By
Sean Reilly
January 10, 2010, 7:24AM
Homes in New Orleans are still submerged by contaminated flood waters in the photograph made on Sept. 11, 2005, almost two weeks after Hurricane Katrina made landfall on Aug. 29, 2005.WASHINGTON — When lawmakers ponder the woes of the federal flood insurance program, they tend to dwell on the billions of dollars in red ink spilled since 2005, when Hurricane Katrina left a backwash of huge losses.
Less attention has been given to the program’s dependence on private insurance companies and agents to do most of the actual work of selling policies and adjusting claims.
As the Press-Register has reported, those companies — which include industry heavyweights such as State Farm and Nationwide — and agents were paid more than $750 million for their services in fiscal 2008, almost a quarter of total premium payments.
WASHINGTON — In response to criticism, the Federal Emergency Management Agency is pursuing steps that could limit what private insurers take out of the government-backed flood insurance program.
But while some advocates say that FEMA should require competitive bidding to further drive down costs, the agency is reluctant to go that far.
As it now works, insurance companies can sell flood policies and act as adjusters if they meet government guidelines and will accept what FEMA pays under a set fee structure.
Under a different approach outlined in a congressional report last fall, FEMA could instead use competitive bids to select a smaller number of firms — possibly only one — to handle that work under contract.
The report by the Government Accountability Office, a congressional watchdog agency, also suggests FEMA use insurers’ actual expenses in deciding how much to pay them, instead of relying on a formula.
The status quo “is way too expensive,” said Bob Hunter, insurance director for the Consumer Federation of America, a Washington, D.C.-based advocacy group.
But the GAO reported that most insurance officials contacted don’t want to become federal contractors because that would bring added regulation. Also, going with just one firm might be less expensive, but would “almost completely eliminate” the network of agents used to sell policies, the GAO said.
In a written reply to the report, FEMA officials concurred with some recommendations, such as improving the performance of a marketing bonus program.
The GAO report was requested by Sen. Richard Shelby of Tuscaloosa, the top Republican on the Senate Banking Committee. In an e-mail, spokesman Jonathan Graffeo said Congress should consider the recommendations when drafting legislation to renew the flood insurance program.
– Sean Reilly
This amounts to a sweetheart deal, according to some critics. Their position was boosted last fall by a congressional finding that a half-dozen insurers had received more than $300 million in flood-insurance program overpayments during three years. In one case, a company earned a marketing bonus despite having done no marketing.
“There’s just almost no oversight, really,” said Brian Martin, policy director for Mississippi Rep. Gene Taylor, D-Bay St. Louis, who has frequently called into question the insurance companies’ role in the federal program.
At the Federal Emergency Management Agency, which is responsible for the program, top officials have defended the industry alliance as central to expanding participation to some 5.6 million policies nationwide, including more than 55,000 in Alabama and 75,000 in Mississippi.
“This partnership allows us to reach as many communities as possible in a timely and a cost-effective manner,” FEMA spokesman Clark Stevens said in an e-mail.
At the American Insurance Association, a Washington, D.C.-based industry group, Associate General Counsel Eric Goldberg said that the number of participating companies has been on the decline. If flood insurance were “such a gravy train,” he said, there would presumably be more carriers.
Formally known as the Write Your Own program, the alliance dates back to the early 1980s. About 90 companies are involved, and, as of fiscal 2008, they handled 97 percent of FEMA’s flood policies.
Since Katrina, some lawmakers and litigants have accused insurers of potential conflicts of interest since they decide whether to attribute storm damage to wind or water. Regular homeowner policies typically cover wind damage; the government-backed flood program pays for storm surge damage.
A review by the U.S. Department of Homeland Security’s Inspector General’s Office found no evidence to support the accusation, but urged federal managers to keep a closer eye on that concern.
While participation by property owners in flood insurance stand is around an all-time high, the program’s financial condition has never been worse. It is now $19.3 billion in debt to the federal treasury, largely because of Katrina claims.
Lawmakers have been able to agree only on a series of stop-gap extensions to keep the program afloat. The latest will last until the end of next month.
In the congressional review, released in September, the Government Accountability Office found that FEMA had overpaid six insurers by $327 million from 2005 to 2007 and was unable to judge companies’ performance in selling new flood policies. The GAO is a congressional watchdog agency.
“Given the significant risk exposure to the federal government, it is imperative that FEMA carry out its stewardship responsibilities,” the authors wrote.
In response, FEMA officials acknowledged some shortcomings and agreed to study options for improvement. They objected to a recommendation to take insurers’ profits into account when deciding how much to pay them.
Because expenses vary by company, a FEMA representative wrote, that “considering profit” as a factor could compromise the program’s goal of making flood insurance “widely available.”
