I would like to ad lib at this point in my formal statement by reciting briefly an interesting conversation I had with a fellow merchant, as we were in company leaving our local post office this past week. We had been school boy companions in our younger years. He had devoted the past 30 years of his life, the best productive years of his life, to developing a successful appliance operation. He has well educated three boys, and has a daughter still to be educated. He owns a comfortable home, a truck and a car, and I believe a small farm up in the Winchester area. He related to me the other morning that his personal loss in capital equity was in the neighborhood of $100,000 in this disaster but, because he still has equity he was not eligible for a grant-in-aid by an agency such as the Red Cross. No reflection on them, of course. But competitive businesses or other retail operations in our community and all of these other communities we have heard from today, that possibly have been in their type of work for 5 or 6 years, had been borrowing financially and were mortgaged up to their necks. They had so little equity that they did fall eligible to grants from an agency such as the Red Cross.

It would just seem on the surface, at least to me, that the treatment in one case had been fair and liberal and humane, while in the second it might appear otherwise.

Because no American company will write flood-damage policies, the businessmen are certainly at the mercy of the elements, with no means available to them to recover in losses of this kind; hence only the Government could afford to underwrite this type of risk. Naturally, businessmen object to going to the Government for services. that others in the free enterprise system can provide, but in this case I am told that only Lloyds of London write a flood policy and that premiums are set at 25 percent of the face value, which is prohibitive. We recognize two major reasons why the insurance industry cannot offer protection in flood or other natural disasters on a straight commercial basis: (1) the mathematical impossibility of calculating the risk in terms of premium; and (2) the strong likelihood that insurance contracts covering this hazard could probably be sold only in areas where disaster damage was most likely to occur, with the result that the cost could not be spread over a sufficiently large group of potential premium buyers.

On the other hand, as firm believers in the American enterprise system, which entails the likelihood of loss as well as the promise of profit, we could not consistently expect the Federal Government to step in and restore flood sufferers to the position they occupied previously with no effort or foresight on their part.

Here, as in so many other needs of the American people, equity lies somewhere between the two extremes. We believe that the experience of the War Damage Corporation during the war offers the nearest approximation to an effective remedy that is visible on the horizon today. This, as you so well know, was a system under which the potential property damage inherent in armed hostilities, whether inflicted directly by the enemy or occasioned by internal causes, was envisioned as a risk in which the Central Government, in the exercise of its sovereign power to declare and wage war, had an obligation to reinsure. The mechanics, you will remember, were simplified by utilizing the underwriting facilities of the private insurance industry.

It seems to us that the parallel is clear. If it be argued that a natural disaster is beyond the foresight or control of Government, it must be remembered that aggressor nations are not in the habit of communicating their intentions in advance, as Pearl Harbor should have taught us. And in this connection it is not without significance that the Connecticut General Assembly of 1953 expressly authorized the use of civil-defense forces in natural disaster.

Heavy capital losses such as you and I have seen in my community and my State of Connecticut certainly call for a prompt and adequate development of Government disaster insurance before any recurrence of the disaster which fell upon us only weeks ago.

When one thinks of the billions of dollars this country has spent in the past decade for humanitarian relief outside our country, is it too much to envisage or suggest a substantial program in this area of proposed Government disaster insurance? I prefer to think not. We all hope you will be eminently successful in your endeavors and I want to thank you for this opportunity to appear and speak before you. Senator BUSH. Thank you very much, Mr. Cleaveland. Where is your store?

Mr. CLEAVELAND. On Main Street. We celebrated our 150th anniversary sale last month.

Senator BUSH. That is very fine. I certainly congratulate you. Was most of your loss in this flood in personal property rather than real property?

Mr. CLEAVELAND. Yes; entirely so. Entirely through seepage, in fact. We got virtually none of the silt or bad sewage water, and so on, from Main Street proper, but it worked into a depth of 3 feet in our lower sales area and stockroom and boilerrooms, and so on, and the completely display department was ruined.

Senator BUSH. You are in favor of a substantial flood-insurance program?

Mr. CLEAVELAND. Yes, sir; we are.

Senator BUSH. The committee is very grateful to you for coming

over.

Mr. CLEAVELAND. Thank you, Senator. We are grateful to you for the privilege of appearing.

Mr. EDELSTEIN. The next witness is Mr. Simon M. Yaffe, insurance agent of West Hartford.

STATEMENT OF SIMON M. YAFFE, WEST HARTFORD, CONN.

Mr. YAFFE. Gentlemen, I want to talk about insurance. My name is Simon M. Yaffe; I live in West Hartford, Conn. I am now and have been an insurance agent for about 20 years. Mine is a small agency, doing business with small-business men, professional men. homeowners, and people who rent their living quarters. It is because of the nature and size of the business which has brought me close to the "little fellow," rather than in spite of it, that I feel that what I have to say may be of help to this committee.

In other words, I am the man who had to go around to see the fellows who suffered the water damage and explain to them why they were or were not covered under their insurance.

First of all, let me make myself clear on one point. Nothing which I say here is meant to be criticism of the insurance business as a whole.

or as it is conducted by any individual company. No business is conducted by better qualified men than those who direct the policies and affairs of our insurance companies. Yet, I say, no privately owned or operated insurance companies, whether they be stock companies or mutual companies, can or should take over any plan of disaster insurance. May I remind you of some basic principles of insurance which must apply to any plan which this committee may see fit to adopt or approve. First, we must have a dispersion of the risks, geographically. Second, diversification as to the kinds of risks. Thirdand a main principle of insurance-a sharing by many of the losses of a few. With these principles to guide them, insurance companies have served the public throughout the years.

Of necessity, they have had to choose their risks carefully lest the assets of the companies be dissipated because of unprofitable underwriting. They have had to refuse to accept some applications for insurance, in many cases from those who needed the protection the most. In other instances, after insuring certain properties, they have found it necessary to cancel insurance, because of frequency of loss or other factors which made the business unprofitable for the companies to carry. No private insurance company could hope to remain solvent very long if it continued to insure property on which it had to pay for claims very often, and had to continue to pay out more money than it received.

Under a plan of insurance issued by private companies, premium charges would have to be calculated on an experience basis and would therefore be high. Only those who felt they were directly exposed would buy. People in areas where there are few streams would be little interested in flood insurance. Those living inland are not interested in tidal waves. We, here in New England, thought floods could do little damage to us, and even now we have little interest in earthquake insurance or coverage against perils not experienced by us. The three principles of insurance which I previously mentioned would no longer be operative and the law of diminishing returns would go to work. The final result would have to be failure.

Now may I present my plan for disaster insurance for your consideration? Naturally, this is only an outline.

1. There should be established a Federal authority empowered to issue insurance covering losses caused by large-scale disasters, such insurance to cover risks not assumed by private insurance companies, or risks which would not be profitable for them except at very high

rates.

2. These policies should be on a comprehensive basis, with multiple coverages and few exclusions. It may even be advisable to include a permanent war-damage coverage.

When I say "exclusions," that was the bugaboo of the settlement of claims during the past disaster. There are millions of them, and different interpretations of them.

3. These policies should be sold to the public through licensed agents on a cash basis. Selling costs could thus be kept to a minimum and the distribution would be in the hands of the best qualified persons.

4. Policies should insure dwellings-single or multiple commercial property, industrial property, farm property. They should cover not only real property, but personal property in rented living quarters, mercantile property; in short, practically all tangible property.

5. I can't state what the exact premiums should be for this insurance, but since everyone suffers a loss no matter where a catastrophe may occur, the premium should not be promulgated on an experience basis.

6. Policies for single residential property and household property should be in units of $5,000, with a maximum of $15,000 allowed on the real property.

The reason why I say that is I do not think it is the responsibility or obligation of the community at large to replace a $50,000 or $100,000 home for someone who suffered a loss. I think there may be other ways of taking care of that. Therefore, I set the maximum of $15,000 in the case of a single residence.

$5,000 on contents. We do not have to restore oriental rugs and masterpiece paintings, but $5,000 would certainly replace the necessities in a home.

This could be on a $100 deductible basis, in order to eliminate small claims. I suggest a premium of $10 per unit of insurance for 3 years coverage for this particular risk. Such a low rate would encourage everyone to buy such insurance. Incidentally, I rather believe that every lending institution would insist on such insurance supplementing the fire and extended coverage policies they insist on now in connection with the mortgages that they issue.

Senator BUSH. May I interrupt?

Mr. YAFFE. Yes, sir.

Senator BUSH. What do you mean by $10 per unit of insurance? Mr. YAFFE. In other words, $5,000 of insurance.

Senator BUSH. $10 per $5,000 unit?

Mr. YAFFE. That is right.

If I may explain this last thing a little further, I know there was some discussion earlier about the impossibility of having compulsory insurance. Gentlemen, I own a home with a big mortgage on it. I could not hold on to that mortgage and could not get it unless I delivered an insurance policy covering fire and extended coverage to the lending institution. That is true of everyone.

Should some form of disaster insurance at a low rate be issued, there is no question about it but that your various insurance companies and banks would insist on such coverage. That would automatically give you the dispersion that I speak of the widespread coverage throughout the country.

Multiple dwellings could be insured for larger amounts, determined by a sliding scale based on the number of apartments in the property. 7. Mercantile property of all kinds should be insured through policies issued in units of $10,000 with a maximum of $50,000.

I chose that maximum because I do not think that has to stand at that figure, but I simply offer that.

Senator BUSH. You mean it might be higher?

Mr. YAFFE. It might be higher, but later on I have something to say about that, so that if you will forgive me, let us leave it at $50,000 for now.

8. Industrial property of all kinds-this may shock you should be covered up to a maximum of $100,000.

That applies to real property and to the contents. I would say that that $100,000 should apply to 1 location. In other words, we had

testimony from the vice president of the New Haven Railroad as to the extensive losses that the road suffered. Well, $100,000 would go a very, very little way in the matter of paying for losses suffered over a wide area. But if they were able to insure up to $100,000 at any 1 location, you could see that the sum total could go considerably beyond that.

Senator BUSH. You say industrial property of all kinds should be covered up to a maximum of $100,000. Supposing you have a plant? Mr. YAFFE. Yes, sir.

Senator BUSH. I am thinking, for instance, of the Hershey manufacturing plant in Ansonia, which had $1,800,000 damages in the first flood. Can they insure under your idea the real property for $100,000 and also the personal property and inventories in addition, or was it your intent to limit that company to $100,000?

Mr. YAFFE. May I ask you to defer that question until I have taken up item No. 11?

Senator BUSH. You may defer your answer.

Mr. YAFFE. Yes. That may be a partial answer to your question. 9. As to farm property, frankly, I don't feel qualified to say how it should be insured, but it can be done.

I know there were definite losses of topsoil and other farm property. 10. As to all property except single homes and household contents, insurance should be issued for no more than 50 percent of the value, within the limits previously mentioned.

11. This limitation as to the amount on insurance which could be issued under my plan offers a wonderful opportunity, as well as a challenge, to private insurance companies. Here is a chance for them. to offer policies at low rates, covering residences on a $15,000 deductible basis-in other words, private companies can insure the overage all above the amount which would be covered under a Federal disasterinsurance plan-personal property on a $5,000 deductible basis, commercial property on a $50,000 deductible basis, and industrial property on a $100,000 deductible basis. Here is a wonderful new field for private business. Just as the social-security law opened the way to more annuity sales-and I know that, because you could not go to a man who was in the low-income brackets and try to sell him a bill of goods and try to sell him $50 worth of retirement insurance. You got nowhere with him, but when he was able to get $100 or $125 or more under the social-security law, that $50 of supplemental insurance went a long way toward providing for his old age, and he was in the market for insurance.

And as to GI insurance, I know the insurance companies and we agents were very much worried about that. The GI insurance was an important factor in the tremendous increase in the sale of life insurance. The biggest boost in the amount of sales in life insurance took place after the boys got back from the Army and after they were conditioned to buying insurance in units of $5,000 and $10,000, whereas formerly they told you they were insurance-poor if they bought $2,000 worth.

Senator BUSH. How would you make this Federal Insurance Authority's policies available to the homeowners? Would you use the established channels of the insurance agents of the big companies? Mr. YAFFE. It could be issued directly by this Authority through the agencies and bypass the companies.