question before us is, should the Federal Government subsidize that risk?

Mr. WITT. If a person builds a home in a high-risk area, if they build to standards and codes under the flood insurance program, then they are going to have to build that structure to meet those standards and codes. Then they can buy insurance. If they build and the disaster hits that house, regardless if they build, then are we going to continue to give them disaster assistance?

Senator KERRY. In our legislation we specifically provide a disincentive for them to make a reckless decision, by asking them to assume the risk. In fact, they should be denied assistance if there has been a specific of Federal fund trends because it is within 03

zone.

In other words-I mean, this is again a public policy issue-I would like to know why your department believes it has an interest in having people in an area where either the flood insurance program will have the area, therefore premiums go up for everybody. Or, disaster assistance will be paid out.

I for one do not want to pay any more disaster assistance unless we have to. Also, I for one do not want to encourage development of an area that third-prong, has a high erosion, hazard area. I agree with you on that.

Why would you not support the bill, then, on that measure? Why would you not support denial of Federal flood insurance? It does not deny them actuarial rates' private insurance. They can buy it. They can build. They can get private insurance. But why would you as a Federal Government disaster official want to not prohibit federally supported insurance? Would not making them meet the standards and codes and identifying the erosion high-risk areas also be better than risk-management?

But the fact is that in order to build, they would still need a building permit, zoning requirements, et cetera. So they would still have to live up to the Code. They can't build without building to code. The question is: "Are we going to federally insure their building within a zone that we don't think they should build in?"

Mr. WITT. I just feel like that we need to look at both sides of it to make sure that if the denial will keep people from further building in an erosion high-hazard area, then-or would the requirement for them to meet the standards and codes and require them to purchase insurance to be able to build there, which one would be more effective for you?

Senator KERRY. Well, can you suggest to me why it would be effective to make cheap insurance available to them?

Mr. WITT. I do not think it would be cheap. It would be based on actuarial rates.

Senator KERRY. If it is based on an actuarial rate, then the private sector could handle it and the Government has no business doing it.

Dr. BAKER. Good point.

Senator KERRY. I mean, it is either cheaper, or it is what the private sector carries, there is no business for the Government to do it. Do you want to comment, Dr. Baker?

Dr. BAKER. No, Senator Kerry, just to say that Judge Witt suggested that this could be a short study, and it might be very short.

Senator KERRY. How short?

[Laughter.]

Dr. BAKER. I cannot comment on that, but we would likeSenator KERRY. Do you think we could do this study before the markup in a couple of weeks?

Mr. WITT. Senator, if you request it we will.

Senator KERRY. Well, I would certainly encourage it. I am trying to find the rationale. I do not feel like I am picking on you. We talked about this in my office, so I do not feel like I am blindsiding you. I really cannot find the rationale. What we are here to do is to put this thing on a sound economic footing that is fair-and I want to underscore "fair."

No property currently insured loses insurance under this bill. No property that is going to be built back to code is going to be jeopardized. This is not in any way punitive.

If you want to go ahead and build and take a risk, go ahead and do it if you can find a private insurer. All we are trying to do is limit the Federal Government's handout for something that we know is going to be a disaster at one point or another.

Now I want to emphasize that as we are about to break for this first vote. Let me just see if Senator Sarbanes has some questions before we break.

Senator SARBANES. Yes. I just wanted to ask Director Witt, what liabilities are you now exposed to under the Flood Insurance Program? How much?

Mr. WITT. At the current time, Senator, we have about-if we had to pay all the claims at this time, we would probably be $35 million in the red. Right now we have about $160 million in cash

reserve.

Senator SARBANES. Well, how much do you have in outstanding liabilities? It must be in the hundreds of billions, is it not?

Mr. WITT. $243 billion.

Senator SARBANES. So you have outstanding liabilities. This nationwide, of $243 billion. And you have reserves of $160 million? Mr. WITT. Yes.

Senator SARBANES. What do you think your reserve figure ought to be against $243 billion worth of liabilities?

Mr. WITT. What my insurance man said, that is just coverage. That is not liability.

Senator SARBANES. All right, coverage. What do you think your reserve figure against that amount of coverage ought to be?

Mr. COLLINS. Excuse me, sir. We are actuarially sound for the average historical loss year. As the Director indicated, that $243 billion of coverage is just that. It is not liability, Senator. If it were it would be as if all the liability insurance policies in the country

Senator SARBANES. I understand that. Against that, you think $160 million is an adequate reserve?

Mr. COLLINS. We have enough reserve now to get through this fiscal year to October 1 without going in the red.

Now there comes a situation where we have a catastrophic hurricane for example, a Category IV, we will be paying those claims after October 1. It is possible, sir, that we would have to dip into the borrowing authority.

Senator SARBANES. How much borrowing authority do you have? Mr. COLLINS. We have $1 billion, all-told, in two increments, $500 million each.

If we get into the borrowing authority, then the Director will work with the Congress and the OMB to see how that is paid back. We have not used taxpayer money or borrowing authority since 1986. We have been paying all of our claims, my salary, all administrative costs for the average historical loss year out of policyholder premium surplus.

Last year, Senator, we went through about $800 million in loss payments from Hurricane Andrew on through the winter storms in the northeast. We had an awful year. We would be in much better shape had we not had that kind of unprecedented loss year.

Senator SARBANES. Except as I understand, NOAA has said that there has been a lull in this forum in the recent years. Is that correct? Historically? In terms of historical patterns, and you are getting more and more people moving into these areas, are you not? Mr. COLLINS. Well, I think the demographics show that people tend to move toward the coastal areas.

Senator SARBANES. Who is going to pay this bill? I mean, we are facing the prospect potentially of a very large bill. Now obviously you do insurance and you do not cover it fully, but it seems to me this coverage seems to be pretty thin, isn't it?

Mr. COLLINS. Our statute was created by Congress in order that we should subsidize existing buildings. When a community comes into the program, they promise to elevate the new construction to the 100-year flood, which produces actuarially sound policies and rates. But the older homes are subsidized. Forty-eight percent of our business, by virtue of the statute are subsidized.

Senator KERRY. But if my colleague would yield for a moment, just two quick points.

No. 1, you do not have all the damage in, or the assessment in from what has happened in the Midwest.

Mr. COLLINS. No, sir. So far we have paid $24 million.

Senator KERRY. Correct. But you don't know what's yet to come, number one.

No. 2, there is significantly more mitigation and encouragement that you could offer to communities which would minimize your disaster assistance and your flood, if you had a larger fund that was capable of leveraging that mitigation. Correct?

Mr. COLLINS. Yes, sir.

Senator KERRY. And if you had a larger fund, ultimately you might yet be able to reduce rates more. Correct?

Mr. COLLINS. That would be ideal. That is the way the lender compliance provisions of S. 1405 comes in. If we can sell more policies, we can spread the risk and gain more premium income.

Senator SARBANES. Where does the money come from if you use up your $1 billion line of credit and people who have these policies are in trying to get their claims paid? Where does that money come from?

Mr. COLLINS. If we had to dip into the borrowing authority Senator KERRY. No, no. You used up your borrowing authority.

Mr. COLLINS. [continuing] and use it up, we would have to come to the Congress to consider what the Congress would want to do in a legislative ways.

Senator SARBANES. Well, you would be coming to us asserting that there were people who got the policies and paid the premiums, but you didn't have any money to pay the claim. Is that correct? Mr. COLLINS. We would come to you asserting that, for example, in a 1 in 1,000 chance, the $4 billion storm. There is a 1 in 1,000 chance of that. If that were to occur, we would have to come to you and say, the borrowing authority may well be insufficient.

Senator SARBANES. So you would not assert that the Government in good conscience could deny those claims, do you, on the basis that it had used up the reserve, and had used up the borrowing authority? We obviously would be almost compelled to pay them, would we not?

Mr. COLLINS. We do not assert that, Senator, and we came to you early on to suggest we may have to do something about this. You can count on that, sir.

Senator KERRY. Folks, I truly apologize for those who have travelled any distance, and to everybody for your schedules, but we are going to have to now adjourn until tomorrow morning at 9 a.m., when we will resume the questioning.

Thank you.

[Whereupon, at 2:44 p.m., the hearing was recessed, to reconvene at 9:00 a.m., September 15, 1993.]