FEMA Reconsidering Private Insurers’ Role in Flood Insurance

May 26, 2015

Federal officials have agreed to consider a proposal calling for an end to the federal flood insurance model that allows private insurance carriers to write and service policies.

Senator Charles E. Schumer, D-N.Y., citing alleged “widespread fraud” and “unjust denials” in the handling of Superstorm Sandy claims, has urged the Federal Emergency Management Agency (FEMA) to scrap the decades-old Write Your-Own (WYO) insurance model from the National Flood Insurance Program (NFIP) and “move forward to overhaul the process entirely.”

Schumer says the system is too profit-oriented and too complicated for serving disaster victims.

In a letter to FEMA, Schumer said “profit-driven motivations and incentives ” are understandable “but not commensurate” with a federal program designed to provide fair payments to those that suffer losses.

In addition to being influenced by profit, the WYO system is too complicated with “potentially 80 different companies selling policies to property owners, 80 different systems for collecting premiums, and 80 different processes for calculating proper payouts to victims,” Schumer said.

He also said the WYO system encourages the WYOs to fight homeowners in court because they are not responsible for the legal expenses.

“The only way to change this unacceptable culture is to scrap it,” he said.

FEMA said it is reviewing the entire insurance program in light of the experience with Sandy claims and will consider all reform options.

“We expect WYO companies who partner with us to share FEMA’s values of putting survivors first. We’re pleased that Senator Schumer shares our concerns and as we work to reevaluate the program and consider future reforms, everything is on the table, including reexamining role that WYOs have in servicing our program,” Rafael Lemaitre, FEMA spokesperson, told Insurance Journal.

The WYO model, which has been in place since 1983, allows participating insurance companies to write and service policies in their own names. There are currently over 80 different companies that sell policies.

WYO carriers receive about 30 percent of premiums for expense and commissions.

A number of insurers and engineering firms have been sued by homeowners claiming they used doctored engineering reports to avoid paying Superstorm Sandy damages. The firms have denied any wrongdoing and claimed there is no incentive in the WYO system for them to lowball claims.

Insurers have also noted that more than 99 percent of all Sandy claims were paid and closed efficiently.

Schumer cited a “60 Minutes” TV show segment in early March during which a senior FEMA official claimed to have seen evidence of claims fraud by insurers and engineering firms dating back to 2013.

In light of the allegations, FEMA in March agreed to reopen every flood insurance claim filed by Sandy victims. That is approximately 144,000 claims, including 2,200 currently in litigation.

Schumer dismissed arguments of those who say that the WYO system encourages competition. “True competition does not exist in the current WYO model anyway, as these providers know that the federal government is ultimately paying for losses they must pay out,” he told FEMA.

He said FEMA’s inability to acquire data associated with NFIP policies from WYO carriers is another “glaring deficiency” in the current model.

He said FEMA should retire WYOs from the current flood insurance system and instead allow the NFIP to offer all flood insurance policies directly to the property owners.

Schumer told FEMA that it does not need to wait for Congressional action in order to make changes.

FEMA chief Craig Fugate told a congressional task force on April 28 that he wants to see more importance given to paying the full amount of legitimate claims.

“We want to fix this,” Fugate said. “If we owe money, we pay. Too often in government we are focused on not making an overpayment, putting more emphasis on not overpaying a claim. I gotta get it right. How do we get to something that’s more successful and works better the first time?

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