The federal government may be overpaying private insurers for their operating costs associated with the National Flood Insurance Program (NFIP), a recent report said.
The government’s payments to insurance companies for operating costs ranged from “more than a third to almost two-thirds of the total premiums paid by policyholders to the NFIP for fiscal years 2004 through 2006,” the Government Accountability Office found.
NFIP, which is administered by the Federal Emergency Management Agency (FEMA), is largely implemented by private insurance companies that sell and service policies and adjust claims under the “Write Your Own” (WYO) Program.
The report maintains that in fiscal years 2005 and 2006, larger payments to WYO insurance companies were the result of settling an unprecedented number and dollar amount of claims for damages resulting from major hurricanes and flood events including Hurricane Katrina.
But, according to the report, FEMA determines operating costs for WYO insurance companies using procedures established about 25 years ago. The procedures cannot ensure that payments are based on reasonable estimates of actual expenses because actual expenses incurred by the companies for their services to the NFIP are not considered, the GAO said.
To determine the amount of these payments, FEMA negotiated payment approaches with insurance industry representatives when it established the current WYO program in 1983 based on industry averages for operating expenses for other lines of insurance (such as homeowners, commercial, and fire), past practice and discussion.
GAO interviewed FEMA and insurance officials, and studied statutes, regulations, payment data, methodologies and audits of WYO companies.
The report recommends that “FEMA take steps to ensure that it has a reasonable estimate of actual expenses WYO companies incur to help determine payments for services and that financial audits are performed.”
Source: U.S. General Accountability Office (GAO)
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