Editor's Note: This article originally appeared in National Underwriter, P&C.

WASHINGTON--A government watchdog agency report has hit the Federal Emergency Management Agency for lax oversight of the program that has private insurers write policies for the National Flood Insurance Program.

In its report, the Government Accountability Office proposed several changes for the Write Your Own program that it believes could save money, including contracting with a single insurance company to manage the program.

Unless reauthorized, the NFIP is due to expire in a week. As it now operates, participating property and casualty insurance companies write and service the standard flood insurance policy in their own names and receive an expense allowance for policies written and claims processed while the government underwrites losses.

Other GAO proposals include maintaining the program as currently managed, or replacing the NFIP's current payment system with a competitively awarded contract that could lower costs for selling and servicing flood insurance policies and administering claims.

But, the agency cautioned, "Each alternative involves trade-offs in terms of the impact on the program's basic operations that would have to be considered."

Write Your Own insurers, in addition to selling and servicing flood insurance policies, also adjust claims for damages.

GAO said it has found that when it compared expense payments FEMA made to six WYO insurers for 2005 through 2007, it found the payments exceeded actual expenses by $327.1 million, or 16.5 percent of total payments made.

The report was requested by Sen. Richard Shelby, R-Ala., ranking minority member of the Senate Banking Committee. He requested the report as Congress continues to debate the long-term reauthorization of the program.

Currently, the authorization of the existing program runs out Sept. 30, at the end of the current fiscal year. The House has passed legislation that would extend the current program until March 31, 2010, pending further talks with the Senate.

The Senate is expected to act possibly later this week.

Officials of the National Association of Professional Insurance Agents said they doubted whether any of the GAO's proposals for change in the WYO program would be effective.

"Although improvements can always be made to increase efficiency, PIA is skeptical that a centralized service entity approach is the answer," a spokesman said.

The spokesman said that past federal authorities responsible for the NFIP program employed this structure several times over the decades.

"Each time, it was managed by different administrations' FEMA officials contracting with different vendors and it proved a costly failure," said PIA Senior Vice President Ted Besesparis.

In fact, he said, "the failures of centralized service entity approaches led the GAO, in past reports, to recommend the WYO program in the first place."

The GAO report found FEMA has not implemented all the financial controls and procedures for the WYO programs that it has established; has not made most of the audits required for cause; state insurance department audits; and marketing, litigation and customer service operational reviews.

In addition, the report said, 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 its control plan, it cannot ensure that the WYOs are fully complying with program requirements," the report said.

PIA officials noted that the $17 billion deficit in the NFIP program incurred because of Hurricanes Katrina and Rita in 2005 is what has prompted congressional concern about the NFIP program and its WYO program.

But, a PIA spokesman noted, "Attributing the debts incurred in the flood insurance program subsequent to the 2005 hurricanes primarily to FEMA's management of the program belies the fact that four major hurricanes striking the United States in two years caused extensive flooding losses that exceeded reasonable reserving--and just several years prior to these events, Congress moved monies from NFIP premium reserves (which at the time were described as excessive) to off-set FEMA operating expenses and redirect the savings to other federal government programs."

Arthur D. Postal is Washington Bureau Chief for National Underwriter, P&C.

Special Reports /

GAO: Oversight Too Loose For Insurers Writing Flood Cover

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