Federal Emergency Management Agency:

Improvements Needed to Enhance Oversight and Management of the National Flood Insurance Program

GAO-06-119: Published: Oct 18, 2005. Publicly Released: Oct 18, 2005.

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In the wake of Hurricane Isabel in 2003, GAO was mandated by the Flood Insurance Reform Act of 2004 to report on issues related to the National Flood Insurance Program (NFIP) and its oversight and management by the Federal Emergency Management Agency (FEMA). Private insurance companies sell NFIP policies and adjust claims, while a private program contractor helps FEMA administer the NFIP. To address this mandate, this report assesses (1) the statutory and regulatory limitations on coverage for homeowners under the NFIP; (2) FEMA's role in monitoring and overseeing the NFIP; (3) FEMA's response to concerns regarding NFIP payments for Hurricane Isabel claims; and (4) the status of FEMA's implementation of provisions of the Flood Insurance Reform Act of 2004. Although impacts from Hurricane Katrina were not part of the report's scope, GAO recognizes that this disaster presents the NFIP with unprecedented challenges.

The amount of insurance coverage available to homeowners under the NFIP is limited by requirements set forth in statute and FEMA's regulations, which include FEMA's standard flood insurance policy. As a result of these limitations, insurance payments to claimants for flood damage may not cover all of the costs of repairing or replacing flood-damaged property. For example, homes that could sustain more than $250,000 in damage cannot be insured to their full replacement cost, thus limiting claims to this statutory ceiling. In addition, NFIP policies cover only direct physical loss by or from flood. Therefore, losses resulting primarily from a preexisting structural weakness in a home or losses resulting from events other than flood, such as windstorms, are not covered by NFIP policies. To meet its monitoring and oversight responsibilities, FEMA is to conduct periodic operational reviews of the 95 private insurance companies that participate in the NFIP, and FEMA's program contractor is to check the accuracy of claims settlements by doing quality assurance reinspections of a sample of claims adjustments for every flood event. FEMA did not use a statistically valid method for sampling files to be reviewed in these monitoring and oversight activities. As a result, FEMA cannot project the results of these reviews to determine the overall accuracy of claims settled for specific flood events or assess the overall performance of insurance companies and their adjusters in fulfilling responsibilities for the NFIP--actions necessary for FEMA to have reasonable assurance that program objectives are being achieved. In the months after Hurricane Isabel, FEMA took steps intended to address concerns that arose from that flood event. In April 2004, FEMA established a task force to review claims settlements from Hurricane Isabel claimants. As a result of task force reviews, almost half of the 2,294 policyholders who sought a review received additional payments. The additional payment amount averaged $3,300 more than the original settlement--for a total average settlement of about $32,400 per claimant. In most cases, the additional funds were for repairing or replacing buildings or property not included in the initial adjuster's loss determination, or to cover additional material or labor costs. FEMA has not yet fully implemented provisions of the Flood Insurance Reform Act of 2004 requiring the agency to provide policyholders with a flood insurance claims handbook that meets statutory requirements, to establish a regulatory appeals process, and to ensure that insurance agents meet minimum NFIP education and training requirements. The statutory deadline for implementing these changes was December 30, 2004. Efforts to implement the provisions are under way, but have not yet been completed. FEMA has not developed plans with milestones for assigning accountability and projecting when program improvements will be made, so that improvements are in place to assist victims of future flood events.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In GAO's most recent assessment of the Federal Emergency Management Agency's (FEMA) oversight of Write-Your-Own private (WYO) insurance companies who sell and service flood insurance policies, we reported that FEMA's March 2009 draft Control Plan changed the methodology to reflect this recommendation and FEMA documentation showed that the agency was selecting statistically representative samples of files to review for claims operation reviews and underwriting operation reviews. We also reported that, for claims reinspections, FEMA's March 2009 draft Control Plan changed the file selection methodology to partially implement our recommendation; i.e., a random selection, but only from a population that fits certain criteria of over 400 claims per a single event. For our sample of 10 WYOs, we found that this eligible population represented a small portion (13 percent) of all claims filed in FY2007.

    Recommendation: To improve FEMA's oversight and management of the NFIP, the Secretary of the Department of Homeland Security should direct the Under Secretary of Homeland Security for Emergency Preparedness and Response to use a methodologically valid approach to draw statistically representative samples of claims for underwriting and claims portions of operational reviews and for quality assurance reinspections of claims by general adjusters.

    Agency Affected: Department of Homeland Security: Directorate of Emergency Preparedness and Response

  2. Status: Closed - Implemented

    Comments: In October 2005, we reported that the Federal Emergency Management Agency's (FEMA) flood insurance claims handbook did not fully comply with statutory requirements to include information regarding the appeals process that FEMA was statutorily required to establish through regulation. FEMA provided a revised Flood Insurance Claims Handbook, effective as of November 13, 2006, that includes a detailed description of the claims appeal process. FEMA sent a memo to flood insurance coordinators in December 2006 directing their attention to the revised handbook. We also reported that the establishment of a regulatory appeals process is required by section 205 of the Flood Insurance Reform Act of 2004, but, at the time of our report, it was unclear how or when FEMA would establish the regulatory appeals process. FEMA issued a press release and published a Final Rule on Flood Insurance Claims Appeals Process on Oct. 13, 2006. Finally, we reported that Section 207 of the Flood Insurance Reform Act of 2004 required FEMA, in cooperation with the insurance industry, state insurance regulators, and other interested parties, to establish minimum training and education requirements for all insurance agents who sell flood insurance policies. At that time, we concluded it was too early to tell the extent to which insurance agents would meet FEMA's minimum standards. In July 2009, FEMA provided an update on the status of states' efforts to implement mandatory flood insurance training requirements that showed that, as of May 26, 2009, almost all states had implemented such requirements.

    Recommendation: To improve FEMA's oversight and management of the NFIP, the Secretary of the Department of Homeland Security should direct the Under Secretary of Homeland Security for Emergency Preparedness and Response to develop documented plans with milestones for implementing requirements of the Flood Insurance Reform Act of 2004 to provide policyholders with a flood insurance claims handbook that meets statutory requirements, to establish a regulatory appeals process, and to ensure that insurance agents meet minimum NFIP education and training requirements.

    Agency Affected: Department of Homeland Security: Directorate of Emergency Preparedness and Response

 

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