limit is $1 billion. Terms and conditions of evidences of indebtedness to meet approval of Commissioner and Secretary of Treasury. Interest rate fixed by Secretary of Treasury according to formula prescribed. Borrowed funds deposited in appropriate fund. (f) Disaster insurance fund and disaster reinsurance fund usable for (1) operating and administrative expenses, (2) payment of claims, and (3) repayment of Treasury borrowing. Section 15-Advisory committee Commissioner shall appoint advisory committee of 3 to 15 familiar with insurance or reinsurance problems. Section 16-Definitions (a) "Flood" includes flood, tidal wave, wave wash, high tidal water, hurricane, deluge, water component of severe storm, and landslide due to excess moisture. (b) "Natural disaster" includes flood, plus earthquake, volcanic eruption, severe freeze, blizzard, duststorm, hailstorm, snowslide, explosion, drought, smog, radioactive contamination, other air pollution, land subsidence, excluding fire or wind except where either occurs as result of or in conjunction with one of the listed perils. Section 17-Studies (a) Commissioner to study practicability of extending program to other natural disasters besides flood. (b) Commissioner to study reinsurance program to avoid need for flood insurance by Federal Government. (c) Commissioner to study feasibility of private insurance takeover of act's programs with or without Federal financial support. Section 18-Additional powers Commissioner may (a) sue or be sued; (b) enter contracts freely; (c) acquire real or personal property; (d) hire employees; (e) issue necessary rules and regulations; (f) exercise specific and necessary implied powers. Section 19-Reservation of rights Commissioner's acquisition of real property shall not take away State or local jurisdiction. Section 20-Taxation Act not to be construed to exempt from State or local taxation any real property acquired by Commissioner due to payment of claims. Section 21-Annual report Annual report by HHFA to President for submission to Congress shall report comprehensively (1) operation of act's programs; and (2) status of studies under section 17, plus legislative recommendations, if any. Annual report for calendar year 1961 to contain Commissioner's opinion regarding advisability of withdrawing in whole or in part Federal aid for insurance under act after June 30, 1962. Affirmative opinion to be accompanied by legislative recommendations. Until affirmative opinion is given, similar report should be made every fifth year. Section 22-Separability provision Comparative analysis of 3 bills on disaster insurance or indemnity, 84th Cong., 2d sess.1 By William F. McKenna, counsel S. 3137 (Senators Lehman and Kennedy) S. 2768 (Senators Kennedy and Saltonstall) New Federal Flood Insurance Administration Flood, as defined. Study coverage of other Real or personal property (sec. 4). 4. Ownership of property covered. Private, State and local government (sec. 4). President names agency (sec. 3 (a)). S. 2862-Amendment in the nature of a sub- New commissioner in HHFA. Policy power given HHFA Administrator (sec. 301). Flood, hurricane, tides, tidal wave and high Indemnity: Flood, including rising water from water (sec. 3 (a)). tide, wind or rain. Administrator may expand definition (sec. 101). Reinsurance: Flood (sec. 201). Real property and business inventories (sec. Indemnity: Real property plus business in3 (a)). Private (sec. 3). ventories, stored farm commodities, house- Indemnity: Private, State and local govern- Reinsurance: No express limitation. Insurance: Per single piece of real property Indemnity: Per person limit on policies (secs. 3 limit on policies (sec. 3 (e)). None. (b) and 105). None. Indemnity: Adequate to provide claim reserve Indemnity: At least 60 percent of nonprofit Reinsurance: Insuring company (sec. 202). Reinsurance: Administrator's discretion (sec. 203 (3)). See footnote, p. 982. Comparative analysis of 3 bills on disaster insurance or indemnity, 84th Cong., 2d sess.-Continued By William F. McKenna, counsel Item S. 3137 (Senators Lehman and Kennedy) S. 2768 (Senators Kennedy and Saltonstall) $1 billion, plus $1 billion on July 1, 1957, and $1 Borrow up to $1.5 billion from U. S. Treasury 1⁄2 billion dollars, plus 2 billion dollars on July 1 Each item applies to both insurance or indemnity and reinsurance unless otherwise noted. S. 2862-Amendment in the nature of a sub- Indemnity: $1.9 billion, plus $1 billion with Payable from appropriated funds (not a pro- No express provision regarding sharing of No formal committee beyond authority to Dissatisfied claimant may sue in United States United States (including District of Columbia), Report to President on or before Jan. 3, 1961, CRITIQUE OF S. 2862, WILLIAM F. MCKENNA, COUNSEL, JANUARY 9, 1956 The following observations are made in connection with S. 2862, National Flood Indemnity Act of 1956, introduced by Senator Bush for the administration on January 5, 1956. 1. Geographic limits.-Section 3 (e) and (f) of the bill in defining "United States" and "State" omit United States possessions. These could be included by defining the United States and States as the several States, Territories, and possessions, and the District of Columbia. 2. Personal property.—Section 101 expressly includes in "personal property" for the purposes of direct Federal flood insurance only business inventories, stored agricultural commodities and household effects. It leaves to the Administrator's determination other personal property to be included. By contra, section 201 dealing with reinsurance authorizes the Administrator to reinsure companies insuring against flood loss on "personal property," without expressly limiting the type covered. 3. Flood.-Section 101 in defining "flood" expressly includes "rising water caused by tide, wind, or rain." It leaves to the Administrator discretion to expand this definition by regulation. 4. Rates.-Section 102 requires indemnity contract fees to "be based on consideration of the risks involved and the desirability in the public interest of providing indemnity protection at reasonable cost" (a seeming combination of actuarial and subsidy approaches to the ratemaking task). i However, the effect of this language is restricted by a proviso that in setting fees "the Administrator shall set up estimated rates which would be necessary to provide an adequate reserve to pay all claims for losses over a reasonable period of years" (a nonprofit, actuarial approach, excluding administrative expenses). At The next proviso requires the insured to pay at least 60 percent of this nonprofit, actuarial rate, the remainder of 100 percent to be paid half by a State and half by the Federal Government. This leads to the conclusion that a reasonable cost for indemnity protection is never lower than 60 percent of the actuarial, nonprofit rate. Query whether this is always true in the light of testimony received by this committee in its disaster insurance hearings. the Goshen, N. Y., hearing, testimony was given that in one instance Lloyds' of London quoted a rate of $250 per $1,000 value to cover certain real property against flood risk. It may well be that 60 percent of this ($150 per $1,000) would still be too high to form a practical rate at which to sell flood insurance. In other cases, Lloyds' would not insure against flood risk at any rate. It might prove desirable to allow the administering agency more flexibility in establishing rates in order to achieve a flood indemnity program that will truly provide protection to those who need it. 5. Reserve buildup.-Section 102 requires loss reserves to be provided "over a reasonable period of years." Since section 403 contemplates a report to the Congress by January 3, 1961, on the feasibility of a transfer of the program. to private insurance companies, presumably the assumption is that adequate reserves will have been built up by that date-roughly, a 5-year period. 6. Uniformity.-Section 102 contemplates uniform rates for similar risks, an acceptable concept in theory. This differs from a uniform national rate for all contracts on a given type of property. 7. State participation. As worded, section 102 prevents the issuance of a single indemnity contract until the State in which the property covered is located has paid into a Federal fund the State's allotted portion of the fee due on the contract. This raises a question regarding workability of the entire direct indemnity program. Many State legislatures meet only biennially. Failure of a State to provide for its portion of each indemnity contract on property in the State would deprive all property in the State from protection under this program. Query whether a given State legislature will be willing to appropriate in advance such indefinite sums as may be needed to fulfill the obligation placed on the State under this bill. The bill gives the State no voice in the program, but only the obligation of paying for part of it. Taxation without representation is as abhorrent between governments as between a government and the governed. If State financial participation is desired, it would seem more practical to require the State to contract with the Federal Government to reimburse it annually for a fixed percentage of claims paid on property in the State during the preceding year; with authority to offset other moneys due the State from the Federal Government in the event of default on such contract. This would permit the program to go forward without requiring as a condition precedent that the State participate in each separate contract fee payment. Testimony given the committee demonstrated the flood problem to be more national than intrastate in character. Flood conditions in one State may well be caused or contributed to by action or inaction of a second State wholly outside the remedial jurisdiction of the suffering State. National problems should be openly met by Federal measures, not allowed to lack solution by invoking hybrid Government devices resulting in a program whose benefits may prove more illusory than real. Under the bill the State involved retains a veto power over every potential indemnity contract; yet the contract is designed to afford protection to the insured, not to the State. Under the bill, each contract involves a forced subsidy on the part of the State involved, for no method is provided for returning funds to the State should the program prove to be profitable. The bill obviously hopes to make the program profitable, as section 403 envisions assumption of flood risks by private insurance companies. Yet it seems to assume a program normally working with compulsory Federal and State subsidies, hardly a proper yardstick to measure public acceptability by potential insureds of a similar protective program in which the insured must pay 100 percent of the actuarial fee plus enough to pay operating costs and produce an acceptable profit. Technically it would be possible to omit the States from consideration under the bill even under its present language if the insured paid 100 percent of the actuarial fee, but this would too likely prove prohibitive. For many reasons, this method of compulsory State participation bears careful scrutiny. It raises serious doubts regarding workability of the indemnity program on a nationwide basis. 8. Administrative expense.-Section 102 requires all Federal administrative expenses under the indemnity program to be paid from appropriations out of the Federal Treasury. A private insurance company would of necessity pay administrative expenses out of fees, earnings and salvage from the insurance program. The bill's method thus provides an unrealistic and short yardstick against which to measure the ultimate feasibility of the indemnity program as a profitable commercial venture, even without considering the nonprofit nature of the bill's program. The Federal crop-insurance program began with a similar device; but more recently has charged some operating expenses against the program. 9. Declining applications and risks.-Section 103 authorizes the Administrator to decline any application or risk, as well as regulating the classification, limitaUnder the power to decline any application, there tion, and rejection of risks. is the danger the Administrator may play favorites or use discrimination in the absence of further statutory safeguards. Under the power to decline any risk, there is the danger the Administrator may thwart congressional intent through inordinate caution in excluding from coverage risks intended to be The Administrator's other powers to vary fee schedules covered by this act. according to risks should prove adequate to exclude inadvisable risks. 10. Crop insurance.-Section 104 precludes indemnity if flood insurance is obtainable on reasonable rates and conditions from a public program. This presents a problem of cooperating with the Federal crop-insurance program, which presently covers only about 800 out of 3,000 counties. Under the bill's present language, the Administrator could issue in-ground crop insurance against flood in the cases in which insurance is not available from the Federal Crop Insurance Corporation. 11. Indemnity contract limit.-Section 105 limits each indemnity contract to a Federal obligation of $250,000 per person (including a corporation or like organization and a State and local government). Most insurance contracts operate on a per property rather than a per person basis. The limit is obviously a policy matter. It would seem needlessly high for owner-occupants of single family dwellings. It might well prove too low to meet the flood insurance needs of many business enterprises. A classified lower limit for residences and higher limit for other property might better distribute the allotted indemnity funds according to need, especially if changed to a per property rather than a per person basis. This provision in section 105 speaking of "obligating the United States" not in excess of $250,000 per contract leaves doubt as to whether $250,000 is the top Another possible interpretation requires consideration face limit per contract. of the provision in section 105 that the United States has no obligation to pay |