Flood Insurance:

Opportunities Exist to Improve Oversight of the WYO Program

GAO-09-455: Published: Aug 21, 2009. Publicly Released: Sep 21, 2009.

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Since 2004, private insurance companies participating in the Federal Emergency Management Agency's (FEMA) Write-Your-Own (WYO) program have collected an average of $2.3 billion in premiums annually and, of this amount, have been paid or allowed to retain an average of $1 billion per year. Questions have been raised about FEMA's oversight of the program in light of the debts FEMA has incurred since the 2005 hurricanes. GAO placed NFIP on its high-risk list and issued several reports addressing the challenges the program faces. This report addresses the methods FEMA uses for determining the rates at which WYOs are paid, its marketing bonus system for WYOs, its adherence to financial control requirements for the WYO program, and alternatives to the current system. To do this work, we reviewed and analyzed FEMA's data and policies and procedures and obtained the views of select WYOs and flood insurance experts.

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 not aligned its bonus structure with its long-term goals for the program. The WYOs generally offered flood insurance when requested but did not strategically market the product as a primary insurance line. FEMA has not set explicit marketing goals beyond a 5 percent goal of increasing policy growth each year, and the WYO program primarily rewards companies that are new to NFIP for sales increases that may result from external factors, including flood events. The Government Performance and Results Act states that when results could be influenced by external factors, agencies can use intermediate goals to measure contributions to specific goals. Paying bonuses based on such intermediate targeted goals could bring the bonus structure more in line with FEMA's goals for the NFIP program. 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. Three alternative administrative structures could replace NFIP's payment arrangement with a competitively awarded contract that could lower costs for selling and servicing flood insurance policies and administering claims: (1) contracting with one or more insurance companies, (2) contracting with a single vendor, or (3) contracting with multiple vendors and maintaining the WYO network. Each alternative involves trade-offs in terms of the impact on the program's basic operations that would have to be considered.

Recommendations for Executive Action

  1. Status: Open

    Comments: FEMA is continuing (as of 08/29/2014) to analyze Write-Your-Own (WYO) payments and related flood expenses for selected companies and is evaluating the reliability (accuracy, consistency, etc.) of the National Association of Insurance Commissioners (NAIC) data for purposes of performing the analysis we had recommended.

    Recommendation: To provide transparency and accountability over the payments FEMA makes to WYOs for expenses and profits, the Secretary of Homeland Security should direct the Under Secretary of Homeland Security, FEMA, to determine in advance the amounts built into the payment rates for estimated expenses and profit.

    Agency Affected: Department of Homeland Security

  2. Status: Open

    Comments: FEMA is continuing (as of 08/29/2014) to analyze Write-Your-Own (WYO) payments and related flood expenses for selected companies and is evaluating the reliability (accuracy, consistency, etc.) of the National Association of Insurance Commissioners (NAIC) data for purposes of performing the analysis we had recommended.

    Recommendation: To provide transparency and accountability over the payments FEMA makes to WYOs for expenses and profits, the Secretary of Homeland Security should direct the Under Secretary of Homeland Security, FEMA, to annually analyze the amounts of actual expenses and profit in relation to the estimated amounts used in setting payment rates.

    Agency Affected: Department of Homeland Security

  3. Status: Open

    Comments: FEMA is continuing (as of 08/29/2014) to analyze WYO payments and related flood expenses for selected companies and is evaluating the reliability (accuracy, consistency, etc.) of the National Association of Insurance Commissioners (NAIC) data for purposes of performing the analysis we had recommended.

    Recommendation: To provide transparency and accountability over the payments FEMA makes to WYOs for expenses and profits, the Secretary of Homeland Security should direct the Under Secretary of Homeland Security, FEMA, to consider the results of the analysis of payments, actual expenses, and profit in evaluating the methods for paying WYOs.

    Agency Affected: Department of Homeland Security

  4. Status: Closed - Not Implemented

    Comments: FEMA did not immediately reassess its practice of paying WYOs an additonal one percent of written premiums for operating expenses. FEMA officials informed us that such an assessment would require additional time to collect and analyze a sufficient amount of reliable actual expense data from enough WYOs. Such an analysis would be necessary to determine the costs the WYOs incur to underwrite and administer flood polices that are above and beyond what they typically incur for the other lines of property and casualty insurance on which the operating expense payment rate is currently based on.

    Recommendation: To provide transparency and accountability over the payments FEMA makes to WYOs for expenses and profits, the Secretary of Homeland Security should direct the Under Secretary of Homeland Security, FEMA, to in light of the findings in this report, immediately reassess the practice of paying WYOs an additional 1 percent of written premiums for operating expenses.

    Agency Affected: Department of Homeland Security

  5. Status: Open

    Comments: FEMA continues (as of 08/29/2014) to work with the National Association of Insurance Commissioners (NAIC) to improve the consistency with which commission, operating, and loss adjustment expenses are reported by insurance companies that participate in the National Flood Insurance Program.

    Recommendation: To increase the usefulness of the data reported by WYOs to the National Association of Insurance Commissioners (NAIC) and to institutionalize FEMA's use of such data, the Secretary of Homeland Security should direct the Under Secretary of Homeland Security, FEMA, to take actions to obtain reasonable assurance that NAIC flood insurance expense data can be considered in setting payment rates that are appropriate, including identifying affiliated company profits in reported flood insurance expenses.

    Agency Affected: Department of Homeland Security

  6. Status: Open

    Comments: FEMA continues (as of 08/29/2014) to work with the National Association of Insurance Commissioners (NAIC) to improve the consistency with which commission, operating, and loss adjustment expenses are reported by insurance companies that participate in the National Flood Insurance Program.

    Recommendation: To increase the usefulness of the data reported by WYOs to the National Association NAIC and to institutionalize FEMA's use of such data, the Secretary of Homeland Security should direct the Under Secretary of Homeland Security, FEMA, to develop comprehensive data analysis strategies to annually test the quality of flood insurance data that WYOs report to NAIC.

    Agency Affected: Department of Homeland Security

  7. Status: Closed - Implemented

    Comments: FEMA changed the formula for which WYO companies earn bonuses to include growth incentives for meeting targeted growth goals in areas set by FEMA. The new WYO incentive goals matched goals that FEMA set for its NFIP FloodSmart marketing campaign--increasing policies in underserved areas, for small businesses, and for residential preferred risk policies. A portion of the bonus formula retained meeting overall policy growth, as in the past. In proposing the new formula to the WYO companies in August 2011, FEMA's Deputy Administrator for Insurance wrote that he believed the new formula would address the concerns raised by GAO. After obtaining and incorporating WYO comments, FEMA wrote the WYO companies in December 2011 letting them know that the new formula will apply in the 2013 marketing year.

    Recommendation: If FEMA continues to use the WYO bonus program, the Secretary of Homeland Security should direct the Under Secretary of Homeland Security, FEMA, to improve it by considering the use of more targeted marketing goals that are in line with FEMA's NFIP goals.

    Agency Affected: Department of Homeland Security

  8. Status: Closed - Implemented

    Comments: FEMA has developed a WYO Financial Control Plan monitoring system to capture and monitor biennial audit activities, triennial claims operation reviews, claims reinspections, and industry (A.M. Best) data to provide snapshots of WYO companies' performance. FEMA discontinued the triennal operation reviews of WYO marketing because FEMA's WYO marketing bonus program is now based on FEMA's policy growth goals, thereby negating the need for tracking WYO marketing performance. FEMA also discontinued the customer service and state audit activities sections of the control plan and created a new liaison position between the flood insurance program and the State Departments of Insurance who is responsible for keeping abreast of state insurance department audits pertaining to the NFIP and gathering information regarding NFIP-related customer service issues. FEMA also added an additional review of overall WYO performance by an independent staff person responsible for determining if a company warrants further reviews by the Risk Insurance Director. The Division Director determines whether to refer an individual WYO company to the WYO Standards Committee for action. If all remedies available to the WYO Standards Committee are exhausted, FEMA will undertake an audit for cause.

    Recommendation: To improve oversight of the WYO program and compliance with program requirements, the Secretary of Homeland Security should direct the Under Secretary of Homeland Security, FEMA, to consistently follow the Control Plan and ensure that each component is implemented.

    Agency Affected: Department of Homeland Security

  9. Status: Closed - Implemented

    Comments: To address customer service and state audit activities, FEMA established a new liaison between the National Flood Insurance Program (NFIP) and the State Departments of Insurance. This person will, among other things, be responsible for keeping abreast of state insurance department audits pertaining to the NFIP and gathering information regarding NFIP-related customer service issues. These activities will inform the NFIP of State Insurance Audits involving the NFIP and replace triennial customer service reviews. Through the liaison, FEMA hopes to build and strengthen effective working relationships between the NFIP, the National Association of Insurance Commissioners, and individual State Insurance Departments. FEMA also instituted an in-house oversight process to monitor, review, and approve Special Allocated Loss Adjustment Expenses, which include litigation expenses.

    Recommendation: To improve oversight of the WYO program and compliance with program requirements, the Secretary of Homeland Security should direct the Under Secretary of Homeland Security, FEMA, to ensure that any revised Control Plan include oversight of all functions of participating WYOs, including customer service and litigation expenses.

    Agency Affected: Department of Homeland Security

  10. Status: Closed - Implemented

    Comments: FEMA has developed a Financial Control Plan monitoring system to systematically capture and monitor biennial audit activities, triennial claims operating reviews, triennial underwriting operation reviews, claims inspections, and industry (A.M Best) data to provide a snapshot of WYO company performance. FEMA discontinued the triennial operation review of WYO company marketing and customer service because its new bonus formula is based on NFIP goals, negating the need for reviewing WYO marketing activities. In addition, a FEMA staff person not involved in the basic monitoring process independently reviews the results and if warranted, recommends further review by the Risk Insurance Division Director. The Division Director determines whether to refer the company to the WYO standards Committee or take other actions. If all remedies available to the WYO Standard Committee are exhausted, FEMA will undertake an Audit for Cause.

    Recommendation: To improve oversight of the WYO program and compliance with program requirements, the Secretary of Homeland Security should direct the Under Secretary of Homeland Security, FEMA, to systematically track insurance companies' compliance with and performance under each component of the Control Plan and ensure centralized access to all the audits, reviews, and data analyses performed for each participating insurance company under the Control Plan.

    Agency Affected: Department of Homeland Security

 

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