at least the first $300 of any claim and 10 percent of the balance of the claim. Would this permit the face amount of each contract to run as high as $278,077 ($278,077-$300-[10 percent of the difference between $278,077 and $300= $27,777]=$250,000)? This could be clarified by placing the limit on the "face

amount of the contract." Computation indicates that under the present bill 7,600 contracts could be issued having a face amount of $278,077 if the aggregate United States exposure is limited to $1.9 billion. Increasing the aggregate limit by $1 billion, as permitted by the bill with Presidential approval, would increase the number of possible contracts by 4,000 for a total of 11,600 contracts. Reducing the limit per policy to $28,080 would increase the potential number of policies to 116,000. At a limit of $11,410 the contract potential expands to about 290,000 in number. These figures compare with some 164 million United States population (comprising about 42 million families) and 4 million business enterprises (of which about 2 million are 1-or-2-man enterprises, mainly in the service field). Under the bill's policy of only 1 contract per "person," as defined in the bill, this allows about 1 contract for every 150 potential family, corporate or Government purchasers. Obviously not all these will want to buy flood insurance. But most businesses and governments will want to buy more than the $11,410 limit used in arriving at this ratio. The problem is raised whether this size program will give a true test of the feasibility of the program, since the principle of adverse selection will work to induce those most exposed to flood risk to apply early for indemnity contracts, leaving more desirable risks to compete for such portion, if any, of the total authorized coverage as remains after the greatest risks have been covered.

12. Loss deductible.—Section 105 employs a formula to determine the minimum loss deductible. This is $300 plus 10 percent of the remainder of any claim. In principle this serves the threefold purpose of eliminating nuisance claims, cutting operating costs, and requiring the insured to share the risk on all portions · of the insured loss. I understand the more normal insurance practice to be to have a fixed dollar amount loss deductible (frequently $50 on standard extended coverage). The risk-sharing device is obtained by coinsurance requirements, forcing the insured to carry insurance on a substantial portion of the value of the property under the penalty of otherwise receiving only partial recovery for a partial loss under the policy.

It should be borne in mind that the higher the loss deductible, the less benefit: the policy gives the insured. A disaster victim frequently needs all the cash or credit he can obtain in order to recoup his losses.

13. Aggregate liability.-Section 106 of the bill permits a total aggregate liability of $1.9 billion under indemnity contracts and permits the President to increase this by an additional $1 billion. This section also permits the Administrator to earmark portions of this amount for geographic areas of the United States according to the needs of persons in such areas.

The policy decision to be made on this point is whether an aggregate permissible exposure to risk of $1.9 billion is sufficient to supply the needs of the country for flood insurance, considering the limitation this places on the number of contracts which may be issued when taken in conjunction with the individual limit per indemnity contract.

14. Reinsurance scope.-Title II of the bill deals with reinsurance. Section 201 authorizes Federal reinsurance of insurance companies against loss on account of flood insurance on real or personal property. Such reinsurance can be issued only as necessary to enable insurance companies to provide insurance where it would otherwise not be available. It should be noted that this provision leaves with the Administrator complete discretion as to type of insurance to be provided. It also permits coverage of all types of personal property. However, it makes it necessary to determine whether the insurance involved is presently available, presumably on any terms; otherwise, the Administrator would not be authorized to issue reinsurance under the provisions of this bill. Interpretation of this provision raises this difficult problem. Testimony given the committee in its field hearings shows that insurance companies in the Lloyds' group offered flood risk coverage on some real property in the United States at a rate of $250 per $1,000 valuation. A question is raised as to whether such an offer is to be interpreted under the bill as meaning that insurance is available against flood risk under such conditions.

15. Reinsurance premium rates.-Section 202 requires the Administrator to fix rates for reinsurance upon consideration of the risks and requires the rates to be adequate in his judgment to cover all claims for losses under reinsurance

agreements over a reasonable period of years. This seems to require the Administrator to calculate such rates on an actuarial basis. It raises the question whether a private company could successfully compete with the subsidized direct Government indemnity contract program even if the private company wished to make use of the reinsurance provisions in the bill. The direct indemnity contract provisions contemplate a subsidy. The reinsurance provisions appear not to, except for administrative expense.

16. Uniformity of rates.-Section 202 requires reinsurance rates to be uniform throughout the United States for similar risks. This provision is acceptable, since it allows a difference in rates according to risk involved.

17. Conditions in policies reinsured.-Section 203 of the bill grants the Administrator regulatory authority over the terms and conditions of insurance policies reinsured under the bill. Obviously, such control should be retained by the Administrator.

18. Noncompetition-Section 204 of the bill precludes the issuance of reinsurance if it is otherwise available at reasonable rates and upon reasonable conditions from private sources. It should be noted that this specifically refers to reinsurance being available rather than insurance. The provision is proper as to reinsurance.

19. Aggregate exposure to risk on reinsurance.-Section 205 earmarks $100 million as the top exposure to risk on reinsurance under this bill. This raises the policy question as to the sufficiency of this amount when balanced against an authorized exposure to risk of $2.9 billion on indemnity contracts issued by the United States directly. It also has the effect of isolating this particular $100 million, making it unusable for direct indemnity contracts in the event no need develops for its use under the reinsurance program.

20. Administering agency.-Title III of the bill provides for administration and financing of the program. Section 301 creates a new constituent administration within the Housing and Home Finance Agency similar to FHA and PHA from a housekeeping standpoint. This new unit would be known as the Federal Flood Indemnity Administration headed by a Commissioner appointed by the Administrator. The bill does not contemplate confirmation of the Administrator by the Senate, a departure from the requirement for the heads of FHA and PHA. Placing administration within a constituent agency of HHFA obviously raises a policy question. Presumably the main function of the Housing and Home Finance Agency is to coordinate housing programs of the Government. Under the bill indemnity contracts would cover other types of property besides housing, namely business properties and property owned by State and local governments. Under present programs the experience of the HHFA with insurance is primarily limited to general supervision of the mortgage insurance program administered by FHA. Whether this differing type of insurance is persuasive as to placing administration of the flood indemnity program within HHFA is a matter for policy decision. Other programs have suggested that the choice of the administering agency be left to the President; or that the Small Business Administration be named since it already handles a disaster loan program for business and homes; or that the Federal Civil Defense Administration be named on the theory that it could complement its wartime duties with training received in administering the peace-time disaster insurance program, especially since it already acts as Federal coordinator for disaster relief under an Executive order. A further possibility would be to name the Treasury Department, in the absence of reviving RFC, since the problems of liquidating RFC were given by statute to the Secretary of the Treasury. The old War Damage Corporation, an RFC subsidiary, is still in the process of liquidation.

21. Budgetary control.-Section 301 (b) makes the FFIA subject to the Government Corporation Control Act, but section 301 (c) makes the Administrator's determination final regarding vouchers he approves in connection with final transactions of all indemnity contracts and reinsurance agreements, even as against the General Accounting Office.

22. Funds.-Section 302 authorizes a Federal flood indemnity fund and Federal flood reinsurance fund. Into the indemnity fund are to be placed fees paid by the insured, together with payments by the Federal and State governments. Reinsurance premiums are to be placed in the reinsurance fund. The Administrator is empowered to invest money in both funds in United States obligations. These provisions are satisfactory.

23. Financing.-Section 303 authorizes the Administrator to borrow up to $500 million at any one time from the Secretary of the Treasury in order to finance activities under the bill. The remaining provisions of the section dealing

with interest to be paid on such borrowings are couched in the usual language. Money borrowed is to be placed in the indemnity fund or the reinsurance fund as deemed advisable by the Administrator. The policy question here raised is whether the amount here provided is sufficient, but it should be recalled that indemnity fees are to be collected in advance and that section 305 of the bill authorizes the Secretary of the Treasury to pay valid claims out of the United States Treasury. Presumably the $500 million borrowing authorization would be called upon to meet the need of the Administrator for indemnity reserves before adequate reserves have been built up over the reasonable period of years allowed by the other portions of the bill. None of this amount is available for Federal administrative expenses since these are to be paid out of appropriated funds under the provisions of section 304 of the bill.

Apparently section 305 sets up a safety valve which gives claimants a direct line to the United States Treasury in the event the Administrator is unable to pay any valid claim under this bill. Also, presumably, no interest is to be paid by the Administrator for the use of money so paid out by the Federal Treasury. 24. Participation.-Title IV of the bill contains general provisions. Section 401 directs the Administrator to encourage maximum participation of private companies under this bill. It directs him to use the services and facilities of public groups and private insurance companies, agents, brokers and adjustment organizations. It authorizes him to agree with private companies that they may act as underwriter agent or claim agent on the Administrator's behalf.

The section does not seem to provide express authority for the Administrator to enter into participation agreements with private companies whereby they will share in the profits or losses from the program in a manner similar to that arrangement carried out by the War Damage Corporation. It is, of course, questionable whether any such grant of authority would be placed in use by private companies at this time.

25. Private takeover.-Section 402 instructs the Administrator to consult with insurance industry representatives to make continuing studies concerning methods for expanding the reinsurance program and for facilitating the takeover of all flood risks by private insurance carriers.

This section appears to have supplanted provisions for a formal advisory board. Under it the Administrator is limited to consultation with insurance industry representatives. Other bills have authorized a broader representation on advisory boards by permitting membership to those familiar with insurance or reinsurance problems.

How

26. Duration. No express termination date is provided in this bill. ever, section 403 requires the Administrator to send a report to the President on or before January 3, 1961. The President in turn is to submit the report to the Congress. Among other matters it is to contain recommendations for legislation terminating the Government insurance program and providing for assumption of flood risk by private companies or, in the alternative, it is to explain why such legislation would not be feasible or advisable at that time.

As previously pointed out, it is questionable whether the bill sets up a proper yardstick for measuring the feasibility of a flood-insurance program, since it contemplates both Federal and State subsidy of premium payments. Moreover, it does not envision any profit being made on the program; and it requires payment of all Government administrative and operating expenses out of general United States Treasury funds rather than out of funds raised under the indemnity program.

Since the staff study indicated that in any given year the amount of flood damage in the United States varies considerably from the average amount of damage over a long span of years, it is questionable whether a 5-year program will truly test the feasibility of flood insurance. A period of light damage during that 5 years might inaccurately lead to the belief that such a program over a longer period would be commercially profitable. On the other hand, a period of heavy damage during the 5-year period might lead to the unfair conclusion that no private insurance program is commercially feasible while in truth it might prove feasible over a longer period of years.

27. Payment of claims.-Section 404 (a) authorizes the Administrator to pay claims either directly or through his agents. It limits claims to the actual cash value of the indemnified property or the cost of replacing such property with material of like kind or quality, less depreciation at the time of loss. It is suggested that the latter test make it plain that indemnity paid will equal the cost of replacing the damaged property in the condition it was in just before the damage occurred. Translating the formula into a computation of depreciated

value of a damaged road becomes complex when compared with the similar calculation of estimating the actual cost of repair in order to restore the road to its undamaged condition.

28. Judicial review.-Section 404 (b) allows a dissatisfied claimant 1 year within which to file suit in the Federal court in the district where the property is located. One year is measured from the date the Administrator mails notice of disallowance in whole or in part to the claimant.

Such a provision will assure judicial review for dissatisfied claimants.

29. Coordination.-Section 405 (a) empowers the Administrator to consult with other Government agencies having jurisdiction over land use and flood control, in order to assure that the indemnity and reinsurance program is consistent with the programs of such Government agencies. This apparently is intended to encourage flood zoning. The Administrator is also entitled to the cooperation of other Federal agencies where the Administrator's program may affect existing or proposed flood control works. Finally, the Secretary of Agriculture and the Administrator are to coordinate their respective programs for flood indemnity insurance and reinsurance of agricultural commodities.

Section 405 (b) authorizes the Administrator to receive from or exchange with certain State or private organizations dealing with insurance problems information helpful in establishing fees and premiums and in administering the indemnity and reinsurance programs. As a minor point, it should be noted that this does not expressly authorize the Administrator to supply information to such groups unless he receives something in return for such information. This deficiency could be remedied by adding the word "supply," before the word "receive."

30. General corporate powers.-Section 406 grants the Administrator general powers usually assigned to a corporation. These include the authority to sue and be sued; to enter into contracts; to acquire and dispose of real or personal property; to hire employees under the Civil Service and Classification Acts, requiring bonds as necessary (but not authorizing the Administrator to pay bond premiums); to place three positions in supergrades; to conduct necessary research and investigation; to issue rules and regulations; and to exercise incidental powers necessary to carry out the purposes of the bill.

31. Exemption from attachment.-Section 407 of the bill exempts claims under the bill from attachment, garnishment, levy or other legal processes and also exempts claims from setoff against indebtedness due the United States. This provision is designed to insure receipt of funds from an approved claim by the person indemnified.

32. Jurisdiction of real estate.-Section 408 of the bill preserves civil and criminal jurisdiction for States and political subdivisions over any real property acquired by the Administrator under the bill.

33. Taxation.-Section 409 provides that nothing in the bill shall be construed to exempt from taxation by any State or political subdivision any real property acquired and held by the Administrator in connection with the payment of any claim under the bill. This is a provision similar to that contained in comparable portions of the National Housing Act concerning the takeover of property on foreclosure or default. It should be noted that it is limited in scope in that it applies only to property taken over in connection with payment of a claim under this bill.

34. Separability.-Section 410 of the bill is the usual separability provision sustaining a portion of the act even though the remainder be held invalid.

Senator LEHMAN. All these bills are officially before us. However, I believe it is a fair statement of this committee's present state of mind to say that the major alternatives before us are the administration bill, S. 2862, introduced by Senator Bush, and the Lehman-Kennedy bill, S. 3137. Senator Kennedy worked with me in the redraft of my bill.

These hearings, therefore, will be largely concerned, I expect, with these two bills and the differences between them. It is my hope that witnesses will direct their remarks to evaluation and constructive criticism of this pending legislation. In a moment, I want to mention some of the differences between the two bills I have mentioned in order to set the stage for these hearings.

Before I do so, however, I think it is important to point out how large the area of agreement is between Senator Bush's bill and my

own. Both bills set up a flood-insurance program. Both recognize that this program breaks new ground, since private insurance com panies have not written flood insurance in the past and indeed have asserted their inability to do so. Therefore, both programs recognize that some element of Government subsidy is necessary. Both legislative proposals view the enterprise as one demanding flexibility and an experimental approach.

I believe also that Senator Bush and the administration share with me and my cosponsors a sincere desire to put a workable program into operation as soon as possible.

I have every reason to believe that we may expect quick action from the full committee as soon as this subcommittee is ready to make its recommendations. Moreover, I know that the interest in this program among Senators from all over the country is very great, and I believe we may expect prompt action on the Senate floor. We have the assurance of the majority leader to this effect.

Now let me mention briefly a few of the variances between S. 3137 and S. 2862.

First, the administration bill contains a provision under which no insurance may be issued in a State until that State has made arrangements to pay a portion of the premiums. The Lehman-Kennedy bill contains no such requirement. The program set forth in S. 3137 would be an entirely Federal one, in cooperation with the insurance industry.

Second, the administration bill contains a formula whereby premium rates to be insured are to be set at 60 percent of the actuarial rate, however that may be established. The remaining 40 percent would be paid half by the participating State government and half by the Federal Government. The Lehman-Kennedy bill uses more general language, envisioning a rate below actuarial levels if necessary. Third, the administration bill would limit policies to one per person. The Lehman-Kennedy bill would place its limits on a per-locusof-property basis, with a grant of authority to the Administrator to honor original applications before honoring those made by persons who are, as it were, coming around for a second helping.

Fourth, the administration bill would earmark its funds and separate those for direct insurance from those to be used for the reinsurance program. The Lehman-Kennedy bill would not.

There are other differences, some specific and critical, others general and perhaps philosophic. The staff has prepared a detailed comparative analysis of the differences among all three of the bills pending before us, which has already been inserted in the record. (See p. 932.)

Now let us proceed with the hearing which today will be devoted to the administration, and its first witness, Mr. Frank J. Meistrell, Deputy Administrator of the Housing and Home Finance Agency, which under the terms of both the Bush bill and the Lehman-Kennedy bill would administer the insurance program.

Senator BUSH. Mr. Chairman, I would like to compliment the chairman on his opening statement and to assure him of my eagerness to cooperate in any way. As he has pointed out, there is a large area of agreement in these bills, and I think there is no question that the chairman and all of us will work primarily to get something in the nature of a flood insurance bill which people can afford and which can