Ron Wright heads the Federal Emergency Management Agency (FEMA) and FEMA runs the National Flood Insurance Program (NFIP). FEMA’s mismanagement of the NFIP and its poor business model — and Hurricane Katrina — caused the agency to be billions in the hole.
The NFIP has also been accused recently of fraud and delaying the insurance review process. So Wright and the officials at the NFIP have enacted sweeping new regulations to oversee the private companies implementing the program. “We didn’t have the policy holder at the center of what we were doing. A series of long-term actions need to be taken.”
At the heart of the reforms is a demand for increased transparency and oversight of the 79 private insurers issuing flood insurance policies. Much of the call for change came from controversies involving claims filed and settlements enacted from Superstorm Sandy.
Critics said many filing claims were low-balled in settlements. To counter the criticism, FEMA upped payments to those in that category by $58 million. But it’s not enough. Delays still plague those filing claims and one contractor said FEMA ordered him to deny or underpay claims.
A report from National Public Radio (NPR) said private insurers are lining their pockets at the expense of those filing claims. And the money involved in the accusation is over $406 million.
NPR and the General Accountability Office (GAO) say Write-Your-Own program insurers keep 30% to 40% of premiums as payment for writing the insurance and administering the program. The GAO thinks that’s too much. Considering actual expenses, the insurers — the GAO notes — are overpaid by as much as 16.5%. And it pointed out that one insurer picked up $327.1 million more than actual expenses.
Insurers had no comment on the NPR report or the GAO comments but Insurance Information Institute (I.I.I.) President Dr. Robert Hartwig did. He said both reports are flawed and profits are closer to 10% to 15% and those are reasonable profits considering the services provided.
“It is always going to be the case — in the event of a major catastrophic loss where hundreds of thousands of people will have seen damage or complete destruction of their property — in some instances they will believe they are due more than in fact the claim was ultimately adjusted for,” Hartwig said.
And besides — Hartwig added — FEMA determines payment. “This is a fee-for-service operation. The federal government determines what the appropriate payment is.”
FEMA oversight is also to blame for the NFIP problems. The agency doesn’t pay enough attention to its own rules and in many cases doesn’t even try to enforce them. None of this has escaped the notice of some in Congress. New Jersey Senator Bob Menendez is one of the program’s biggest critics.
“FEMA was happy to give these Write Your Own insurance companies a blank check to litigate against Sandy victims with every hard-nosed tactic imaginable, wasting millions of policyholders’ dollars in never-ending court costs to cover up widespread underpayment, rather than using even a fraction of that money to pay storm survivors,” Menendez said.
He likens the claims appeals process to a shell game and wants FEMA to reopen all of the Sandy cases and eventually wants private insurers ousted from the program.
While that’s not likely to happen, this criticism and all of the Superstorm Sandy problems has led to what Wright calls the transparency changes and “making sure everyone can see what we’re doing and where we are going. This is part of how, I am convinced, we will be able to restore credibility.”
Here are the details on the reforms:
• Re-doing its contract with private insurers that offer flood policies.
• This will potentially allow FEMA to renegotiate the contract while increasing oversight.
• Redesigning the appeals process for policyholders who aren’t satisfied with the amount of the payout for their initial flood claims.
• Creating an oversight team to monitor costs when private insurers are sued for flood claims. Victims of Sandy have said that insurers currently have no incentive to settle suits quickly, since FEMA pays all litigation costs associated with disputed claims.
Source links: Two from Insurance Business America — link 1 and link 2