The Bush administration is against expanding the National FloodInsurance Program to include windstorm coverage, a Treasuryofficial bluntly told a House subcommittee last week, placing amajor roadblock in the path of legislation to create all-perilsfederal homeowners coverage.

"The administration opposes H.R. 920," Assistant Secretary forEconomic Policy Phillip Swagel said in testimony before the HouseFinancial Services Subcommittee on Housing and CommunityOpportunity.

However, with White House opposition leaving the stand-alonebill dead in the water, insurance industry officials are concernedabout plans by Democrats on the House Financial Services Committeeto resurrect the concept by adding a windstorm coverage provisionto H.R. 1862--a bill introduced earlier that would reform the NFIPand increase its borrowing authority.

"It is unfortunate that we are taking a flood reform bill thathad strong bipartisan and industry support and bogging it down witha very controversial addition that will create a great deal ofopposition to the overall bill," said Justin Roth, a seniordirector at the National Association of Mutual InsuranceCompanies.

A congressional staffer familiar with the issue confirmed thatthe gambit is being discussed, but said it was unclear whether Rep.Taylor's bill will be added to the NFIP reform measure, or proposedas an amendment when the legislation is processed by thecommittee.

But another lobbyist, who asked not to be named, cautioned thateven if the all-perils provision is added, that does not mean itwill be approved by the full House.

"In several recent meetings with industry representatives, Rep.Barney Frank, D-Mass., chairman of the committee and author of H.R.1862, has indicated that he will support the all-perils language asa part of the reform package," according to the lobbyist.

At the same time, however, "he has said he expects a flooramendment to strip that language from the legislation, and hissupport of the broad flood reform is not contingent upon thepassage of the all-peril provisions," the lobbyist added.

Prompting the latest maneuvering was Mr. Swagel's testimony atlast week's hearing, warning that a federal insurance program forwind damage will displace the active private market, and "couldgive rise to a large new burden on federal taxpayers."

"The administration supports leaving wind coverage to thewell-developed private market for such insurance and not creating afederal program for wind losses," he said.

The private market already prices coverage effectively for winddamage according to risk, noted Mr. Swagel, who added that highprices for insurance in coastal areas should be viewed as areflection of that risk, rather than a "defect of the market."

Furthermore, he warned that a federal program would come with"significant negative consequences."

"Federal involvement in wind insurance would further displaceprivate coverage, lead to costly inefficiencies, and retardinnovation in a private sector that is generally functioning welloverall," said Mr. Swagel. An additional factor, he noted, would bethe pressure on program officials to set aside the risk-basedpricing called for in H.R. 920 and offer subsidized coverage.

"By lowering insurance prices below the actuarially fair value,a federal program would encourage people to take on more risk thanif they faced the full expected costs of damages," he said, addingthat such a subsidy would encourage development in high-risk areasand potentially increase the government's exposure. "A federal rolein bearing risk would have taxpayers nationwide subsidizinginsurance rates for the benefit of a smaller population."

As an example of how an expanded NFIP might go awry, Mr. Swageltold lawmakers to look at the current program.

"The experience of the NFIP illustrates some of the concernsabout an expanded federal role," he said, noting that "the programcharges less than full actuarial rates for properties in high-riskareas as well as older, risk-prone properties that have experiencedrepeated flood losses."

The hearing was called to air reaction to the Multiple PerilInsurance Act of 2007. The bill was introduced earlier this year byRep. Gene Taylor, D-Miss., a vocal critic of the insurance industryfor its actions in the wake of the 2005 storm season, who settledhis own suit against State Farm for Hurricane Katrina damages inJanuary.

During the hearing, Rep. Taylor said that his experience, givenhis position, shows just how poorly insurers acted in handlingclaims in coastal areas. "If they do that to a congressman, what doyou think they do to a school teacher, or a football coach, or aretired petty officer?" he asked.

However, Treasury's views were supported by Ted Majewski, seniorvice president of Pennsylvania-based Harleysville Insurance Group,representing the American Insurance Association, the PropertyCasualty Insurers Association of America and NAMIC.

Mr. Majewski said policyholders most likely to buy expandedcoverage would be in high-risk areas, thus creating an "adverseselection" and limiting the program's ability to spread its windrisk.

He said the NFIP is already facing considerable deficits as aresult of 2005 storms, while "the private insurance industry paidmore than three times the amount of the flood program losses toconsumers after the storms of 2005. Our industry is preparedthrough its infrastructure to address such catastrophicevents."

Regulators, however, took a different view of the bill and itsimpact on the federal government's exposure.

Kansas Insurance Commissioner Sandy Praeger--also the NAIC'spresident-elect--cited a "growing discrepancy" between total lossesand insured losses after a major catastrophe, "exacerbated by alack of all-perils coverage."

As an example, Ms. Praeger said while the private market paidout $40 billion in the wake of Hurricane Katrina, the federalgovernment authorized "well over $100 billion" in additional aidprograms on top of the $20 billion paid by the NFIP. "Privateinsurance covered only one-third of the total economic response,with taxpayers covering the remaining 70 percent."

At the same time, the NAIC offered as an alternative making theNFIP solely a reinsurance mechanism that would eliminate thenecessity of filing two separate claims for damages.

Robert P. Hartwig, president of the Insurance InformationInstitute, said H.R. 920 will not necessarily solve any of theproblems facing the market today, given that the legislationproposed to offer wind coverage as an option for consumers, and "asa general rule, homeowners tend to pass on optional coverages."

Indeed, he noted, the take-up rate for flood coverage hashistorically been "woefully low" despite the fact that it isoffered at highly subsidized rates, and is unlikely to rise as aresult of the bill.

He also cited low take-up rates for optional earthquakecoverage, purchased by just 12 percent of Californiahomeowners.

Even if the expanded NFIP avoided the political pressures tolower rates below actuarially sound levels, Mr. Hartwig concludedthat "H.R. 920 may never achieve its objective of providing amultiperil policy because of the longstanding, fundamental factthat penetration rates for flood insurance remain woefully low inmany areas where the twin perils of windstorm and flood arecommon."

During the hearing, Rep. Taylor, documenting gaps in coverage,said his bill is necessary because "the people who played by therules, and who thought the insurance companies were going to playby those same rules, got screwed by the insurance companies," hesaid.

Rep. Taylor lambasted Mr. Hartwig and Mr. Majewski. "You haveearned your pay," he said to them, for defending the industry andarguing that H.R. 920 would crowd out a private sector willing andable to write windstorm coverage. He argued that the industry'santitrust exemption allowed insurance executives to "call eachother up and say 'let's raise our rates.'"

Rep. Taylor has made similar assertions in the past, which Mr.Hartwig, among other industry officials, said is simply not truebecause under the terms of the McCarran-Ferguson Act, insurers arenot permitted to collaborate to fix prices.

Much of the problem, according to Rep. Taylor, is that the"Write Your Own" program under the NFIP legislation allows insurerswho sell and administer flood and standard homeowners insurance toallocate how much of a claim should be attributed to flooding andhow much is the result of wind.

This system, he said, puts adjusters in the "horrible position"of having to determine if their employer should pay a claim, orputting it on the shoulders of the federal government.

Rep. Richard Baker, R-La., praised Rep. Taylor and otherco-sponsors of the bill for seeking a solution, but offered somealternatives of his own--including allowing insurers greaterability to reserve for catastrophic losses on a tax-free orpreferred basis while establishing a federal backstop similar tothat of the Terrorism Risk Insurance Act. As the level of privatesector reserves rose, he said, the role played by the federalbackstop would be scaled back.

Perhaps the simplest idea, Rep. Baker said, was to "allow peopleto sell an insurance product for the price they can sell it for."The NFIP and state programs have "distorted the market," he added,and would only do so further if it were expanded.

"A remedy other than creating additional taxpayer liability isthe way to go," he said.