WRITTEN TESTIMONY OF BANKERS INSURANCE GROUP

Bankers Insurance Company is domiciled in the State of Florida and is currently the fourth largest writer of Federal flood insurance in the country. Writing through the Government's Write Your Own Flood Program (WYO) we have responsibility for approximately 170,000 flood policies. We have been closely watching the development of the proposed flood reform legislation for several years and we respectfully submit our comments and recommendations for your consideration.

We strongly support legislation that clarifies and enforces compliance to the requirements of the National Flood Insurance Act of 1968 and as amended, the Flood Disaster Protection Act of 1973. We also support State and local efforts in mitigating flood and erosion risks, however we cannot support legislating the denial of insurance. We would like to offer alternatives that have worked well in comparable programs in the insurance industry and when utilized in conjunction with the Community Rating System, which is included in this proposed legislation, will provide benefits to the community as a whole and the individual property owner. We are looking forward to the proposed increases in the maximum allowable limits for flood insurance coverage which have not been raised since 1978 and are grossly out of line in today's economy. Finally, we request your assistance in getting language inserted in the pending legislation that will limit the ability of the States to impose taxes other than the estate premium tax which the FIA and the WYO Flood Companies believe should be paid. We believe that S. 1405 with some tweaking and fine tuning can be the legislative instrument that will prove beneficial to the overall success of the National Flood Insurance Program.

Bankers has been a committed participant in the WYO Program since it's inception in 1983 and was one of the first six companies to sign the "Arrangement" with FIA. In many companies flood insurance is viewed as an accommodation product for their agents. In our company flood insurance is our number one product. We have extensive experience in the many intricacies of flood insurance as it is utilized by lenders, borrowers, and agencies in twenty-one States. We are also cognizant of the fact that existing legislation has not achieved the desired level of compliance that was the original intent of Congress in order to minimize the economic devastation to homeowners resulting from flood and reduce the drain on the Federal budget. Unfortunately, recent statistics emerging from the Midwest only serve to emphasize what we have known for many years, that the vast majority of high risk households eligible for flood insurance (approximately 85 percent), do not buy it.

Bankers has taken a leadership role in its efforts to expand the flood policy base and enhance the public awareness to the peril of flood. The company has dedicated resources and personnel to the training of agents, financial institution staff and company staff on flood insurance. We have invested heavily in the development of systems and technology in order to make all Federal flood products available to our customers. The Company President serves as Chairman of the National WYO Flood Marketing Committee and is President of the Flood Insurance Servicing Companies Association of America (FISCAA). The Company's Chief Financial Officer is a working member of the WYO Flood Standards Committee. The Senior Vice President serves on the Flood Committee of the National Committee of Property Insurers (NCPI), the National WYO Flood Marketing Committee, and is Secretary for the FISCAA.

Having said all of the above... even with our credentials and corporate commitment to the marketing of flood, the sale of flood insurance is more than challenging. Agents experience great difficulty selling flood insurance. Many will tell you that it's the hardest product for them to sell even though, during the life of a thirty year mortgage loan for a home located in a Special Flood Hazard Area, there is a 25 percent chance (1 in 4) that the home will experience a flood loss as opposed to a 1 percent (1 in 10) chance of loss from fire. Most people, if given the option, do not want to buy insurance and in particular, flood insurance. That's why it has been said that "GOD and LENDERS sell flood insurance."

Since flood reform legislation was formulated and drafted in the House in 1990 and H.R. 1236 was introduced in May, 1991 in an effort to rectify the low compliance problem, we have experienced some of the worst property damaging natural disasters in our country's history. And credible forecasters continue to predict more frequent and more severe storms to come.

We need meaningful legislative assistance. To that end we offer our comments and suggestions on various portions of the bill: Title II-Compliance and Increased Participation; Title IV-Mitigation of Flood and Erosion Risks; and Title VI-Miscellaneous Provisions.

TITLE II-COMPLIANCE AND INCREASED PARTICIPATION

(1) Existing legislation does not make mention of refinances in the same context of "makes, increases, extends, renews, or purchases," when discussing loan activity. Refinancing was not a common term when the original legislation was drafted. We suggest adding the word "refinance" to makes, increases, extends, renews, or purchases, as appropriate throughout the bill.

(2) Previous drafts of this legislation specifically prohibited waiving the flood insurance requirement for any reason. We strongly urge that the waiver prohibition be restored to S. 1405 because the lack of clarity on this subject in the existing legislation has caused considerable problems for lenders in the past. While the argument can be made that a law is a law and laws cannot be waived, in the lending environment it is common practice to waive required insurance coverages such as Collateral Protection on consumer loans. When this is done the lender opts to self insure the risk. Self insurance is not now nor has it ever been an option in flood insurance, however we need legislative clarity on this point.

(3) Existing legislation requires the lender to notify the purchaser of improved real estate of the special flood hazard in writing within a reasonable period in advance of the signing of the purchase agreement, lease or other documents. Subsequent guidelines have interpreted "reasonable" as at least 10 days notice prior to closing. S. 1405 does not mention when a lender should notify a mortgage applicant that the property is in a Special Flood Hazard Area. Without notification prior to closing the applicant does not have the opportunity to make an informed decision regarding a major purchase nor can the borrower obtain flood insurance which could be a condition of closing. Current notification guidelines of at least 10 days prior to closing, or at time of commitment, whichever is earlier, have worked well in the past and we strongly urge their inclusion in S. 1405.

(4) S. 1405, Section 1364(e) requires participating communities to notify and warn homeowners and "known lenders" when individual properties are reclassified as in a SFHA on a new or revised flood map. This implies that the communities will be making the determinations. There are a number of questions to be raised in connection with this approach:

a. How will it be determined what source communities will use for flood hazard determinations? Will they use FEMA flood maps exclusively? How will this be regulated? Will there be penalties for using unofficial maps?

b. In accordance with the guarantee provision, will the community have to guarantee the accuracy of its determinations and reimburse the homeowner for an uninsured flood loss or unnecessary flood insurance premiums paid due to an inaccurate determination?

c. How will the community determine which lenders are active in their community? What about "unknown" lenders?

d. Since many lenders sell or transfer the servicing of their mortgage loans to firms located all over the Nation, and the servicer is responsible for updating, how will the communities know whom to notify?

We submit that this provision is unwieldy and unworkable and suggest that it be deleted in its' entirety and the notification requirements clearly stated in S. 1405 Sec. 604 be sufficient to fulfill the intent of this provision.

(5) We believe that Section 205(e) which permits reliance on a previous determination less than five years old to be counter-productive. FEMA estimates that there is an average of 6,000 new and revised maps issued annually. Inevitably, the change in flood status of many properties will be missed over a period of five years resulting in uninsured flood losses on properties in a SFHA, the situation the legislation is designed to eliminate.

We suggest that this Sec. 205(e) be deleted in it's entirety from the text.

(6) Previous drafts of this legislation permitted lenders to charge a reasonable fee for flood zone determinations to the borrower notwithstanding any Federal, State, or local law. This provision has been removed from S. 1405 and we believe that without the option to charge for the zone determination the lender is being placed in the position of having to fund the determination process themselves or suffer the consequences of fines and related penalties. We recommend inserting into Sec. 205"(e)" Fee for Conducting Determination and we suggest the following wording, "Notwithstanding any other Federal, State, or local law, any user of the Standard Determination Form as described in Sec. 1365"(c)" Required Use may charge the borrower a reasonable fee for the costs of determining whether the improved real estate or manufactured home securing the loan is located in an area of special flood hazards.

TITLE IV-MITIGATION OF FLOOD AND EROSION RISKS

(7) As an insurance company we are in the business of providing insurance coverages and mandating the denial of insurance is not usually the norm. While some risks are certainly more desirable than others, there is usually an opportunity for all property owners to obtain at least the minimum required coverages albeit at an appropriate rate. Therefore we cannot support the provision to deny insurance as indicated in Title IV-Mitigation of Flood and Erosion Risks Sec. 1314 without a corresponding alternative provision which affords the ability to purchase insurance. We believe this can be accomplished through utilization of the Community Rating System (CRS) in this section of the bill. By making CRS a significant factor in this section the Director theoretically retains the ability to deny insurance in certain situations of non-compliance much like other lines of insurance with specific underwriting guidelines for preferred business. It is reasonable to assume that communities voluntarily participating in CRS would equate to preferred risks in the insurance industry. This method also allows the individual communities to have some control of their rating structure.

Those communities who do not voluntarily participate in CRS would in essence be the non-preferred risks or the non-standard risks similar to those in the residual markets. While insurance would be available to everyone the risk would be actuarily calculated. The obvious benefit to this type of program is that in the event that the Director should be forced to invoke his authority and deny insurance on a structure(s), the property owner still has recourse.

Note: We have attached suggested language to accomplish this. Please refer to Attachment A.

TITLE VI-MISCELLANEOUS PROVISIONS

(8) We wholeheartedly support the provisions for increasing the available amounts of coverage in the flood insurance program. The amount of coverage available in the flood program has not been increased since 1978. That was fifteen years ago. Today's consumer understands insurance to value and wants replacement cost on their property when they suffer a loss. They don't want to recover a portion of their loss, they want to be made whole. Property values have certainly increased over fifteen years as has the price of labor and material needed to replace a home.

From an underwriting perspective, high valued properties generally constitute a better risk and historically produce a lower loss ratío.

(9) We also recommend that all lending entities be encouraged to adopt regulations comparable to those now promulgated by some Federal agencies which require the amount of flood insurance to be equal to the lesser of 100 percent of the insurable value of the building or the maximum coverage available in the NFIP in order to accommodate insurance to value. This could be accomplished by footnote or other notation to the legislation.

(10) Normally government does not tax government but in recognition of the role of States in regulating insurance company solvency for other lines of insurance and the role that State regulation plays in licensing insurance agents and brokers, the Federal Insurance Administration has authorized insurance companies participating in the NFIP to pay State premium taxes. This is a policy the Federal Insurance Administration has followed since the inception of the NFIP in 1968 and it seems reasonable to continue.

The FIA has expressed concern that the efforts by many States and local governments to impose taxes and levies upon NFIP flood insurance premiums collected by WYO companies, beyond the premium tax which we believe should be paid, may lead to eventual Congressional action to pre-empt State taxation and regulation in the case of the NFIP, a step which would probably extend to the premium tax, as well as to the other types of State and local taxes.

Under the terms of the Arrangement between the WYO companies and the FIA, the WYO companies are allocated a certain percentage of premium to pay agent commissions, State premium taxes and marketing and servicing expenses. When States demand more than the allocated average amount targeted for State premium tax companies will be less inclined to market flood insurance in those States. Ironically the State of Alabama sued FEMA for not doing an adequate job of promoting the flood program. There are many companies active in marketing flood insurance in the Write Your Own Program who choose to avoid marketing in Alabama because they have the highest taxes in the country applicable to insurance premiums. The expense allowance paid to the companies by the Government is not adequate for this percentage to be paid to the States without sacrificing other services to the cus

tomer.

We respectfully suggest that these problems could be solved by amending Title VI of S. 1405, Sec. 607 Regulations to read:

The Director of the Federal Emergency Management Agency and any appropriate head of any Federal agency may each issue any regulations necessary to carry out the applicable provisions of this Act and the applicable amendments made by this Act. No State or local governmental body shall have the authority to promulgate rules or regulations, pass laws, or issue policies that directly or indirectly affect or govern agreements, arrangements, contracts, or actions authorized by the National Flood Insurance Act of 1968, as amended, the Federal Disaster Protection Act of 1973, as amended, and this Act; premiums collected for deposit in the National Flood Insurance Fund shall be exempt from all taxation now or hereafter imposed by the United States, by any territory, dependency or possession thereof, or by the State, county, municipality, or local taxing authority, except that the insurance policies issued by or in conjunction with the Federal Government pursuant to the National Flood Insurance Act of 1968, as amended, the Federal Disaster Protection Act of 1973 and this Act; shall be subject to State insurance premium tax only.

We sincerely appreciate your consideration of our recommended changes and comments and the opportunity to provide input to this pending legislation.

ATTACHMENT A

On page 37 line 20 insert after area "(in communities voluntarily participating in the Community Rating System (CRS))"

and on line 21 insert after construction "(that is not built in accordance with criteria established for local community participation in the CRS;)"

and on line 23 insert after structure "(to be)"

and on line 23 delete after not "readily movable)" and replace with "(in accordance with criteria established for local community participation in the CRS)" On page 38 line 4 insert after; "(or)"

and on page 38 line 5 delete after not "readily movable)" and replace with "(built in accordance with criteria established for local community participation in the CRS)"

and on page 38 line 8 insert after structure "to be)"

and on page 38 line 8 delete after not "readily movable)” and replace with “(in accordance with criteria established for local community participation in the CRS)” and on page 38 line 11 insert after section "(in communities voluntarily participating in the CRS)"

On page 38 insert after line 11 and before Sec. 407"(c)" Premiums for Flood and Erosion Risk Areas in Communities Not Voluntarily Participating in the Community Rating System.-With respect to structures that are subject to flood and/or coastal erosion risk and are located in communities that choose to not voluntarily participate in the Community Rating System Program, premiums shall be calculated based on the actuarial risk for these structures.

(b) Transition. The Director of the Federal Emergency Management Agency (hereafter in this title referred to as the "Director") may pay amounts under flood insurance contracts for demolition or relocation of structures as provided in section 1306(c) of the National Flood Insurance Act of 1968 (as in effect immediately before the date of enactment of this Act) only during the 1-year period beginning on the date of enactment of this Act.

SEC. 406. LIMITATIONS ON NEW FLOOD INSURANCE COVERAGE IN EROSION HAZARD AREAS.

The National Flood Insurance Act of 1968 (42 U.S.C. 4001 et seq.) is amended by inserting after section 1313 the following new section:

"SEC. 1314. PROPERTIES LOCATED WITHIN 30-YEAR AND 60-YEAR EROSION HAZARD AREAS.

"(a) Properties Located Within 30-Year Erosion Hazard Area.-After the establishment of erosion hazard areas under section 1360(i), the Director may not make flood insurance available within a 30-year erosion hazard area in communities voluntarily participating in the Community Rating System (CRS) with respect to any new—

"(1) construction that is not built in accordance with criteria established for local community participation in the CRS; or

"(2) addition to an existing structure, if the addition makes the structure to be not in accordance with criteria established for local community participation in the CRS.

"(b) Properties Located Within 60-Year Erosion Hazard Area and Outside 30-Year Erosion Hazard Area.-After the establishment of erosion hazard areas under sec

tion 1360(i), the Director may not make flood insurance available with respect to any new

"(1) nonresidential structure; or

"(2) residential structure that is not built in accordance with criteria established for local community participation in the Community Rating System; or

"(3) addition to an existing structure, if the addition makes the structure to be not in accordance with criteria established for local community participation in the Community Rating System; that is constructed or relocated landward of the 30-year erosion hazard area and within the 60-year erosion hazard area established by the Director under such section in communities voluntarily participating in the CRS.

"(c) Premiums for Flood and Erosion Risk Areas in Communities Not Voluntarily Participating in the Community Rating System. With respect to structures that are subject to flood and/or coastal erosion risk and are located in communities that choose to not voluntarily participate in the Community Rating System Program, premiums shall be calculated based on the actuarial risk for these structures. SEC. 407. RIVERINE EROSION STUDY.

(a) Study.-The Director shall conduct a study to determine the feasibility of identifying and establishing riverine erosion hazard areas, erosion rates, and baseline reference features, and the best methods of community management of such hazards consistent with section 1361 of the National Flood Insurance Act of 1968. In conducting the study, the Director shall

(1) investigate and assess existing and state-of-the-art technical methodologies for assessing riverine erosion;

(2) examine and evaluate natural riverine processes, environmental conditions, human-induced changes to the banks of rivers and streams.

COMMENTS OF THE BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM

TITLE I-DEFINITIONS

Section 101(a)(7)

The bill defines "regulated lending institution as a bank, savings association, credit union, or similar institution subject to the supervision, approval, regulation or insuring of a Federal entity for lending regulation"."

Because of the vagueness of the italicized provision above, there is some question as to what is covered. Does this mean that a foreign entity, or some other type of business subject to Board approval or Board regulations would be covered? If there is something more specific that the Congress wants to address here, it should be spelled out.

Section 1364. Notice Requirements

Section 1364(c) Participating Communities-states that every six months, the Director of FEMA will send a list of changes, revisions, and amendments made to flood insurance rate maps during the preceding six months to each participating community. In turn, the participating community will be required, by regulation, to "provide annual notice by mail, publication, . . . or other reasonable method, to regulated lending institutions that are known to lend in the community, and to the owners of all properties newly determined to be in special flood hazard areas, of the requirement that Federal flood insurance be purchased for insurable structures located within the special flood hazard areas of the community."

There is no requirement that flood insurance be purchased on these properties. The requirement is that no loan in a flood hazard area be made, increased, extended, or renewed without flood insurance.

Section 204. Placement of Flood Insurance By Regulated Lending Institution or Federal Agency Lender

a regu

Section 204(e)(1) Notification to Borrower of Lack of Coverage-states that, If, at any time during the term of a loan [subject to flood insurance]. lated lending institution or Federal agency lender determines that the building or manufactured home and any personal property securing the loan held or serviced by the regulated lending institution is not covered by flood insurance. the regulated lending institution or Federal agency lender shall notify the borrower that