NU Online News Service, July 12, 3:45 p.m.EDT

The Federal Emergency Management Agency says in a letter thattaking over management of more than 800,000 flood insurancepolicies currently administered by State Farm will save the agencymore than $50 million annually, compared to the cost of the currentWrite-Your-Own program.

The letter, dated June 27, responds to a request forclarification of FEMA's position on a "depopulation amendment" thatpassed the House by voice vote as part of the debate over H.R.1309, the Flood Insurance Reform Act of 2011. The request was madeby Rep. Randy Neugebauer, R-Tex., chairman of the Oversight andInvestigations Subcommittee of the House Financial ServicesCommittee.

The amendment in question would require FEMA to reduce thenumber of flood insurance policies that are directly managed by theagency to no more than 10 percent of the total number of floodinsurance policies in force.

It would also require FEMA to refuse to accept future transfersof policies to the NFIP Direct program.

The Property Casualty Insurers Association of America (PCI) andthe Independent Insurance Agents and Brokers of America support theamendment.

It was prompted by State Farm's decision to drop out of theWrite-Your-Own Program in 2010. Under an agreement with FEMA, StateFarm ceded underwriting of 832,000 NFIP policies to the NFIP Directprogram, with the transition scheduled to be completed bySeptember.

FEMA's letter supports the arrangement with State Farm and takesa position against the proposed amendment.

The letter says that individual full-risk national floodinsurance policyholders will average savings of $7 a year savings,for a total of $30 million in savings a year for all policyholders,under the new arrangement.

Subsidized policyholders will receive $20 million in savings,which will mean the agency "can slightly reduce the average amountof subsidy and there will be more funds available to pay claims orto reduce current borrowing."

The letter, written by Edward Connor, deputy, Federal Insuranceand Mitigation Administration, for FEMA, says the agency hasvoluntarily agreed to inform NFIP Direct customers annually oftheir ability to switch to a WYO-carrier. The letter estimates theannual cost of this as $900,000.

The WYO program has been consistently targeted by the GovernmentAccountability Office as being mismanaged by FEMA.

Ben McKay, PCI senior vice president of federal governmentrelations, defended the purpose of the amendment. He says the"historic" 700 percent expansion of FEMA's involvement in floodinsurance "will put the federal government in direct competitionwith private market insurers and make the NFIP Direct program thelargest administrator of flood insurance in the nation."

But, Phil Supple, a spokesman for State Farm, says the"amendment is not about getting the federal government out of theflood insurance business.

"It is one group of insurance companies trying to poach businessfrom a separate group of agents," he says.

Under the arrangement with FEMA, State Farm captive agents wouldcontinue to sell the policies, but claims servicing would behandled by FEMA and government-designated claims adjusters.

The House launched debate on the legislation at 1 p.m. today. Avote on the bill is expected by late today.