When I began blogging to what would become Slabbed my knowledge of complex finance was exceeded only by my ignorance of how the political process really worked. What I found from my perch here in Soggy Bottom is that talking aka cussin’ and discussin’ dominates the process. And besides all the talking that goes on inside the beltway there is a mirror conversation that happens on the outside, in places like Yahoo Allstate finance message board and in Sheila Brinbaum speeches where alternate realities are peddled out of economic self interest.
Beyond the shilling however the Government Accountability Office has been looking at the NFIP and their findings tell the real story, of a program abused by private for profit insurers with no oversight on part of FEMA. For instance in September 2007 the GAO found:
FEMA’s payments to WYO 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 approach FEMA uses to determine operating costs for WYO insurance companies, rooted in policies negotiated and established about 25 years ago, 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. Although it has authority to do so, FEMA does not collect data on actual WYO flood insurance expenses that could provide a basis for insuring that the WYO payments are based on a reasonable estimate of actual expenses.
Fast forward to December 2007 and another GAO report which found FEMA asleep at the switch and a program structures to create “an inherent conflict of interest”:
Insurance coverage gaps and claims uncertainties can arise when coverage for hurricane damage is divided among multiple insurance policies. Coverage for hurricanes generally requires more than one policy because private homeowners policies generally exclude flood damage. But the extent of coverage under each policy depends on the cause of the damages, as determined through the claims adjustment process and the policy terms that cover a particular type of damage. This process is further complicated when the damaged property is subjected to a combination of high winds and flooding and evidence at the damage scene is limited. Other claims concerns can arise on such properties when the same insurer serves as both NFIP’s write-your-own (WYO) insurer and the property-casualty (wind) insurer. In such cases, the same company is responsible for determining damages and losses to itself and to NFIP, creating an inherent conflict of interest.
And the GAO continued looking at the program most recently with the issuance of this report dated last month. The professionals at GAO continue to find a program operated with little oversight and no internal controls:
FEMA does not systematically consider actual flood insurance expense information when it determines the amount it pays the WYO for selling and servicing flood insurance policies and adjusting claims. Rather, since the inception of the WYO program, FEMA has used various proxies for determining the rates at which it pays the WYOs. Consequently, FEMA does not have the information it needs to determine (1) whether its payments are reasonable and (2) the amount of profit to the WYOs that are included in its payments. When GAO compared expense payments FEMA made to six WYOs to the WYOs’ actual expenses for calendar years 2005 through 2007, we found that the payments exceeded actual expenses by $327.1 million, or 16.5 percent of total payments made. Considering actual expense information would provide transparency and accountability over payments to the WYOs……..
FEMA has explicit financial control requirements and procedures for the WYO program but has not implemented all aspects of its Control Plan. FEMA provides guidance for WYOs that is intended to ensure compliance with the statutory requirements for the NFIP and contains checks and balances to help ensure that taxpayer funds are spent appropriately. FEMA did most of the required biennial audits and underwriting and claims reviews but did not do most of the required audits for cause; state insurance department audits; and marketing, litigation, and customer service operational reviews. In addition, FEMA did not systematically track the outcomes of the various audits, inspections, and reviews that it performed for the 10 WYOs included in this review of FEMA’s oversight of the program. Because FEMA does not implement all aspects of the Control Plan, it cannot ensure that the WYOs are fully complying with program requirements.
How striking when compared against the alternative realities I linked above. Others have noticed as well. Rebecca Mowbray at the Times Picayune filed this report yesterday that includes some of that alternate reality courtesy of insurance shill Robert Hartwig with the industry trade group III as well as reality courtesy of our own Brian Martin:
FEMA has no idea how much in expenses or profits it pays the private insurance companies that sell and administer policies through the National Flood Insurance Program, a new report from the Government Accountability Office says.
The report, “Opportunities Exist to Improve the Oversight of the WYO Program,” or write-your-own, referring to the private companies that write flood policies on their own letterhead, is the latest in a series of critiques by the investigative arm of Congress.
The GAO says FEMA doesn’t collect the information it needs to determine whether payments to insurance companies are reasonable.
Rather than consider the actual costs of administering flood policies that companies report to the National Association of Insurance Commissioners, FEMA comes up with a figure for how much to pay insurers in overhead based on average industry operating expenses for five lines of insurance that have nothing to do with flood coverage.
“FEMA sets rates for paying (companies) for their services without knowing how much of its payments actually cover expenses and how much goes toward profit,” the report concludes.
The flood program has been in the spotlight since Hurricane Katrina, when examples surfaced that insurers might have been using flood insurance money to subsidize their wind damage payments, but FEMA was incapable of investigating because it didn’t collect the relevant information from the companies than run the flood program.
Since Katrina, Congress has yet to undertake an overhaul of the flood program. Congressional authorization of the flood program expires Sept. 30, but the House voted recently to extend the deadline until next spring.
The GAO report says that one-third to two-thirds of all flood premiums collected each year go to the private insurance companies administering the program, depending on the number of claims each year.
In its response to the report, FEMA said it would work with the insurance commissioners association to collect more information on flood insurance expenses, but the agency did not agree with the recommendation to consider actual expenses and profits in setting payment rates. “It would be impossible for the NFIP to accurately calculate the expenses for 90 companies,” reads a response letter from the Department of Homeland Security, where FEMA is based.
Bob Hunter, director of insurance at the Consumer Federation of America, said FEMA is abdicating its responsibility to taxpayers by not managing the flood program better. “It’s a windfall for them, especially the bigger companies,” Hunter said, referring to the private insurers. “FEMA defends it. It’s another system that has no accountability.”
Bob Hartwig, president of the Insurance Information Institute trade group, notes that the report says nothing disparaging about insurers. “The report is not accusing insurers of any impropriety,” Hartwig said. “It’s up to FEMA, working with insurers, to determine what an appropriate return is on these policies.”
The report also noted that insurers received bonuses for increasing enrollment in the flood program regardless of whether companies had anything to do with it; since Katrina, mandates for government aid, changes in the flood maps and new home construction in flood zones all resulted in more people buying flood policies.
But Hartwig said bonuses were appropriate because getting people to sign up was only half the battle. “It’s not just about the increase, but the ability to retain these individuals in the program,” he said.
Brian Martin, legislative director for U.S. Rep. Gene Taylor of Mississippi, who has been a leading voice in Congress on flood insurance issues, said the GAO report is yet another snapshot of how FEMA poorly manages the program and creates an environment that’s ripe for abuse.
“I hope that members of Congress will take a serious look at this, and how to make this program work better. It could be run a lot more efficiently,” Martin said. “It can’t just be a windfall to the insurance companies.”
Slabbed’s continuing coverage of the GAO reports on the NFIP:
Reuters reporter Kevin Drawbaugh spins GAO report for insurers.
GAO report finds inherent conflicts of interest.
GAO looks at insurers based in Tax Havens
NFIP Premium structure FUBAR. Behind the numbers.