Private firms take big cut of flood insurance revenue

Tuesday, September 11, 2007
By SEAN REILLY
Washington Bureau

WASHINGTON -- When national flood insurance policyholders pay their yearly premiums, they probably assume the money will mainly be used to pay flood claims. They are assuming wrong, according to congressional reviewers with the Government Accountability Office.

In a new report, those reviewers found that close to two-thirds of last fiscal year's $2.4 billion in premium revenue ended up with the insurance companies that effectively run the National Flood Insurance Program on a day-to-day basis by marketing policies and processing claims.

While the money is intended to cover insurers' operating costs, the GAO questioned whether the reimbursement formula is overly generous. The report also raps Federal Emergency Management Agency managers for repeatedly failing to follow through on auditing requirements.

Although the report does not spell out what individual insurers received last year, the flood program includes State Farm, Allstate, Nationwide and other industry heavyweights, according to FEMA's Web site. The American Insurance Association, a Washington, D.C., trade group that represents such property and casualty insurers, is still analyzing the report and had no comment on the findings, a spokesman said.

In 2005-06, only five out of 94 participating companies had financial statement audits performed, the report says. FEMA should enforce compliance, the report says, and also look into what participating companies actually spend on their work on the federally backed flood insurance program.

The findings drew a mixed reaction from Steven Pecinovsky, an official with the Department of Homeland Security, FEMA's parent agency. In a three-page letter attached to the report, Pecinovsky conceded the need for better audit oversight but described the big payout to insurers essentially as a fluke caused by a deluge of claims following Hurricane Katrina and a half-dozen other storms in 2004 and 2005.

It is "misleading" to show payments to insurers as a percentage of premium revenues in large loss years, Pecinovsky said. Nonetheless, FEMA is looking at ways to cap payments to insurers for processing claims in such years, he said.

Created in 1968, the flood program has some 54,000 policies in effect just in Alabama, the bulk of them for properties in Mobile and Baldwin counties, according to the most recent available statistics.

Mainly because of Katrina losses, the program nationally is $17.5 billion in debt to the federal treasury. The GAO report comes as the House of Representatives is expected to take up legislation this year that, among other changes, would raise the limit on annual premium increases from 10 percent to 15 percent.

A spokesman for the bill's sponsor, U.S. Rep. Maxine Waters, D-Calif., did not respond to a phone call and an e-mail seeking comment. U.S. Rep. Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee and is a co-sponsor, has not yet read the report, a spokeswoman said.

The government got into the business of flood coverage because the insurance industry didn't want the job. Paradoxically, however, the program relies heavily on private insurers and agents to sell policies and handle claims, a set-up that FEMA says expands coverage and improves service.

In return, participating companies get to keep about one-third of premium income for commissions, operating expenses and incentive bonuses, the GAO report says. They also collect fees for processing and adjusting claims on a scale that pays them more in major loss years.

The system has existed largely unchanged since 1983, according to the report. FEMA "cannot ensure that payments are based on reasonable estimates of actual expenses," the report says, because the agency does not consider or collect actual expense data from participating companies.

(Readers can reach Press-Register Washington Bureau Reporter Sean Reilly at sean.reilly@newhouse.com or (202) 383-7815.)

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Original published on September 11, 2007.


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