The federal government may be overpaying private insurers for their operating costs associated with the National Flood Insurance Program (NFIP), a recent report said.
The government’s payments to insurance companies for operating costs ranged from “more than a third to almost two-thirds of the total premiums paid by policyholders to the NFIP for fiscal years 2004 through 2006,” the Government Accountability Office found.
NFIP, which is administered by the Federal Emergency Management Agency, is largely implemented by private insurance companies that sell and service policies and adjust claims under the “Write Your Own” Program.
“The partnership has, over time, relieved FEMA of the need to develop, hire, and train an in-house corps of sales agents, adjusters, and others to administer flood insurance,” the report said.
However, the GAO report maintained that in fiscal years 2005 and 2006, larger payments to WYO insurers were the result of settling an unprecedented number and dollar amount of claims for damages resulting from major hurricanes and flood events including Hurricane Katrina. In fiscal year 2006, FEMA paid almost 65 cents of every dollar collected in premiums to the WYO insurance companies.
According to the report, FEMA determines operating costs for WYO insurance companies using procedures established about 25 years ago. “The underlying methodologies may not take into account factors that have changed over the life of the program. For example, costs of claims settlements have trended upward as the costs of labor and materials to repair flood-damaged properties have increased, resulting in larger payment amounts to WYO insurance companies for adjusting claims,” the report indicated. The outdated procedures cannot ensure that payments are based on reasonable estimates of actual expenses because actual expenses incurred by the companies for their services to the NFIP are not considered, the GAO said.
To determine the amount of those payments, FEMA negotiated payment approaches with insurance industry representatives when it established the WYO program in 1983 based on industry averages for operating expenses for other lines of insurance (such as homeowners, commercial and fire), past practice and discussion.
GAO’s report recommended that “FEMA take steps to ensure that it has a reasonable estimate of actual expenses WYO companies incur to help determine payments for services and that financial audits are performed.”
“While the WYO program has been beneficial, FEMA runs the risk of not being able to ensure that it is able, as time goes on, to manage and control the program’s costs,” the report concluded.
GAOinterviewed FEMA and insurance officials, and studied statutes, regulations, payment data, methodologies and audits of WYO companies for the report.
Was this article valuable?
Here are more articles you may enjoy.