National Flood Insurance Program:

FEMA's Management and Oversight of Payments for Insurance Company Services Should Be Improved

GAO-07-1078: Published: Sep 5, 2007. Publicly Released: Sep 5, 2007.

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Extraordinary recent flood events raise serious questions about the solvency of the National Flood Insurance Program (NFIP), which is administered by the Federal Emergency Management Agency (FEMA). The NFIP is largely implemented by private insurance companies that sell and service policies and adjust claims under the Write Your Own (WYO) Program. This report, prepared under the authority of the Comptroller General, examines (1) how much FEMA paid the WYO companies in recent years for operating costs and how FEMA determined payment amounts; (2) how FEMA's approach to determining operating costs assures that payments are reasonable estimates of companies' expenses; and (3) how FEMA assures that financial and management controls are in place for the WYO program and operate as intended. To do these assessments, GAO interviewed FEMA and insurance officials, and analyzed statutes, regulations, payment data, methodologies, and audits of WYO companies.

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. In fiscal years 2005 and 2006, larger payments to WYO insurance companies were the result of settling an unprecedented number and dollar amount of claims for damages resulting from major hurricanes and flood events including Hurricane Katrina. To determine the amount of these payments, FEMA negotiated payment approaches with insurance industry representatives when it established the current WYO program in 1983 based on industry averages for operating expenses for other lines of insurance (such as homeowners, commercial, and fire), past practice, and discussion. 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. FEMA officials said that they have not asked WYO insurance companies to provide expense information due to concerns that the approach would increase FEMA's administrative costs and cause a decline in WYO program participation. However, some data on expenses WYO insurance companies allocate to flood insurance are available. FEMA officials said that they cannot use this information due to reporting inconsistencies. Also, there is some precedent in two similar public-private insurance partnerships for collecting actual expense information. FEMA's decision to rely on long-standing practices does not meet federal internal control standards that agencies be held accountable for, among other things, stewardship of government resources. Biennial financial statement audits--FEMA's primary mechanism to provide assurance that it receives complete and accurate financial management information from the WYO insurance companies--were not performed consistently as required by regulation. FEMA regulations require each participating company to arrange and pay for these audits by independent certified public accounting firms. However, many WYO insurance companies did not comply with the schedule in recent years. For example, for fiscal years 2005 and 2006, 5 of 94 participating companies had biennial financial statement audits performed. FEMA officials said they allowed some companies to delay having the audits done because they were in the process of contracting with new subcontractors to perform their financial reporting responsibilities. Nonetheless, without the required biennial audits, FEMA lacks an appropriate internal control mechanism for effective program oversight.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To improve financial accountability over payments the NFIP makes to the WYO insurance companies, to strengthen controls over expenditures of policyholders' and taxpayers' dollars, and to provide assurance that payments made to the WYO insurance companies are proper and in accordance with program requirements, the Secretary of Homeland Security should direct the Under Secretary of Homeland Security, FEMA, to ensure that its approach to establishing a schedule of operating costs is based on a reasonable estimate of actual expenses by taking such actions as FEMA deems necessary such as working with NAIC to ensure consistency in the way all WYO insurance companies compile and report data on expenses allocated to their federal flood business.

    Agency Affected: Department of Homeland Security

    Status: Closed - Implemented

    Comments: According to officials, the Federal Emergency Management Agency (FEMA) is working with the National Association of Insurance Commissioners (NAIC) and has obtained expense data submitted by all insurance companies to the NAIC in February 2010. They said FEMA has begun the preliminary analysis of this data to assure its completeness and will work with the NAIC to assure that the Write Your Own companies reliably and accurately report their Federal Flood data. Initial analyses are anticipated to be completed by October 2010. However, they said it might take one or two more years before all companies are consistently reporting the Federal Flood expenses.

    Recommendation: To improve financial accountability over payments the NFIP makes to the WYO insurance companies, to strengthen controls over expenditures of policyholders' and taxpayers' dollars, and to provide assurance that payments made to the WYO insurance companies are proper and in accordance with program requirements, the Secretary of Homeland Security should direct the Under Secretary of Homeland Security, FEMA, to ensure that biennial financial statement audits of WYO insurance companies are conducted by independent CPA firms as required by FEMA regulation, and that FEMA reviews the audits to ensure that payments made are proper and in accordance with program requirements.

    Agency Affected: Department of Homeland Security

    Status: Closed - Implemented

    Comments: In April 2010, Federal Emergency Management Agency (FEMA) officials said they had developed a new system to track all Write Your Own (WYO) Financial Control Plan activities and monitor company performance. They said that, in response to our recommendation, they monitor, review and follow-up on all WYO company biennial audits. They offered to provide copies of spreadsheets that track biennial report submissions for 2008,2009, and 2010. The GAO team responsible for the fiscal year 2010 financial management review of the National Flood Insurance Program (GAO-10-66) is working with FEMA to verify that the database established to track biennial audits and operational reviews, and rate companies is fully operational in order to close their recommendation that FEMA review the results of biennial audits, as well as operational reviews, and claim reinspections. Therefore, we consider our prior recommendation closed as implemented.

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