GAO Says FEMA May Overpay Insurers in Flood Program

The U.S. Government Accountability Office is criticizing potential inefficiencies that have benefited participating insurance companies in a report detailing the relationship between the Federal Emergency Management Agency and the private insurers who help administer the National Flood Insurance Program.

The Write Your Own program allows private insurers to sell and administer policies for the NFIP, keeping a share of the premiums. "These companies have collected an average of $2.3 billion in premiums annually since 2004 and have been paid or allowed to retain an average of $1 billion for each of these years," according to the report from the GAO, a nonpartisan congressional auditing organization. "The amounts WYOs receive for their services represent from one-third to two-thirds of the total NFIP premiums collected annually, depending on the number of flood claims filed," the report said. "It is imperative that FEMA carry out its stewardship responsibilities by effectively and efficiently overseeing the WYO program and the more than 90 participating insurance companies."

FEMA doesn't routinely take the WYOs actual expenses into account when determining compensation, according to the report. "It does not have the information it needs to determine whether its payments are appropriate and how much profit is included in its payments to WYOs." The program also hasn't linked its bonus structure to its own long-term plan -- failing to reward the companies specifically for meeting program goals, such as expanding the policy base in low-risk flood areas, the report found.

In 2008, the WYOs accounted for 97% of the 5.6 million NFIP policies. This 20-month GAO audit of this program began in 2007 because of a request from Sen. Richard Shelby, R-Ala., ranking Republican on the Senate's Banking, Housing and Urban Affairs Committee.

In a look at six of the major companies, the payments made to them in 2005, 2006 and 2007 exceeded the expenses they reported to the National Association of Insurance Commissioners by more than $327 million, representing an estimated 16.5% profit.

The report indicated that FEMA has taken some resulting action to change its policies, but "additional opportunities exist for FEMA to improve its oversight of the WYO program and ensure that payments to the participating insurance companies are based on actual company expenses," the report contends.

The popular NFIP program is nearing its Sept. 30 expiration. A bill to extend that date by several months has passed the U.S. House of Representatives, but it's still awaiting action in the Senate (BestWire, Sept. 8, 2009).

The top five writers of homeowners multiperil in the United States, according to A.M. Best Co. state/line data, are State Farm Group, with 21.4% market share; Allstate Insurance Group, with 10.9%; Farmers Insurance Group with 7.1%; Liberty Mutual Insurance Cos., with 5.0% and Travelers Group, with 4.5%.