Mr. Chairman, I am sure I speak on behalf of every citizen of this State and region when I express my appreciation to you for your efforts in coming to Massachusetts and New England. I want to welcome you and your associates to this city and emphasize my personal gratitude for your generosity in adding, at the request of Senator Saltonstall and myself, this hearing to your already heavy schedule.
I. The need for a Federal Flood Insurance Program.
1. The growing flood problem.
Estimates of the property damage and financial loss suffered as the result of the August and October floods in this region, though varying, have gone as high as two billion dollars. The communities, homeowners, businessmen and others who bore the brunt of this terrible loss can never hope to regain, from public or private sources, all that was swept away; but they do hope that the tragic lesson of this calamity may spur Congress into taking action to alleviate such losses in the future. The most important step, of course, is acceleration of the construction of all necessary flood control projects. But of nearly equal importance to this area - where the frequency of floods may be sharply increasing, as the result of new hurricane paths - is the question of insurance.
2. The need for insurance.
Although prevention of damage to property is obviously preferable to reimbursement for its loss, once such destruction is an accomplished fact reimbursement softens the blow and makes possible earlier rehabilitation. The accepted manner of providing such reimbursement is through a system of insurance - whereby the risks of future losses are spread equitably (a) over all interested members of the community, and (b) perhaps more important for our purposes today, over a very long period of years - thus making it possible to budget in advance, with consequent increases in peace of mind and economic security, a small, regular contribution for such purposes each month for many years, instead of being confronted with an overwhelming amount following a catastrophe.
These benefits are as true in the case of floods as they are in the case of any other catastrophe now covered by insurance. Some suggest that flood insurance, however, whether public or private, is undesirable because it would encourage retention of property in potential danger areas, a problem which is not presented by fire and most other disaster insurance programs. Certainly some care needs to be exercised to prevent this tendency (and the Kennedy-Saltonstall bill so provides). But an estimated ten million people live on fifty million acres in potential flood areas in this country - particularly here in New England, where our major cities are located in river valleys - and some four hundred billion dollars is invested in those areas. All possible floods in these areas cannot be prevented; the cities and industries cannot be abandoned or relocated; and thus insurance is needed. Of course, insurance by its very nature cannot be available on the same terms to those who live in the very "flood-bottoms" themselves; and any insurance program requires, moreover, all policyholders to take preventive measures to reduce damage. Thus, unlike a flood relief program restricted to direct grants to all persons, the cautious and the careless alike, insurance discourages unwise investments and encourages reduction of losses.
3. The unavailability of private insurance.
An insurance program is thus both necessary and desirable to cover floods in much the same manner as fires, lightning, hailstorms, cyclones, earthquakes, tornadoes, blizzards and practically every other natural catastrophe are covered. But the fact of the matter is that flood insurance of any kind is virtually unavailable today. Nor is there any prospect that the private insurance industry will offer adequate protection against potential flood damage at reasonable rates. Practically none of the heavy damage suffered by the homeowners and businessmen in this area was covered by insurance. This is without question the most glaring gap in the protection offered by an industry which has otherwise offered insurance on every conceivable - and some not so conceivable - subject.
4. The reasons for the unavailability of private flood insurance.
I do not criticize the private insurance industry for its failure to offer this badly-needed protection. The prudence which they owe their other policyholders as well as their stockholders prevents them from embarking alone on such a program for the following reasons:
a. First, any insurance company which unilaterally added flood damage to its "extended coverage" policies would find itself unable to compete with other companies failing to offer this expensive item.
b. Second, in attempting to cope with flood problems in multi-state river valleys, to fix varying rates and conditions for property in different areas, and to experiment in this new, unchartered wilderness, private insurance companies would face 48 different sets of conflicting state insurance laws and inappropriate (for flood purposes) restraints.
c. Third, no insurance company is able or willing to expend the funds necessary for the prediction and measurement of floods and flood damage in each river basin in order to make possible some actuarial estimate of the risks involved. Even if such surveys could be undertaken, it would be necessary to recover their costs through still higher premiums from policyholders.
d. Fourth, no insurance company would be willing to tie up the funds necessary for the maintenance of the large financial reserve which would be required to meet the contingency of a heavy flood early in the program (before flood premium income was sufficient to maintain that reserve).
e. Fifth, previous experience with flood insurance, largely around the turn of the century and limited to particular valleys, was most unprofitable; and any modern company whose sales might be concentrated in a particular region fears the same result.
f. Sixth, the possibilities of a catastrophic loss early in the game, an adverse selection of risks due to a limited base, a declining demand after flood waters have receded and unpopular variations in rates, would all make impossible the guarantee of a reasonable profit within a reasonable period of time.
5. The need for, and feasibility of, Federal flood insurance.
It is apparent from the unavailability of private flood insurance that the only alternative to some form of Federal insurance is no insurance at all. However much we may criticize the Federal Government's entry into this field, however doubtful we may be about the success of such an experiment, it is important to remember that the only other choice facing us is no insurance whatsoever.
The Insurance Company Report of 1952 which outlined the industry's reasons for refusing to enter this field also stated:
"Since for the reasons outlined private underwriters cannot undertake to provide specific flood indemnity as an insurance venture, it follows that Government likewise could not undertake to provide specific flood indemnity by means of insurance. There is no reason to believe that the Government would encounter fewer obstacles to such an undertaking than private insurers."
A re-examination, in terms of a Federal program, of the six obstacles found in private insurance, shows the fallacy of this conclusion.
a. The Federal Government, of course, would have no problems of competition with other insurance companies who would not offer flood protection. On the contrary, the monopolistic nature of its position would make possible a broader base and cheaper rates than any single company could offer.
b. Similarly, the Congress, recognizing that state boundaries have no significance in national disasters, would be able to promulgate a fair and yet economically sound program for property owners in all parts of the country, experimenting without regard to the various state insurance regulations.
c. Third, the Federal Government has already, and properly so, assumed the responsibility of predicting and measuring floods and flood damage, as well as erecting flood control projects to reduce this damage. The cost of such tasks, clearly in the national interest, are properly borne by the public as a whole, and thus, unlike private insurance administrative costs, would not be charged exclusively to the policyholders.
d. Fourth, the question of a large financial reserve poses no difficult problems for Congress, which can authorize - as it has in the past authorized - an agency to borrow funds from the Treasury, either on a regular basis or in case of an emergency in the early years of its existence, such loans to be repaid from premium income.
e. Fifth, unlike the private flood insurance ventures on the Mississippi in 1899, a Federal program would inherently be nation-wide in coverage - drawing additional strength from the fact that major floods tend to occur only in one of two regions - not every region - during any one year.
f. Finally, it cannot be denied that a Federal program will also face problems of risk selection, rate variation and other problems that make a profit dubious. But the Federal Government is not required to make a reasonable profit on its insurance within a reasonable period of time. As stated in the Hoover Commission Task Force Report on Water Resources and Power:
"Flood insurance ... cannot pay off in the working life of an individual, and hence could not be attractive to the managers or stockholders of a business firm. But Government, as a permanent institution with much at stake already, can take a long-range course."
Moreover, a Federal insurance program would pay no State and Federal taxes; it could use existing Federal personnel without additional cost to policyholders; and it could borrow money at cost, or even less than cost, from the Federal Treasury. It would also be in a better position to require long-term commitments from policy purchasers who might otherwise fail to renew as flood memories become dim. Federal flood insurance is thus not only necessary but feasible.
6. The responsibility of the Federal Government.
Floods have long been recognized as an appropriate subject for Congressional action because of their devastating effects upon our nation's interstate commerce, preparedness, health, welfare and economic well-being. Without Federal flood insurance, the Federal Government receives less tax income from non-productive flooded industries and from homeowners able to deduct flood losses. Without Federal flood insurance, heavy Federal subsidies through direct relief grants (to which flood victims have made no special contribution) will continue. Finally, the Federal Government has an important stake in preventing the abandonment of cities and industries in potential flood areas.
Neither is insurance a new field for Congressional action. Crop insurance, war damage insurance and maritime cargo war insurance are among those well-known Federal programs most closely related to the subject at hand; and in addition the Federal Government provides insurance for bank deposits, savings and loan accounts, mortgages on houses and vessels, and investments under the Mutual Security Act; several types of insurance for Government employees and veterans; and social insurance against the risks of retirement and unemployment for practically all working men and women. The Federal Government entered many of these fields, particularly those first mentioned, because of the unwillingness or inability of the private insurance industry to offer adequate protection at reasonable rates, and in spite of predictions of certain failure from representatives of that industry, in much the same situation as we have today. But every one of the programs mentioned has been generally accepted and financially successful. (It is important to note that the insurance industry, in its 1952 Report, specifically compared flood damage with modern war damage; and the Report offered
"the complete facilities of the insurance business...to the Government in carrying out such an undertaking should Congress...determine to provide specific flood indemnity...(and) wish to make use of such facilities in a manner similar to their utilization in connection with the War Damage Corporation in World War II.")
7. It has been suggested that the accelerated flood control program which I previously mentioned should be preferred to the exclusion of any insurance program. But consider these facts:
a. Every flood control expert in the country agrees that no amount of projects, however high the dams, and however adequate the warning systems, could ever eliminate all floods and all damage.
b. It will be years before a comprehensive flood control program can be completed, if it will ever be completed.
c. In some areas flood control is simply not economically feasible, because of the cost of the project, the value of the land to be acquired or other factors.
d. Responsibility of the Federal Government for payment of flood insurance claims would increase, not retard, the speed with which it built projects to reduce those claims.
8. The relationship of Federal flood relief measure to insurance.
The argument has been made that direct grants of money, from both Federal and private sources, would be more in keeping with the American tradition of voluntary relief for humanitarian purposes. But such relief, by its very nature, and as demonstrated by our experience here, is irregular, unreliable and inadequate in terms of complete recovery. Moreover, unlike insurance, for which the property owner pays, it too often requires recipients to undergo a "means test" to demonstrate that they are eligible for a handout. Similarly, disaster loans are no substitute for insurance; for their repayment requires the mortgaging of future income, a mortgaging which many small homeowners - already left with a debt and mortgage for which they have no house - simply cannot undertake. Certainly the insurance method of a small regular payment in advance of the disaster is to be preferred.
II. What Kind of Flood Insurance Bill?
Early in September I proposed the draft Federal Flood Insurance Bill which is before your Committee now. I was joined in this endeavor by my colleague, the Senior Senator from Massachusetts (Mr. Saltonstall); and I have since received assurances of co-sponsorship from Senators in every part of the country, including the Senior Senator from Rhode Island (Mr. Green), the Senior Senator from South Carolina (Mr. Johnston), the Senior Senator from North Dakota (Mr. Langer), the Junior Senator from Oregon (Mr. Neuberger) and the Junior Senator from Maine (Mr. Payne). Numerous other Senators have indicated to me their interest in the bill.
The difference between this draft proposal and the other proposals contained in the Committee prints before your Committee point up a number of questions concerning the exact nature and details of any Federal Disaster Insurance bill.
(1) Use of the term "insurance". Representatives of private insurance companies have objected to the use of the term "insurance" in connection with these proposals. Personally I am willing to substitute the word "indemnity" or any other term if that would facilitate passage of the bill. But inasmuch as all of the proposals thus far envisioned, with or without a Federal subsidy, are based upon the basic principles of insurance, this objection would appear to merit little attention.
(2) Other disasters? A more fundamental question is whether the proposed insurance program should cover other natural or man-made disasters in addition to those caused by floods or high water. With respect to man-made disasters, such as war damage, I have always favored the revival of the War Damage Corporation which operated so successfully in previous years; but your Committee knows of the many controversial problems which have prevented enactment of such legislation in recent times. Thus I would prefer to see such legislation considered independently, rather than risk the delay or defeat of a flood insurance bill which is unrelated to those particular controversies.
With respect to other natural disasters, it is my understanding that private insurance is presently offered - and I hope your Committee will check into this - for every natural catastrophe except floods and high water. In the belief that no Federal program should compete with private industry, I limited my bill to floods alone. I realize that the inclusion of natural disasters more prevalent in other parts of the country is said to increase the potential support of such a bill; but this should not be necessary in view of the official figures on flood damage in every State in the Union during the last several decades.
The definition of "flood" should be broadly interpreted to cover the entire insurance gap, including damage caused by hurricane-driven tides, tidal waves and other high water damage from either fresh or salt water.
(3) What energy? The next fundamental question facing your Committee is the location of responsibility for the administration of this program. I want to stress that the designation of the Small Business Administration in my bill is at best tentative; and was made simply because that agency (a) succeeded the RFC under whose jurisdiction was placed the War Risk program, and (b) is the only agency presently in touch with both homeowners and businessmen in case of disaster. This year's floods point up a drastic need for improved coordination of our many disaster relief programs; and as Chairman of the Subcommittee on Government Reorganization of the Senate Government Operations Committee I hope to look into this matter. Should an over-all disaster agency be created, naturally it should administer this program. If not, and if the Government agencies involved feel that the FHA would be preferable to the SBA, I would be willing to accept that judgment and the judgment of this Committee. A related question which I am also willing to leave to more expert determination is whether such a program should be administered by an independent Government corporation.
(4) Insurance or reinsurance? One of the proposals most frequently made is that the role of the Government should be restricted to that of a reinsurer, protecting private insurance companies against excessive loss on flood insurance policies sold to their customers. To the extent that broad, economical and fair coverage could result, reinsurance would be the ideal way to provide flood insurance with the greatest amount of private enterprise; and my bill authorizes such a function. But to restrict the Federal program to reinsurance alone, and to prohibit it from providing insurance on its own, makes the dangerous assumption that the insurance companies would be willing, with Federal backing, to underwrite flood risks at reasonable rates, providing the same protection to the same people who would be covered under a Federal program. Neither insurance or reinsurance should exclude the other. Under the Kennedy-Saltonstall bill, both insurance and reinsurance are authorized, and a high degree of flexibility is retained. It would be possible, for example, to handle the program entirely through the private insurance companies, including not only the use of their facilities and personnel but also their voluntary financial participation in the underwriting of risks and the sharing of losses and profits. Similarly, practically all of the other various proposals made for some kind of flood insurance would be possible under this bill; and I would prefer the adoption of such a broad and flexible plan, rather than a bill strictly limited to only one of these alternatives.
(5) Role of the insurance industry. The cooperation and participation of the private insurance industry are essential to the success of any Federal insurance program. I have stressed that we must not compete with private insurance; and in addition to restricting my bill to flood property not now eligible for private insurance coverage, the bill specifically provides that insurance and reinsurance would not be available from the Federal Government except when they were not available from private sources. As mentioned, the Kennedy-Saltonstall bill also authorizes reinsurance for companies willing to insure flood risks on that basis; and the maximum use possible of their facilities, services, personnel, records and claims adjustment procedures, as well as their financial participation, is directed. Finally, the Kennedy-Saltonstall bill calls upon the administrator to exchange loss experience and similar information with private firms, and to appoint an Insurance Advisory Committee of members from the industry to assist in the administration of the Act. It is my hope that this program of partnership with private insurance, not competition or duplication, will meet with the approval of the industry and the Congress.
(6) Permanent or temporary? I have stressed from the beginning that this proposal is something in the nature of an experiment, much as the initial programs of Crop Insurance and War Damage Insurance were experiments. For this reason I have attempted, as indicated, to make my bill flexible in nature, with most details left to its administrator. I do not share the opinion expressed by the Budget Bureau, however, that any bill adopted should be temporary in nature, with a life of perhaps three years; for the very nature of insurance, particularly flood insurance, makes it necessary that costs and risks be calculated on a permanent long-range basis from the very beginning. Undoubtedly Congress will want to make changes in the program after its first few years of operation, as it did with Crop Insurance; but we should not write into law this restraint upon sound, long-range planning.
(7) Retroactivity: The Committee print on which no sponsors name appears would provide under this program indemnification for losses already suffered during the current year, on which, of course, no insurance was taken or premium paid. It would be difficult for me to oppose this step, for I know that the heavy losses of our citizens will not otherwise be recovered; but such a proposal introduces into this program principles both alien and unsound from an insurance standpoint, including the burdening of new policy-holders with the costs of floods not covered by the program. I would therefore suggest that such a proposal be considered independently of flood insurance.
(8) What kinds of property? The next fundamental question to be determined by your Committee is the type of property to be covered under a Federal flood insurance program. The Kennedy-Saltonstall bill covers only privately owned real property, including commercial, industrial and residential property. It thus excludes all personal goods, business inventories, crops, detachable equipment and property owned by state and local governments. The primary reason for this admittedly narrow scope was my belief that an experimental bill of this nature would meet success only if strictly limited in terms of coverage and potential economic loss. Although I will favor the broadest bill possible of enactment by Congress, to the extent that no duplication of private insurance efforts is found by this Committee, the following should be kept in mind: Federal Crop Insurance should be expanded - but under its own program, not in this bill. Private insurance companies presently offer flood insurance on bridges, tunnels and other types of publicly owned property; while other state and local governments look upon themselves as self-insurers as does the Federal Government. Automobiles, jewelry, furs, and many other types of movable personal property are also offered coverage by private insurance - and the administrative problems of paying insurances claims on other types of personal property are almost insurmountable.
(9) Compulsory or voluntary coverage? Inherent in the Kennedy-Saltonstall Bill and I believe in all of the bills before you, is the principle of voluntary coverage. Such coverage, of course, would be limited, a problem we cannot ignore. It has been suggested that coverage be made universal by making it compulsory, by automatically including premiums either in the property taxes paid in every state or in the premiums paid on private insurance policies for fire and extended coverage. Such a proposal violates the basic principles of insurance, and distributes the cost of floods equally among all persons regardless of their exposure or their efforts to avoid damage. Those who were actually protected by the program would be paying the same amount for their protection as those who received no direct benefits under the program whatsoever. If a flood insurance subsidy is necessary - as will be discussed momentarily - it should come from general revenues and supplement premium payments - thus requiring a larger contribution from those who will benefit than from those who will not, and distributing the burden equally over all taxpayers, not simply those who own property or insurance policies.
(10) Cost to policyholders and Government. But would a subsidy be necessary? No flood insurance program should be financed entirely out of general revenues, for that would again violate the principle that those receiving protection should pay more than those who do not. The Kennedy-Saltonstall Bill provides that premiums will be charged, and that "rates shall be based insofar as practicable upon consideration of the risks involved and shall to the extent deemed practicable by the Administrator by adequate to cover all administrative and operating expenses arising under this Act, as well as reserves for probable losses." In order to carry out that objective, several provisions have been included in the bill: (a) Coverage, both as to types of property and types of catastrophe, is strictly limited. (b) The Administrator is empowered to establish such terms, conditions and limits as are necessary to attain this objective, and he may decline some applications and risks altogether. (c) A "deductible" of at least $300 plus 10% of the remainder of the claim is required. (d) No insurance or reinsurance shall be issued for properties in conflict with flood zoning laws; and the program shall be administered to prevent inducements for unwarranted acquisition of facilities in obvious flood danger areas. (e) A broader base is made possible by authorizing other Federal agencies participating in the financing of real estate to require purchase of Federal flood insurance under this Act.
I have previously stated the financial advantages enjoyed by a Federal program of this nature. Of course, there will still be problems of maintaining a steady demand, broadening the base to avoid an adverse selection of risks, and selling policies with wide variations in rates dependent upon the location of property; but, as pointed out by the Hoover Commission Task Force Report, these are questions which can be answered only by the initiation of a limited, experimental program. If a supplemental Federal subsidy eventually be needed, it would still be a more efficient and less burdensome form of Federal assistance than the heavy relief grants now required and a not inequitable burden in view of other subsidies in other programs and areas.
(11) Amounts of insurance offered. The dollar amounts suggested in the Kennedy-Saltonstall Bill, with respect to both the aggregate amount of insurance covering my single piece of property and the total amount of insurance which can be issued, were arbitrarily selected and intended to be tentative. I have suggested $250,000 as the limit on the amount of insurance to be written on any single property (but not for any single owner), an amount fixed not only because on my previously expressed desire to offer a limited, experimental bill, but also because of a feeling that those whose real property alone exceeds that value are not those most in need of such insurance. The limit on the total amount of insurance to be provided under the Kennedy-Saltonstall Bill begins at $500,000,000, increasing by that amount each year until it reaches $1 1⁄2 billion by 1958. Although this might well be adequate for an experimental approach of the type I have expressed - particularly in view of the pessimistic predictions that there will be little demand for such insurances once these floods have been forgotten - I would nevertheless be most willing to accept the recommendations of the Committee on this matter.
(12) Conclusion. In reviewing some of the questions with which my staff and I were confronted, and with which this Committee and its staff will be confronted, in drafting a bill for Federal flood insurance, I have set forth the rationale which lies behind many of the provisions contained in the Kennedy-Saltonstall Bill. But I want to stress to you, Mr. Chairman, that my chief concern is not whether my name will be on the bill finally enacted, or whether it is a Democratic bill or a Republican bill - my chief concern is to obtain the best bill possible. I will be delighted to work with you, Mr. Chairman, and the members of your Committee, to bring about the passage of such a measure; and I want to assure you again how deeply your efforts are appreciated in this state and region.
Speech source: Papers of John F. Kennedy. Pre-Presidential Papers. Senate Files. Series 12. Speeches and the Press. Box 894, Folder: "Federal Disaster Insurance hearings, Boston, 9 November 1955".