Private insurance companies working for the government’s flood insurance program have made hundreds of millions of dollars at the same time that thousands of homeowners are claiming they have been underpaid for damage caused by Superstorm Sandy, according to a report by Frontline, the Public Broadcasting System (PBS) investigative news show, and National Public Radio (NPR).
For the past year, Frontline and NPR reporters have been investigating the private insurance companies and government disaster and housing agencies involved in claims from Superstorm Sandy. The result is this report on why three years after the storm, thousands of people are still not in their homes despite billions of dollars spent on recovery efforts.
The report aired as an hour-long documentary on PBS stations Tuesday, May 24 and in multiple radio pieces on NPR. It will also be a virtual reality film on Facebook titled “Business of Disaster.”
The report estimates that private insurers in the flood insurance program have averaged $325 million in profits or about 30 percent each year since Sandy (2011-2014).
According to the report, insurance industry representatives dispute the 30 percent estimate and say profits are closer 10 to 15 percent.
Under the Write Your Own (WYO) program, private insurers receive fees and commissions for writing and servicing policies. The federal government, not the private insurers, is on the hook for the actual claim amounts.
The Frontline/NPR report is the latest criticism of the National Flood Insurance Program (NFIP) and the role of private insurers in it.
According to the Government Accountability Office (GAO), on average, WYO insurers retain 30 to 40 percent of the flood insurance premiums they collect as reimbursement and payment for services rendered to the Federal Emergency Management Agency (FEMA) to cover the cost of managing the flood policies they write. The GAO says this is excessive when compared to actual expenses.
In a 2009 report, GAO found that the federal government is overpaying private insurance companies by as much as 16.5 percent. To just six of the 87 participating carriers, (FEMA), which administers the flood program, paid $327.1 million more than their actual expenses, the GAO found.
Last June, the outgoing director of the NFIP said the program is a “melting iceberg” that is incapable of properly managing its various players including the private insurance carriers that sell policies and handle claims. The government has 80 people overseeing a flood insurance network of hundreds of thousands of vendors and has lost control of how the program is administered, Brad Kieserman, said in testimony before a House Financial Services Subcommittee on Housing and Insurance on Capitol Hill.
Kieserman said that the NFIP has become “increasingly disconnected from its real customers, flood survivors” and that the experiences of claimants following Hurricane Sandy have amplified its shortcomings. He pointed to FEMA’s lack of oversight of the WYO program involving private insurers that delegate some of the work they do as a major part of the problem.
Sen. Charles Schumer, (D-N.Y.), has been critical of the WYO program, where he 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. 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 has said.
FEMA, which manages the NFIP, has heard complaints for years and has vowed to review the role of private insurers and how they are paid.
The Frontline/NPR report finds that in addition to insurers, contractors and lawyers also profit from the current system.
“We found that disasters like Superstorm Sandy aren’t a disaster for everyone,” says NPR reporter Laura Sullivan, who along with Frontline producer Rick Young and his investigative team spent the past year digging into how Sandy recovery dollars were spent. “For some, disasters are big money. We saw thousands of storm survivors stuck in bureaucracy and red tape, insurance companies and contractors making millions in profit, federal aid not reaching homeowners – and government agencies admitting they failed in their efforts to help when people needed it most.”
The Frontline/NPR investigation also looks at the special housing aid Congress gives to local governments after major disasters and the problems that surfaced after the storm. The report shows that rebuilding efforts have left communities where some homes are elevated, some are rebuilt below sea level, and some remain destroyed.
“Business of Disaster” includes interviews with Roy Wright, the current director of the NFIP; J. Robert Hunter, a past director of NFIP; the top official who oversaw Sandy housing recovery for New York City; and Robert Hartwig, of the insurance industry’s Insurance Information Institute (III).
The investigative team said it spent months collecting data on insurance company expenses and revenue, information FEMA has said in the past it does not have, a situation Wright confirms in this report.
The investigation explores allegations that insurance companies systematically underpaid thousands of homeowners on their flood insurance claims and explores why they might have motivation to do this even though they themselves are not paying the actual claims. The reporters speak with Sandy victims, their lawyers, and other investigators about allegations that some engineering firms and insurers doctored reports to deny or lowball claims payments.
At one point, NFIP Director Wright says, “There is no incentive in this program to do anything other than pay for everything covered under the policy.”
At another point, NFIP’s Wright is at a loss to explain certain engineering reports that include pictures of damage but then conclude there was no damage. “That’s shoddy, sloppy work,” Wright says.
NPR reporter Sullivan says that while “on the face of it,” insurers don’t seem to have an incentive to underpay homeowners because they don’t pay claims with their own money, Frontline’s investigation uncovered stories from industry insiders about the pressure from Congress to keep payments down. The fear was that if claims costs were not kept under control, the NFIP, already billions of dollars in debt, might go even further into debt, and then Congress might decide to close down the entire flood insurance program.
In the documentary, III’s Hartwig pushes back on the Frontline scenario. First he argues there is “no evidence of any systematic issues with respect to how the claims were adjusted or how the claims were paid.” He said most claimants were happy with their insurers. He also dismisses as a “pretty convoluted argument” the idea that private insurers would lowball claims to reduce the deficit.
Hunter, former Texas insurance commissioner and former head of the NFIP, reviews Frontline’s findings of 30 percent profit and criticizes the amount as “a sweetheart deal.”
Meanwhile, FEMA has reviewed more than 19,000 Sandy claims and has agreed to give 80 percent additional money.
In addition, FEMA has promised reforms are on the way and it plans to review the role of private insurers in the program. On Monday, the day before PBS and NPR aired “Business of Disaster,” FEMA vowed to change the claims process, including disallowing insurers from handling appeals of their own claims denials.
Momentum is building in Congress and states to encourage more private insurer involvement in the flood insurance market.
- A transcript of “Business of Disaster.”
- Report: FEMA Overpays Private Insurers for Handling Flood Insurance
- FEMA Official: ‘We Are Undertaking Sweeping Reforms’ at NFIP
- Exec’s Parting Shot: Flood Insurance Program Is a ‘Melting Iceberg’
- FEMA Reconsidering Private Insurers’ Role in Flood Insurance
- House Committee Passes Private Flood Insurance Bill
- Why Now Is Time to Privatize Flood Insurance: a Candid Conversation with Hiscox USA CEO Walter
- Flood Insurance Presents Opportunity, Obstacles for Private Insurers
- FEMA Vows Changes to Flood Insurance Claims Appeals
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