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GAO Report Says FEMA Overpaid Insurance Companies

Source: GAO

Posted on 24 Sep 2009

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Over a three-year period, the Federal Emergency Management Agency overpaid insurance companies participating in the National Flood Insurance Program by hundreds of millions of dollars, a new government review concludes.

Under the "Write-Your-Own" part of the flood program, about 90 private insurers — including State Farm, Allstate and other industry heavyweights — adjust claims on FEMA's behalf. In return, they are supposed to be reimbursed for processing and adjusting expenses, according to the review by the Government Accountability Office, a congressional watchdog arm.

But in a sample of six of the larger Write-Your-Own companies, GAO reviewers found that payments exceeded actual expenses by more than $327 million from 2005 through 2007.. The reason: Federal overseers use a formula — not actual expense numbers — to determine how much the companies are owed.

As a result, FEMA lacks the information needed to know "whether its payments are appropriate and how much profit is included in its payments to (Write-Your-Own companies)," the report says.

In a vigorous dissent attached to the report, FEMA representative Jerald Levine called the overpayment conclusion "misleading," in part because the three-year period spanned by the review includes the heaviest loss years in the flood insurance program's history. That period "is not indicative of typical years for lost adjustment expenses," Levine said. FEMA will, however, look into options for restructuring the Write-Your-Own program, he added.

The review, which does not name the six companies that benefited from the alleged overpayments, was requested by Sen. Richard Shelby of Tuscaloosa, the top Republican on the Senate banking committee. Shelby's office is now reviewing the findings, a spokesman said via e-mail Tuesday.

With some 55,000 policies in Alabama alone, the flood program is supposed to be self-supporting. It has yet to recover, however, from Hurricane Katrina and other storms that since 2005 have swamped it with claims and have left it more than $19 billion in debt to the federal treasury.

For policyholders, the upshot is that interest on that debt, along with payments to the Write-Your-Own companies and other expenses, soaked up more than half of every premium dollar in fiscal 2008.

Four years after Katrina, Congress has yet to get the flood program back on track, instead resorting to a series of stop-gap extensions that do little more than keep it on bureaucratic life-support.

In the latest cliffhanger, the program is set to expire at the end of this month, although the House has already approved a bill to keep it in business through next March. The legislation is now with the Senate banking committee, where a spokeswoman could not immediately say Tuesday what the panel's plans are.

Congress created the flood insurance program — which is administered by FEMA — in 1968 because private insurers are generally reluctant to cover water damage. The Write-Your-Own piece dates back to 1983.

Besides adjusting claims, participating companies also sell policies and are eligible for bonuses if they achieve 2 percent to 5 percent growth in policies on a yearly basis. FEMA's handling of that aspect of that program was also questioned by the GAO, which said the agency needs to study whether the current structure is effective.