group of insurance underwriters representing all branches of the insurance industry.

Since it is proposed to handle this project free from taxes, limit the adminis. trative cost to a nominal figure, say 15 percent. As the volume builds up, this might in time be reduced.

Flood policies to be written by agents or direct writers same as present procedures on fire policies. Write policies only on a term basis, 3 to 5 years. Premiums payable on delivery of policies thus eliminating costly collection problems and bad accounts.

Losses to be adjusted by insurance company adjusters as at present. Cost of adjustment part of the loss cost.

Losses to be prorated among all insurance companies in proportion to surcharges and premiums collected by each.

Collection of losses from participating companies and payment to the assured to be handled by large group units such as factory mutual companies, Factory Insurance Association, American Mutual Alliance, Federation of Mutual Fire Co's. They may call on the United States Treasury for payment from excess fund if it is needed. The above groups represent practically all insurance companies in the country. Do not include insurance companies with annual gross income of less than $75,000 thereby eliminating particularly a host of little farm mutuals.

Limit the authority of State insurance departments to the auditing and polic. ing of these funds and its uses; also the control of discrimination in rates ; thus avoid 48 different brands of regulation of this project.

Supervision and administration of the program to be in the hands of a small committee of, say, 8 members, consisting of 2 representatives of the Government, and 6 from various insurance groups, thus eliminating the creation of what might readily become another large Government bureau.

There will be many objections to this plan.

(1) Owners of insured property in areas not exposed to floods will object to sharing the cost of this project. It is universally agreed that no flood-insurance plan can obtain sufficient spread of risk to stand on its own feet; therefore, the cost must be pa, sed on. This program spreads it out more thinly than ans other method. For example, the small-home owner in Providence with, sar. $10,000 insurance on his house would contribute approximately $1.75 per year by his surcharge cost.

(2) Objections will be raised to any program free from Federal income taxes, but this is a disaster-relief program without profit to anyone. There is no more reason to tax it than to tax the Red Cross.

(3) Objection will be raised to the prohibition of the use of these funds as dividends to stockholders or as dividends to policyholders. There is nothing inherent in the ideals of American business that makes it essential to make a profit out of a calamity.

The program is an attempt to find a way whereby the insurance industry finds a way to offer its nationwide expert facilities to render a public service. The alternative may well be a nationwide Government organization much more expensive and much less competent.

A few years' experience free from the disasters of recent years, a situation which we perhaps are entitled to expect, would permit this program to become entirely self-supporting. Very truly yours,

F. T. Moses, Chairman of the Boar. (The following was subsequently received for the record :)

FIREMEN'S MUTUAL INSTRAXCE (O..

Providence, R. I., December 6, 1955.

FLOOD INSURANCE In the hope of contributing something to the problem I suggest the following program:

Provide for a compulsory surcharge of 5 percent on all insurance premiums written (only premiums covering property damage). In case of mutual com panies, net premiums after dividends.

Surcharges so collected not to be subject to State premium taxes, not available to the insurance companies as profits and therefore not subject to Federal income taxes.

Not permitted to be distributed as dividends to stockholders of stock companies or as dividends to policyholders in mutual companies. In other words, insurance companies to set up funds so obtained as a segregated item in their statements to be termed the “disaster reserve,” to be used only for payment of losses occurring from floods and other specifically designated losses now termed disasters and not now available for protection by existing insurance policies.

Premiums now written annually covering property damage in the United States are currently reported at approximately $4 billion.

A 5 percent charge would produce an annual disaster premium of $200 million to which would be added all premiums collected by the sale of flood insurance plus any investment income from the fund.

The Federal Government would set aside the sum of $1 billion to be used only as excess reinsurance after the funds obtained by surcharges and premiums had been exhausted.

In the beginning, amount of insurance available in any one location should be limited to, say, $250,000.

All policies to be written with a deductible clause whereby the assured assumes, say, $25,000 of liability or 10 percent of the loss, whichever is less.

Much can be said for and against the use of a deductible clause. Its advantages are that it (1) avoids a host of minor claims, (2) if the deductible is large enough it is an inducement to the assured to handle the loss as economically as possible, (3) the amount of the deductible is a loss for income-tax purposes.

Rates to be charged the policyholder to be determined by a competent group of insurance underwriters representing all branches of the insurance industry.

Since it is proposed to handle this project free from taxes, limit the administrative cost to a nominal figure, say 15 percent. As the volume is built up, this might in time be reduced.

Flood policies to be written by agents or direct writers same as present procedures on fire policies. Write policies only on a term basis, 3 to 5 years noncancelable and not to be effective until 30 days after inception date. Premiums payable on delivery of policies thus eliminating costly collection problems and bad accounts.

Losses to be adjusted by insurance company adjusters. Cost of adjustment part of the loss cost.

Losses to be prorated among all insurance companies in proportion to surcharges and premiums collected by each.

Loss payments to be made from funds collected in the following order : (1) Earned premiums paid for food policies, (2) funds accumulated from surcharges as earned, (3) excess available from United States Treasury.

Collection of losses from participating companies and payment to the assured to be handled by and limited to large group units such as factory mutual companies, Factory Mutual Association, American Mutual Alliance, Federation of Mutual Fire Companies. They may call on the United States Treasury for payment from excess fund if it is needed. The above groups represent practically all insurance companies in the country. Do not include insurance companies with annual gross income of less than $75,000 thereby eliminating particularly the many small farm mutuals.

Limit the authority of State insurance departments to the auditing and policing of these funds and its uses; include the control of discrimination in rates; thus avoid 48 different brands of regulation of this project.

Supervision and administration of the program to be in the hands of a small committee of, say, 8 members, consisting of 2 representatives of the Government and 6 from various insurance groups, thus eliminating the creation of what might readily become another large Government bureau.

It should be realized that any flood-insurance program will immediately be in business. A variety of figures on flood damage have been attributed to the Army engineers. In a normal year this is said to be $150 million or more. Those properties more seriously exposed will be insured first. Many will not be insured at all but at least the opportunity for coverage will be available.

There will be many objections to this plan.

(1) Owners of insured property in areas not exposed to foods will object to sharing the cost of this project. It is universally agreed that no floodinsurance plan can obtain sufficient spread of risk to stand on its own feet; therefore, the cost must be passed on. This program spreads it out more thinly than any other method. For example, the small homeowner in Providence with, say, $10,000 insurance on his house would contribute approximately $1.75 per year by his surcharge cost. On the other hand, where there is no food hazard a similarly insured property in San Francisco would pay only approximately 60 cents per year.

(2) Some insurance expert suggested funds be provided by an income-tax levy. To go back to my original assumption of the owner of a piece of property insured for $10,000, his surcharge cost would be far less than the proposed levy on his income. The cost of disasters such as our New England foods or a San Francisco earthquake will either be shared by some plan that will distribute it on a nationwide basis or not paid for at all.

(3) Objections will be raised to any program free from Federal income taxes, but this should be considered as a disaster relief program without the need of profit to anyone. There is no more reason to tax it than to tax the Red Cross.

(4) Objection will be raised to the prohibition of the use of these funds as dividends to stockholders or as dividends to policyholders. There is nothing inherent in the ideals of American business that makes it essential to make a profit out of a calamity.

The program is an attempt to find a way whereby the insurance industry finds a way to offer its nationwide expert facilities to render a public service. The alternative may well be a nationwide Government organization much more expensive and far less competent.

A few years' experience free from the disasters of recent years, a situation which we hope we are entitled to expect, would permit this program to become entirely self-supporting.

FREDERICK T. Moses, Chairman of the Board. Senator LEHMAN. The committee now stands in recess until we meet in Hartford on November 14, Monday, at 10 a. m.

(Whereupon, at 4:45 p. m., the committee recessed to reconvene at 10 a. m., Monday, November 14, 1955, in Hartford, Conn.)

FEDERAL DISASTER INSURANCE

MONDAY, NOVEMBER 14, 1955

a

UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,

Hartford, Conn. The committee met, pursuant to recess, in the supreme court chamber, State Library Building, Hartford, Conn., at 10:20 a. m., Senator

Herbert H. Lehman presiding.
Present: Senators Lehman and Bush.

Also present: Representatives Sadlak, Dodd, Seely-Brown, Cretella, and Patterson.

Senator LEHMAN. The hearing will please come to order.

I must apologize for being a little late. I think I have a good alibi. We asked where the Supreme Court Building was and we were directed to what we thought was the Supreme Court Building, but it turned out to be the Superior Court Building. Nobody there knew anything about this hearing, and that is the reason for the delay.

Before I ask you to testify, Governor Ribicoff, I want to make a very brief statement.

In the first place, this is not a hearing of a subcommittee of the Banking and Currency Committee. This is a hearing of the Banking and Currency Committee, although there are only two of us here at the present time. I was asked to serve as acting chairman of the committee during the pendency of their hearings. Other Senators, of course, shall also sit in with us from time to time.

This I believe is the seventh hearing which we have held on Federal disaster insurance. We had 2 days of hearings in Washington and 2 in New York State, 1 in the city and 1 upstate. Last week we had hearings in Boston and Providence, and I am glad to be here today.

This will not close the hearings, although we are not contemplating any additional hearings in the immediate future. We will undoubtedly have to have another hearing, at least one in Washington, to hear the recommendations of the administration. We had hoped to have those recommendations and suggestions at the time that the hearing started 3 weeks ago, but the Director of the Budget, to whom he work had been assigned by the President, advised us at that time that the recommendations or suggestions were not ready and that he needed more time. We have not learned when these recommendations will be ready. The committee has been handicapped because obviously, in view of the importance of this work, it is highly essential that we know the views and receive the cooperation of the administration and of the various agencies concerned.

In the same way, we have not yet had final hearings with the insurance people. We have heard from some insurance men in Boston and

655

« PreviousContinue »