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Highlights

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.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Homeland Security 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.
Open
According to FEMA officials, FEMA planned to respond to this recommendation as part of its development of a final rule on WYO compensation practices, required by the Biggert-Waters Act. FEMA's current payment rates do not explicitly consider WYO insurers' actual expenses and profit. FEMA issued an Advance Notice of Proposed Rulemaking (ANPRM) on July 8, 2019 seeking comments by September 6, 2019 regarding possible approaches to incorporating actual flood insurance expense data into the WYO payment methodology. As of February 2021, FEMA officials completed reviewing comments received in response to the July 2019 notice and concluded that they needed to reassess their approach to compensating WYO insurers.
Department of Homeland Security
Priority Rec.
Priority recommendations are those that GAO believes warrant priority attention from heads of key departments or agencies.
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.
Open
According to FEMA officials, FEMA planned to respond to this recommendation as part of its development of a final rule on WYO compensation practices, required by the Biggert-Waters Act. However, GAO has reported that an annual analysis of the WYO insurers' actual expenses and profit could be regularly performed in relation to FEMA's existing payment methodology. FEMA issued an Advance Notice of Proposed Rulemaking (ANPRM) on July 8, 2019 seeking comments by September 6, 2019 regarding possible approaches to incorporating actual flood insurance expense data into the WYO payment methodology. As of February 2020, FEMA officials said that they would complete an annual analysis of WYO data by the end of fiscal year 2020 and as of February 2021 they completed reviewing comments received in response to the July 2019 notice and concluded that they needed to reassess their approach to compensating WYO insurers.
Department of Homeland Security 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.
Open
According to FEMA officials, FEMA planned to respond to this recommendation as part of its development of a final rule on WYO compensation practices, required by the Biggert-Waters Act. FEMA issued an Advance Notice of Proposed Rulemaking (ANPRM) on July 8, 2019 seeking comments by September 6, 2019 regarding possible approaches to incorporating actual flood insurance expense data into the WYO payment methodology. As of February 2021, FEMA officials said that they completed reviewing comments received in response to the July 2019 notice and concluded that they needed to reassess their approach to compensating WYO insurers.
Department of Homeland Security 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.
Closed - Not Implemented
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.
Department of Homeland Security 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.
Open
According to FEMA officials, FEMA planned to respond to this recommendation as part of its development of a final rule on WYO compensation practices, required by the Biggert-Waters Act. FEMA can also take actions, in addition to any actions related to the rule, to develop method(s) for obtaining reasonable assurance that NAIC data is accurate and usable for setting payment rates before implementation of a new compensation methodology. FEMA issued an Advance Notice of Proposed Rulemaking (ANPRM) on July 8, 2019 seeking comments by September 6, 2019 regarding possible approaches to incorporating actual flood insurance expense data into the WYO payment methodology. As of February 2021, FEMA officials said that they completed reviewing comments received in response to the July 2019 notice and concluded that they needed to reassess their approach to compensating WYO insurers.
Department of Homeland Security 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.
Open
According to FEMA officials, FEMA planned to respond to this recommendation as part of its development of a final rule on WYO compensation practices, required by the Biggert-Waters Act. FEMA can also take actions, in addition to any actions related to the rule, to develop and implement data analysis strategies to annually test the quality of flood insurance data WYO insurers report to NAIC before implementation of a new compensation methodology. FEMA issued an Advance Notice of Proposed Rulemaking (ANPRM) on July 8, 2019 seeking comments by September 6, 2019 regarding possible approaches to incorporating actual flood insurance expense data into the WYO payment methodology. As of February 2021, FEMA officials said that they completed reviewing comments received in response to the July 2019 notice and concluded that they needed to reassess their approach to compensating WYO insurers.
Department of Homeland Security 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.
Closed - Implemented
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.
Department of Homeland Security 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.
Closed - Implemented
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.
Department of Homeland Security 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.
Closed - Implemented
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.
Department of Homeland Security 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.
Closed - Implemented
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.

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