The Bush administration is against expanding the National Flood Insurance Program to include windstorm coverage, a Treasury official bluntly told a House subcommittee last week, placing a major roadblock in the path of legislation to create all-perils federal homeowners coverage.

"The administration opposes H.R. 920," Assistant Secretary for Economic Policy Phillip Swagel said in testimony before the House Financial Services Subcommittee on Housing and Community Opportunity.

However, with White House opposition leaving the stand-alone bill dead in the water, insurance industry officials are concerned about plans by Democrats on the House Financial Services Committee to resurrect the concept by adding a windstorm coverage provision to H.R. 1862--a bill introduced earlier that would reform the NFIP and increase its borrowing authority.

"It is unfortunate that we are taking a flood reform bill that had strong bipartisan and industry support and bogging it down with a very controversial addition that will create a great deal of opposition to the overall bill," said Justin Roth, a senior director at the National Association of Mutual Insurance Companies.

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

But another lobbyist, who asked not to be named, cautioned that even if the all-perils provision is added, that does not mean it will 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 as a part of the reform package," according to the lobbyist.

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

Prompting the latest maneuvering was Mr. Swagel's testimony at last week's hearing, warning that a federal insurance program for wind damage will displace the active private market, and "could give rise to a large new burden on federal taxpayers."

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

The private market already prices coverage effectively for wind damage according to risk, noted Mr. Swagel, who added that high prices for insurance in coastal areas should be viewed as a reflection 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 displace private coverage, lead to costly inefficiencies, and retard innovation in a private sector that is generally functioning well overall," said Mr. Swagel. An additional factor, he noted, would be the pressure on program officials to set aside the risk-based pricing 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 than if they faced the full expected costs of damages," he said, adding that such a subsidy would encourage development in high-risk areas and potentially increase the government's exposure. "A federal role in bearing risk would have taxpayers nationwide subsidizing insurance rates for the benefit of a smaller population."

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

"The experience of the NFIP illustrates some of the concerns about an expanded federal role," he said, noting that "the program charges less than full actuarial rates for properties in high-risk areas as well as older, risk-prone properties that have experienced repeated flood losses."

The hearing was called to air reaction to the Multiple Peril Insurance Act of 2007. The bill was introduced earlier this year by Rep. Gene Taylor, D-Miss., a vocal critic of the insurance industry for its actions in the wake of the 2005 storm season, who settled his own suit against State Farm for Hurricane Katrina damages in January.

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

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

Mr. Majewski said policyholders most likely to buy expanded coverage would be in high-risk areas, thus creating an "adverse selection" and limiting the program's ability to spread its wind risk.

He said the NFIP is already facing considerable deficits as a result of 2005 storms, while "the private insurance industry paid more than three times the amount of the flood program losses to consumers after the storms of 2005. Our industry is prepared through its infrastructure to address such catastrophic events."

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

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

As an example, Ms. Praeger said while the private market paid out $40 billion in the wake of Hurricane Katrina, the federal government authorized "well over $100 billion" in additional aid programs on top of the $20 billion paid by the NFIP. "Private insurance 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 the NFIP solely a reinsurance mechanism that would eliminate the necessity of filing two separate claims for damages.

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

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

He also cited low take-up rates for optional earthquake coverage, purchased by just 12 percent of California homeowners.

Even if the expanded NFIP avoided the political pressures to lower rates below actuarially sound levels, Mr. Hartwig concluded that "H.R. 920 may never achieve its objective of providing a multiperil policy because of the longstanding, fundamental fact that penetration rates for flood insurance remain woefully low in many areas where the twin perils of windstorm and flood are common."

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

Rep. Taylor lambasted Mr. Hartwig and Mr. Majewski. "You have earned your pay," he said to them, for defending the industry and arguing that H.R. 920 would crowd out a private sector willing and able to write windstorm coverage. He argued that the industry's antitrust exemption allowed insurance executives to "call each other 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 true because under the terms of the McCarran-Ferguson Act, insurers are not 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 insurers who sell and administer flood and standard homeowners insurance to allocate how much of a claim should be attributed to flooding and how 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, or putting it on the shoulders of the federal government.

Rep. Richard Baker, R-La., praised Rep. Taylor and other co-sponsors of the bill for seeking a solution, but offered some alternatives of his own--including allowing insurers greater ability to reserve for catastrophic losses on a tax-free or preferred basis while establishing a federal backstop similar to that of the Terrorism Risk Insurance Act. As the level of private sector reserves rose, he said, the role played by the federal backstop would be scaled back.

Perhaps the simplest idea, Rep. Baker said, was to "allow people to 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 is the way to go," he said.