Then the second layer would come into play to pay off the losses. That would be under the national act the NIDF. They would pay the $5 million which that 2 percent that had been levied on us had put in that fund. Then the local government, the State of Michigan, would come into play and they would have to pay under the formula 5 percent of the premiums written. This would amount to $12.5 million. Then the fourth layer would come into play, which would be the Federal Government, which is the back-up part of this program, and they would pay the remainder of the losses that the other assessments had not taken care of, which would be $13.5 million, for a total of $42 million loss. This is my understanding of how it would work. We have not made a computation for the District of Columbia.

Mr. FUQUA. How would it work under the so-called model bill?
Mr. SMITH. Exactly as this.

Mr. FUQUA. Exactly as under the Patten amendment?

Mr. SMITH. It would work the same way except we would be assessed for providing all of the local funds whereas before, in the other area, they would come in with their appropriations. Under the Tydings bill we would have to provide the appropriations which the District of Columbia Government, we think, should provide because of the local government not having met its responsibilities.

Mr. FUQUA. And under the Patten Amendment the local government would not have to make any contribution to this?

Mr. SMITH. Yes, I think it would. There is a difference in how they would meet it and how we would recommend it should be met.

Mr. Dowdy. If I followed you on your example, first there is a 2 percent and a 3 percent assessment against insurance companies that write business in that State?

Mr. SMITH. Yes.

Mr. DowDY. Which would amount to $12.5 million in round figures in your example?

Mr. SMITH. Yes.

Mr. Dowdy. The next $12.5 million, 5 percent, under the national bill, would come from the State Government to pay the losses?

Mr. SMITH. No, sir. Let me back up a bit. Everything the industry is hit for would be around $15 million. First we would have to pay a 2 percent assessment on the premiums written to go into the NIDC. When we get up to the point after the insurance industry has paid, the money in that fund is brought out of NIDC to meet the losses above what the insurance companies have paid out. Then the State or local government would come in.

Mr. DOWDY. You said you had a loss of $42 million in Detroit? Mr. SMITH. Yes.

Mr. DOWDY. If this national bill had been in effect at that time how much would the insurance companies have had to meet of that $42 million loss before it would trigger the 2 percent plus 3 percent of premiums?

Mr. SMITH. Around $15 million it would have cost us before the Federal or local governments would have come into play.

Mr. Dowdy. In other words, about 30 percent of the loss, or is it a percentage of the premiums? How do you arrive at the $15 million you would have to pay?

Mr. SMITH. This is a formula which is in the national act, Mr. Chairman, which has been arrived at and all the parties are agreeable that they think it is equitable.

Mr. DOWDY. The formula would make you pay $15 million before the national act came into play?

Mr. SMITH. Yes.

Mr. Dowdy. After that the 2 percent plus 3 percent paid in the national fund would be applied against the losses remaining?

Mr. SMITH. Yes.

Mr. DowDY. That brings you up to $27.5 million, which leaves about $14.5 million. At that point the local government would have to pay something?

Mr. SMITH. That is correct.

Mr. DOWDY. And as I followed your statement-and all of us should have in mind when this Housing Bill was debated, it was amended every time we turned around and it was hard to keep up with it

Mr. SMITH. We certainly had a difficult time, too, Mr. Chairman. Mr. Dowdy. At that point the State or local government would pay something and that would be equivalent to 5 percent?

Mr. SMITH. Yes, sir.

Mr. Dowdy. And that would be about $12.5 million?
Mr. SMITH. Yes.

Mr. DOWDY. Under the Patten Amendment how would that $12.5 million be raised?

Mr. SMITH. This would be, as I say, the assessment against the insurance companies. We would have to pay it and then recoup it over a three-year period by increasing rates to the policyholders.

Mr. DowDY. Under the so-called model bill, how would this $12.5 million be raised?

Mr. SMITH. This would be through an appropriation by the District of Columbia Government.

Mr. Dowdy. For its failure or inability to enforce the law?

Mr. SMITH. This is the basis for bringing the local governments into the program, and I might say this was recommended by the Presidential panel.

Mr. DowDY. That is the Hughes Panel?

Mr. SMITH. Yes, sir.

Mr. DOWDY. And that is the formula the Hughes Panel recommended?

Mr. SMITH. Yes.

Mr. DowDY. And is that the prime difference between the Tydings and the so-called model bill?

Mr. SMITH. The prime difference between the Tydings bill and the model bill, which we support, is this over-all power of the Commissioner and then this funding. These are the two distinguishing fea

tures.

There is one other point I would like to mention about the authority of the Commissioner, and there is nothing personal about it. The States over the years have regulated the insurance industry.

Mr. DOWDY. Mr. Jordan is the Superintendent of Insurance in the District of Columbia?

Mr. SMITH. Yes.

Mr. Dowdy. He seems to be very competent and able man.

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Mr. SMITH. The other point I wanted to bring to the attention of the Committee regarding this all-encompassing power under the Tydings proposal and the Patten Amendment would be that if a program is established under the law and it gives the Commissioner this power, you have your insurance companies coming in and operating under the program, and then under the Tydings bill or the Patten Amendment the Commissioner can change the rules of the game and we can't do anything about it, and we think this leaves the companies at a disadvantage.

Mr. DOWDY. Let me pursue that a little bit. Under the example you gave that leaves $2 million that has not been paid. Who pays that? Mr. SMITH. I think my example brought it out so it came out on the nose $42 million, Mr. Chairman.

Mr. DOWDY. All right.

Mr. FUQUA. Do you have any breakdown as to how it would come out in the District of Columbia as a result of the April disorders?

Mr. SMITH. We have not made a breakdown of that. There was something like a $20 million or $25 million loss here. But you could apply this formula to the District of Columbia and come out with the breakdown. I am sorry we have not done that for the committee.

I would add one further comment about the manner in which this Patten Amendment was brought about. The Tydings bill, as we understand, was hastily drafted in order to have it attached to the Omnibus Housing Bill when it came up in the Senate. We were given a one-day notice to comment on it. We indicated we would not have sufficient time to give proper consideration to the bill because, as you can appreciate, this is a highly complex situation. So the Senate District Committee did not clear the bill in time for it to be attached to the Senate Omnibus Housing Bill. Then further hearings were scheduled by the Senate District Committee and we had a chance to consult with the staff further and we had a chance to appear and present our views. As a result of these conferences-I am not saying just with us but with the entire insurance industry-the bill was improved. When we said we did not have a chance to study the bill we were told to come up anyhow and it could be cleared up in the House. You know what happened in the House. I personally do not think this is the proper manner in which national legislation which affects an industry the size of the insurance industry or anyone else should be drafted, and it is not a proper process to bypass Committees of Congress. I offer that for whatever value it may have.

Mr. SISK. The thing that concerns me a little bit on this—and I hope you understand there is no implication in the comparison I makebut it seems to me one of the main concerns you have, as well as the main concern Mr. Nangle had, is really who will be the policeman in the case. I am not being critical of the insurance industry because they are a very necessary segment of American lives, but for the first time we have a situation where you are getting your hand in the Federal till-by "you" I mean the insurance industry-in meeting a need that we all know exists. If you will permit the use of a term that is perhaps not too good, you people are concerned about who will police this program. I, for one, have very strong feelings about it if we are going to put the Federal Government and the District of Columbia in the business of financing these programs. I share your concern about law

enforcement and so on, but I will not support turning it over completely to the insurance industry.

Mr. SMITH. We don't ask that at all, Mr. Sisk. I say over the years in the District of Columbia and in the rest of the 50 States, simply because of the expertise and knowledge in the insurance industryMr. SISK. You haven't operated this type of program?

Mr. SMITH. Very similar plans, such as the assigned risk automobile insurance plan.

Mr. SISK. But for the first time we have a situation where the Federal Government is moving in to pay the losses and to guarantee, in essence, your people surviving in business. Is that right?

Mr. SMITH. That is essentially right.

Mr. SISK. Because you cannot meet a $50 million or $100 million riot damage and stay in business, is that correct?

Mr. SMITH. That is correct.

Mr. SISK. I am basically in support of a back-up program to see to it these needs are met. I don't mind seeing the localities responsible for law enforcement made liable to a certain extent for riot damage, but I know you are aware of the statements Mr. Nangle made with reference to some fear of turning over to the Commissioner too much control. If the present Commissioner doesn't do his job we will get rid of him and get another one. I am not protecting any one of these people, but I think we have some real weaknesses that are probably no worse here than in other places. I don't want to prolong this, but I think we have in essence a very basic philosophy involved as to policy.

Mr. SMITH. I would agree, and I would say this, that the insurance industry has a considerable amount of money at stake here too, and we have not caused the problem. We are meeting our losses here now. And I think it should be brought out there is a great deal of concern on the part of responsible Members of Congress and leaders everywhere about these cancellations, about the insurance problem brought about as a result of these riots, and concern as to how we are going to rebuild the burned out areas without letting the people who rebuild get loans, and about the small companies going out of business if they don't have insurance against riots. There is very little concern, though, that the insurance companies, because of these losses, might go bankrupt, and we are vitally concerned.

Mr. SISK. Yes, but when we use the Federal Treasury we will have to have something to say about how the program is run.

Mr. SMITH. I agree and I think there should be proper regulations. I might say, too, this is a reinsurance program and there was a great deal of talk and consultation with the Federal and State and private insurance representatives that tried to work out this national program about the reinsurance situation. If one of our companies has a reinsurance contract with Lloyds of London or with some local reinsurance company, they don't come in and have access to all our books and they don't have authority to tell us how to run the rest of our business. Mr. SISK. That is all, Mr. Chairman.

Mr. Dowdy. As I understand, you think the authority should be in the Superintendent of Insurance rather than in the Commissioner of the District of Columbia. Is that the difference?

Mr. SMITH. We really don't have any great concern over whom it will be placed with except historically and traditionally and custom

arily in the States and in the District of Columbia over many years these matters have always been handled under the direction and authority of the Insurance Commissioner. We think it would be much more efficiently handled under the Insurance Commissioner and the Insurance Departments rather than going through an extra step of the Commissioner and the governing body.

Mr. Dowdy. Is that on the basis you are another step removed from the political control and you are putting it more in the hands of employees of the Insurance Department who should have some knowledge about what they are doing, while the Commissioner doesn't necessarily know anything about insurance, being a political appointment. Is that right?

Mr. SMITH. To give you a perfect illustration, we have worked with the local officials the Commissioner, the Insurance Department, et cetera on what we have termed a voluntary inspection program for the District of Columbia to provide inspections for insurance properties throughout the City and to place these on a voluntary basis while waiting for this legislation. Letters were to go out from the Commissioner's Office to all the insurers doing business in the District of Columbia requesting them to enter into this program and to cooperate with it. I have had half a dozen inquiries from our companies saying they have heard about this program but have never received a letter asking them to be active in it, and yet the letter was supposed to go out to every insurer doing business in the District of Columbia. Why the letter didn't get to everyone, I don't know, but I think this is an illustration in point. The follow-up letter which came from the Insurance Department went to all companies. The original letter from the Commissioner did not.

Mr. Dowdy. Thank you, Mr. Smith.

Mr. SMITH. Thank you, sir.

Mr. Dowdy. We will now hear from the District of Columbia Government. We have Mr. John W. Hechinger, Chairman of the District of Columbia Council; Mr. Robert F. Kneipp, Assistant Corporation Counsel, and Mr. Herbert S. Denenberg, Consultant on Insurance for the District of Columbia. Who will do the talking?

STATEMENTS OF JOHN W. HECHINGER, CHAIRMAN, DISTRICT OF COLUMBIA COUNCIL; ROBERT F. KNEIPP, ASSISTANT CORPORATION COUNSEL; AND HERBERT S. DENNENBERG, CONSULTANT ON INSURANCE, DISTRICT OF COLUMBIA

Mr. HECHINGER. I think I will lead off, if I may, Mr. Chairman. I want to make a brief statement, and I am sorry I do not have copies of my statement, concerning the critical need for an adequate property reinsurance program in the District of Columbia to protect against losses from possible civil disorder or other widespread environmental hazards.

In the several months following the April civil disorders in Washington and many other cities, Congress has moved quickly and responsibly toward passage of a national reinsurance program which will assure businessmen and homeowners the coverage that is so desperately needed in the District of Columbia and in other large cities.