National Flood Insurance Program:
New Processes Aided Hurricane Katrina Claims Handling, but FEMA's Oversight Should Be Improved
GAO-07-169: Published: Dec 15, 2006. Publicly Released: Dec 15, 2006.
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In August and September 2005, Hurricanes Katrina and Rita caused unprecedented destruction to property along the Gulf Coast, resulting in billions of dollars of damage claims to the National Flood Insurance Program (NFIP). This report, which we initiated under the authority of the Comptroller General, examines (1) the impact of Hurricanes Katrina and Rita on the NFIP and paid losses by location and property type; (2) the challenges the Federal Emergency Management Agency (FEMA) and others faced in addressing the needs of NFIP claimants and communities; (3) FEMA's methods of monitoring and overseeing claims adjustments; and (4) FEMA's efforts to meet the requirements of the Flood Insurance Reform Act of 2004 to establish policyholder coverage notifications, an appeals process for claimants, and education and training requirements for agents. To conduct these assessments, GAO interviewed FEMA and insurance officials, analyzed claims data, and examined a sample of reports done on the accuracy of claims adjustments.
NFIP paid an unprecedented dollar amount for a record number of claims from Hurricanes Katrina and Rita. Congress increased NFIP's borrowing authority with the U.S. Treasury from a pre-Katrina level of $1.5 billion to about $20.8 billion in March 2006, but FEMA will probably not be able to repay this debt on annual premium revenues of about $2 billion. As of May 2006, NFIP had paid approximately 162,000 flood damage claims from Hurricane Katrina and another 9,000 claims from Hurricane Rita. Most paid claims were for primary residences where flood insurance was generally required. FEMA and its private sector partners faced several challenges in processing a record number of flood claims from Hurricanes Katrina and Rita, among them were (1) reaching insured properties in a timely way because of blocked roadways and flood water contamination and (2) identifying badly damaged homes to be inspected in locations where street signs had washed away. Despite these and other obstacles, FEMA reported that over 95 percent of Gulf Coast claims had been closed by May 2006, a time frame comparable to those for closing claims in other, smaller recent floods. To help keep pace with the volume of claims filed, FEMA approved expedited methods for claims processing that were unique to Hurricanes Katrina and Rita. To provide oversight of the claims adjustment process, FEMA's program contractor did quality assurance reinspections of Hurricane Katrina and Rita claims adjustments. FEMA did not adopt our October 2005 recommendation that it select the claims to be reinspected from a random sample of the universe of all closed claims; thus, the results of the reinspections cannot be projected to a universe larger than the 4,316 claims adjustments that were reinspected. FEMA agrees with our prior recommendation and plans to do quality reinspections in future flood events based on a random sample of all claims. FEMA did not analyze the overall results of the quality reinspections for Hurricanes Katrina and Rita. FEMA has made progress but has not fully implemented the NFIP program changes mandated by the Flood Insurance Reform Act. For example, 15 states had adopted minimum education and training requirements for insurance agents who sell NFIP policies, as of October 2006.
Recommendation for Executive Action
Status: Closed - Implemented
Comments: According to the Federal Emergency Management Agency (FEMA), the modified claims handling standards described in the September 21, 2005, Bulletin W-0504 and implemented for Hurricane Katrina losses responded to the unprecedented numbers and severity of those losses and were possible only because of the unique resources available, including the water depth data provided without cost from Louisiana State University. FEMA has determined that a detailed, room-by-room, line item-by-line item, unit-cost estimate prepared by a qualified flood adjuster is the most effective method to comply with National Flood Insurance Program (NFIP) regulation. Nonetheless, the NFIP Claims Adjuster Manual includes a description of a methodology companies may use to determine the value of flood damage when the insured building has been completely destroyed. This method requires the best available information to be used in calculating value and is similar to the square footage method authorized for devastating losses (for example, when only the foundation slab remains) such as those after Katrina in coastal Mississippi. While there are no plans to revive the modified claims handling standards authorized after Hurricane Katrina, FEMA officials said the agency is not averse to considering similar measures if a future event requires them and the atypical, cost-effective resources are available.
Recommendation: To strengthen and improve FEMA's monitoring and oversight of the NFIP, including ensuring that claims payments are accurately determined, for future flood events when FEMA implements our prior recommendation to do quality assurance reinspections of a statistically valid sample of claims adjustments, the Secretary of the Department of Homeland Security should also direct the Under Secretary of Homeland Security, FEMA, to analyze the overall results of claims adjustments done for each future flood events to determine the number and type of claims adjustment errors made and to help determine whether new, cost-efficient methods for adjusting claims that were introduced after Hurricane Katrina are feasible to use after other flood events.
Agency Affected: Department of Homeland Security: Directorate of Emergency Preparedness and Response: Federal Emergency Management Agency