National Flood Insurance Program
Oversight of Policy Issuance and Claims Gao ID: GAO-05-532T April 14, 2005According to the National Flood Insurance Program (NFIP), 90 percent of all natural disasters in the United States involve flooding. Because of the catastrophic and unpredictable nature of floods, private insurance companies do not typically cover flood losses. Congress established the NFIP in 1968 to provide an insurance alternative to disaster assistance in response to the escalating costs of repairing flood damage. During congressional hearings on provisions of the Flood Insurance Reform Act of 2004, several legislators testified on NFIP shortcomings, as reported by constituents whose properties had been flooded by Hurricane Isabel in September 2003. The act required GAO to study coverage provided under the NFIP. It also required the Federal Emergency Management Agency (FEMA), the administrator of the NFIP, to take steps to address concerns about coverage and claims procedures. Today's testimony is based on work in progress to address this mandate. It provides preliminary information on (1) the types of coverage limits, restrictions, and exclusions under the NFIP; (2) how FEMA, in partnership with private insurers, manages and oversees the NFIP and the views of selected private sector program managers on how the program is working; and (3) the status of FEMA's efforts to comply with provisions of the Flood Insurance Reform Act.
As a result of policy limits, restrictions, and exclusions, insurance payments to claimants for flood damage may not cover all of the costs of repairing or replacing damaged property. Some limitations are embedded in statute and others have been promulgated by FEMA pursuant to its statutory authority. FEMA officials said that the coverage limitations are necessary to keep the NFIP self-supporting and actuarially sound. Thus, the program is designed to strike a balance between premium prices and coverage. For example, homeowners may choose not to insure personal property under the program. If they do elect to have this coverage, the value of personal property is depreciated. Basement coverage does not include payment to repair or replace finished walls and floors. The work of selling, servicing, and adjusting claims on NFIP policies is carried out by thousands of private sector insurance agents and adjusters under the regulation, management, and oversight of about 40 FEMA employees assisted by about 170 contractor employees. Agents are the main point of contact for policyholders. Four private sector NFIP managers we interviewed said that the agents have varying levels of NFIP knowledge. While training and support are available, historically neither FEMA nor the insurance companies have required completion of training or demonstration of basic program knowledge. Flood-certified adjusters are responsible for assessing damage and estimating losses when flooding occurs. Unlike agents, adjusters have mandatory training requirements. FEMA has oversight mechanisms in place to review the operations of the insurance companies and the work of adjusters. The private sector NFIP managers GAO interviewed were generally supportive of the program. However, they said that FEMA should find ways to make it less complex than and more similar to other property insurance programs. FEMA has taken steps to address its mandates in the Flood Insurance Reform Act, but it did not meet the 6-month timeframe specified. For example, to establish an insurance agent training requirement, an official said FEMA is discussing options but has not developed an action plan. To meet the requirement to provide "simple and complete information" to NFIP policyholders, FEMA has drafted materials explaining coverage, deductibles, and claim- and appeals-related procedures that it expects to have finalized by October 2005.
GAO-05-532T, National Flood Insurance Program: Oversight of Policy Issuance and Claims
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Testimony before the Subcommittee on Housing and Community Opportunity,
Committee on Financial Services, House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EDT:
Thursday, April 14, 2005:
National Flood Insurance Program:
Oversight of Policy Issuance and Claims:
Statement of William O. Jenkins, Jr., Director, Homeland Security and
Justice Issues:
GAO-05-532T:
GAO Highlights:
Highlights of GAO-05-532T, a testimony before the Subcommittee on
Housing and Community Opportunity, Committee on Financial Services,
House of Representatives
Why GAO Did This Study:
According to the National Flood Insurance Program (NFIP),
90 percent of all natural disasters in the United States involve
flooding. Because of the catastrophic and unpredictable nature of
floods, private insurance companies do not typically cover flood
losses. Congress established the NFIP in 1968 to provide an insurance
alternative to disaster assistance in response to the escalating costs
of repairing flood damage.
During congressional hearings on provisions of the Flood Insurance
Reform Act of 2004, several legislators testified on NFIP shortcomings,
as reported by constituents whose properties had been flooded by
Hurricane Isabel in September 2003. The act required GAO to study
coverage provided under the NFIP. It also required the Federal
Emergency Management Agency (FEMA), the administrator of the NFIP, to
take steps to address concerns about coverage and claims procedures.
Today‘s testimony is based on work in progress to address this mandate.
It provides preliminary information on (1) the types of coverage
limits, restrictions, and exclusions under the NFIP; (2) how FEMA, in
partnership with private insurers, manages and oversees the NFIP and
the views of selected private sector program managers on how the
program is working; and (3) the status of FEMA‘s efforts to comply with
provisions of the Flood Insurance Reform Act.
What GAO Found:
As a result of policy limits, restrictions, and exclusions, insurance
payments to claimants for flood damage may not cover all of the costs
of repairing or replacing damaged property. Some limitations are
embedded in statute and others have been promulgated by FEMA pursuant
to its statutory authority. FEMA officials said that the coverage
limitations are necessary to keep the NFIP self-supporting and
actuarially sound. Thus, the program is designed to strike a balance
between premium prices and coverage. For example, homeowners may choose
not to insure personal property under the program. If they do elect to
have this coverage, the value of personal property is depreciated.
Basement coverage does not include payment to repair or replace
finished walls and floors.
The work of selling, servicing, and adjusting claims on NFIP policies
is carried out by thousands of private sector insurance agents and
adjusters under the regulation, management, and oversight of about 40
FEMA employees assisted by about 170 contractor employees. Agents are
the main point of contact for policyholders. Four private sector NFIP
managers we interviewed said that the agents have varying levels of
NFIP knowledge. While training and support are available, historically
neither FEMA nor the insurance companies have required completion of
training or demonstration of basic program knowledge. Flood-certified
adjusters are responsible for assessing damage and estimating losses
when flooding occurs. Unlike agents, adjusters have mandatory training
requirements. FEMA has oversight mechanisms in place to review the
operations of the insurance companies and the work of adjusters. The
private sector NFIP managers GAO interviewed were generally supportive
of the program. However, they said that FEMA should find ways to make
it less complex than and more similar to other property insurance
programs.
FEMA has taken steps to address its mandates in the Flood Insurance
Reform Act, but it did not meet the 6-month timeframe specified. For
example, to establish an insurance agent training requirement, an
official said FEMA is discussing options but has not developed an
action plan. To meet the requirement to provide ’simple and complete
information“ to NFIP policyholders, FEMA has drafted materials
explaining coverage, deductibles, and claim- and appeals-related
procedures that it expects to have finalized by October 2005.
[See PDF for image]
[End of figure]
www.gao.gov/cgi-bin/getrpt?GAO-05-532T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact William O. Jenkins Jr. at
(202) 512-8757 or jenkinswo@gao.gov..
[End of section]
Mr. Chairman and Members of the Subcommittee:
I appreciate the opportunity to participate in today's hearing to
discuss the National Flood Insurance Program (NFIP) and the Federal
Emergency Management Agency's (FEMA) role in overseeing processes for
issuing policies and adjusting claims after floods occur.[Footnote 1]
My testimony is based on preliminary results to date of our ongoing
review of the NFIP, as mandated by the Flood Insurance Reform Act of
2004.[Footnote 2]
According to NFIP statistics, 90 percent of all natural disasters in
the United States involve flooding. However, flooding is generally
excluded from homeowner policies that typically cover damage from
losses including wind, fire, and theft. Because of the catastrophic
nature of flooding and the inability to adequately predict flood risks,
private insurance companies are largely unwilling to underwrite and
bear the risk of flood insurance.
Under the National Flood Insurance Act of 1968,[Footnote 3] Congress
established the NFIP to provide an insurance alternative to disaster
assistance in response to the escalating costs of repairing flood
damage. In creating the NFIP, Congress found that "a program of flood
insurance with large-scale participation of the federal government and
carried out to the maximum extent practicable by the private insurance
industry is feasible and can be initiated."[Footnote 4] Under the NFIP,
homeowners with mortgages insured by federal lenders on property in
communities identified to be in special high-risk flood hazard areas
are required to purchase flood insurance on their dwellings, up to a
maximum of $250,000 in coverage for single-family homes. Optional,
lower-cost coverage is also available under the NFIP to protect homes
in areas of low to moderate risk. To insure furniture and other
contents against flood, property owners must purchase separate NFIP
personal property coverage for up to $100,000.
FEMA, the agency responsible for coordinating the federal response to
disasters, administers the NFIP. FEMA has been generally successful in
keeping the NFIP on sound financial footing. FEMA reports that the NFIP
is self-supporting for the average historical loss year, which means
that operating expenses and flood insurance claims are not paid for by
the taxpayer, but through premiums collected on flood insurance
policies. FEMA has exercised its authority to borrow from the Treasury
three times in the last decade when losses were heavy. However, it has
repaid all borrowed funds with interest.
By 2005, the NFIP is projected to have approximately 4.7 million
policyholders in the nearly 19,000 participating communities, with $699
billion of insurance in force. Since its inception, the program has
paid about $12 billion in insurance claims, primarily from policyholder
premiums that otherwise would have been paid through taxpayer-funded
disaster relief or been borne by the home and business owners
themselves.
During congressional hearings held last year on the Flood Insurance
Reform Act of 2004, several legislators testified on NFIP concerns as
reported by constituents whose properties had been flooded by Hurricane
Isabel in September 2003. Problems they reported included inadequate
payments and unclear policies and procedures for filing and adjusting
damage claims. According to NFIP statistical data, NFIP policyholders
filed about 23,770 claims for $454.2 million for flood damage as a
result of this storm, primarily in Maryland, Virginia, and North
Carolina.
Several months later, the hurricane season that began in August 2004
struck hard in Florida and other East and Gulf Coast states. In Florida
alone, more than one in five homes suffered wind, rain, flood, or other
damage from the hurricanes, according to FEMA. According to NFIP data,
the combined impact of Hurricanes Charley, Frances, Ivan, and Jeanne in
August and September 2004 made them the most costly catastrophes in
U.S. history, surpassing the costs of Hurricane Andrew in 1992 and the
World Trade Center and Pentagon terrorist attacks in 2001. FEMA
reported that these storms resulted in 59,125 NFIP claims for more than
$1.3 billion in payments as of March 2005 on claims that have been
closed.
To meet our legislative mandate, as modified and expanded to include
information on the 2004 hurricane season, and as discussed with your
committee and the Senate Committee on Banking, Housing, and Urban
Affairs, we are reviewing several issues related to NFIP claims and
FEMA's oversight role. Today, we are prepared to provide preliminary
information on (1) the types of limits, restrictions, and exclusions to
coverage that exist under the NFIP; (2) how FEMA, in partnership with
private insurers, manages and oversees the NFIP, and the views of
selected private sector NFIP program managers on how the program is
working; and (3) the current status of FEMA's efforts to comply with
provisions of the Flood Insurance Reform Act that mandate it establish
insurance agent education and training requirements, new processes for
explaining coverage to policyholders when they purchase and renew
policies, and an appeals process for claimants.[Footnote 5] In
addition, appendix I presents data on policies in force and payments
claimants received under the NFIP for flood events over the life of the
program through 2004.
To address these issues, we collected data from the NFIP management
information system, examined program documentation, and interviewed
officials of FEMA and its program contractor. We also interviewed four
private sector NFIP program managers for insurance companies and
managers at one vendor--a company that subcontracts with insurance
companies to handle all or part of their flood business. Using a
semistructured interview instrument, we asked these managers how their
operations are managed and reviewed, how they believe the program is
working, and what suggestions they have for improvements. In
consultation with FEMA officials, we selected the interviewees because
they are among the largest private sector partners for the NFIP. We
observed FEMA-sponsored training of insurance agents and adjusters and
a FEMA oversight review of the management of a private insurance
company's NFIP business.
Our work that forms the basis of the preliminary observations presented
in our testimony today is still in progress. For example, we have not
yet completed our review of the NFIP program and the claims made after
Hurricane Isabel and the 2004 hurricane season. Among the ongoing work
to be completed prior to issuing our report later this year are (1) an
assessment of the reliability of FEMA's management information system,
(2) interviews with the general adjusters who supervised claims
adjustments in Maryland after Hurricane Isabel and in Florida during
the 2004 hurricane season, (3) observations of FEMA's monitoring and
oversight activities, and (4) a review of the operational reviews FEMA
has done over the last several years. Our work is being done in
accordance with generally accepted government auditing
standards.[Footnote 6]
In summary, we found:
* The NFIP is not designed to cover all flood losses. Some limitations
are embedded in statute and others have been promulgated by FEMA
pursuant to its statutory authority to keep the program self-supporting
and actuarially sound. For example, the limited coverage allowed for
basements does not include payment to repair or replace finished walls,
floors, furniture, and other personal property.
* The work of selling, servicing, and adjusting claims on NFIP policies
is carried out by thousands of private sector insurance agents,
adjusters, and other employees. The private sector effort is regulated,
managed, and overseen by about 40 FEMA employees with the assistance of
about 170 contractor employees. The private sector program managers we
interviewed said that the NFIP has many positive aspects, but its
implementation is complex for policyholders, agents, and adjusters.
Each of the four interviewees, when asked how the NFIP could be
improved, said that FEMA should look for ways to make the program less
complex and more similar to other property insurance programs.
* Although its 6-month deadline elapsed in December 2004, FEMA
continues its efforts to comply with mandates of the Flood Insurance
Reform Act that it establish (1) insurance agent education and training
requirements, (2) new processes for explaining coverage to
policyholders when they purchase and renew policies, and (3) an appeals
process for claimants who are dissatisfied with the settlement of their
claims. FEMA officials said that the rule-making process required for
two of the initiatives takes more than 6 months to complete. On the
third initiative, FEMA is awaiting DHS approval of materials it has
prepared to explain coverage to policyholders. A FEMA official
estimated that it would be after October 2005 before it has fully
complied with the mandates.
NFIP Is Not Designed to Cover All Flood Losses:
As a result of coverage limits, restrictions, and exclusions in NFIP
policies, insurance payments for flood damage may not pay all of the
costs of repairing or replacing flood-damaged property. Certain NFIP
limitations are embedded in statute; others have been promulgated by
FEMA pursuant to its statutory authority. FEMA officials said that the
coverage limitations are necessary to keep the NFIP self-supporting and
actuarially sound. Thus, the program is designed to strike a balance
between premium prices and coverage.
The following are several examples of NFIP coverage limitations,
restrictions, and exclusions that affect the premium and amount a
claimant could expect to receive for flood damage:
* Homeowners are required to insure their homes for the amount of their
federally backed mortgages. If a home is insured for less than 80
percent of its full replacement cost or the maximum coverage amount of
$250,000, or it is not a primary residence, NFIP will pay the actual
cash value for the damage. The actual cash value represents the
original cost of the structure less depreciation and, in most cases,
will not cover the full cost to repair damage to or replace the
dwelling. The value of physical depreciation is based on the age and
condition of the item.
* If a home is insured for 80 percent or more of its full replacement
cost or the maximum coverage amount of $250,000 and is a primary
residence, NFIP will pay replacement costs for damage to the dwelling.
The policy defines replacement cost as coverage to replace the damaged
part of the dwelling with materials of like kind and quality to what
was damaged. The policy will pay the amount actually spent for this
repair or replacement up to its limit.
* A homeowner may choose not to insure personal property under the
program.
* A deductible amount is applied against claims for dwellings and
personal property.
* Basements, which are defined as building areas below grade level on
all sides, have limited coverage that does not include payment to
repair or replace finished walls, floors, furniture, and other personal
property.
* The personal property limit paid for jewelry, artwork, and home
business equipment is $2,500 for all items combined. No coverage is
provided on these items if they are located in a basement.
* Actual cash value, not replacement value, is paid on all covered
furniture and other personal property. Thus, personal property is also
depreciated.
* A detached garage is covered by the dwelling policy only if it is
used solely for vehicles and storage. If the garage is improved (e.g.,
a sink is installed), flood damage to the structure is not covered
under the NFIP.
In a hypothetical property adjustment we developed with the assistance
of FEMA's director of claims, a poorly maintained 30-year-old home
located in a designated flood zone had flood damage when a nearby river
overflowed. The property was valued at $60,000. It was insured under
the NFIP for $30,000. Although a contractor estimated it would cost
$40,000 to repair damages to the structure and personal property losses
totaled another $10,000, a NFIP adjuster determined that payment on the
claim was $8,000.
The following circumstances reduced the amount of coverage:
* The homeowner had chosen not to insure his personal property.
* Because the homeowner did not insure the structure for at least 80
percent of its value, actual cash value will be paid for repairs or
replacement of damage to the dwelling. Since the condition is poor, the
actual cash value will be low.
* A $1,000 deductible will be applied.
* The adjuster determined that some problems that needed to be
addressed had not been caused by the flood (e.g., leaking pipes in the
bathroom and preexisting mold in the basement).
* Only limited coverage is allowed in the basement of the home, where
the largest amount of damage occurred.
Private Insurers Sell, Service, and Adjust Claims under FEMA Management
and Oversight:
The work of selling, servicing, and adjusting claims on NFIP policies
is carried out by thousands of private sector insurance agents and
adjusters who work independently or are employed by insurance companies
or vendors under subcontract to insurance companies to handle their
flood business. In contrast, according to a FEMA official, about 40
FEMA employees are responsible for regulating, managing, and overseeing
the program, which is expected to grow to about 4.7 million policies in
2005. FEMA is assisted in this effort by about 170 contractor
employees.
According to FEMA, about 95 percent of the NFIP policies in force are
written by agents who work for or represent 94 private insurance
companies that issue policies and adjust flood claims in their own
names. The companies, called write-your-own companies, receive an
expense allowance from FEMA of about one-third of the premium amounts
for their services and are required to remit premium income in excess
of this allowance to the National Flood Insurance Fund.[Footnote 7] The
insurance companies share the FEMA expense allowance with the agent
selling and servicing the policy and a vendor, if the company has
subcontracted with one to handle all or part of its flood insurance
business.
Independent Agents Are the Main Point of Contact for Policyholders:
Flood program managers for each of the four write-your-own companies we
visited said that insurance agents were the main point of contact for
policyholders and those seeking to purchase flood insurance. The
managers we interviewed noted that agents had varying levels of
knowledge about the NFIP. For example, one flood manager noted:
It is clear that some agents do not understand the program. It is very
complex and different from the other lines of insurance. Flood
insurance is much more complex than automobile and homeowners
insurance. Some items of specific concern are definitions of elevated
buildings and basements.
Officials at FEMA, the four insurance companies, and the vendor said
that they offered support to the insurance agents who sell and service
NFIP policies. Reported support included training, help from telephone
hotline customer service representatives, development of rate quotes,
and Web sites with NFIP information. However, other than requiring that
agents meet basic state insurance licensing requirements, neither FEMA
nor the four insurance companies have historically required that agents
complete training or demonstrate a basic level of knowledge of the NFIP
to sell flood policies.
Adjusters Are the Eyes and Ears of the NFIP:
When losses occur, flood adjusters employed by insurance companies or
independent contractors become the eyes and ears of the NFIP. Claims
adjusters are assigned to policyholders by their insurance companies
after the policyholders have notified their agents of a flood loss and
the agents have written loss reports. Adjusters are responsible for
assessing damage; estimating losses; and submitting required reports,
work sheets, and photographs to the claimants' insurance company, where
the claim is reviewed and, if approved, processed for payment. They
work under the coordination of a general adjuster assigned to manage
claims adjustments for the flood event.
Unlike agents who sell flood insurance policies, adjusters must be
certified by FEMA to work on NFIP claims. To be approved to adjust
residential flood losses, an adjuster must have at least 4 consecutive
years of full-time property loss adjusting experience and have attended
an adjuster workshop, among other requirements. To keep their
certifications current, adjusters are required to take a 1-day
refresher workshop each year and pass a written examination testing
their knowledge each year.
FEMA's program contractor maintains a database of independent adjusters
who are qualified to adjust flood claims. A FEMA official said that
4,844 flood-certified adjusters are registered in the database, as of
April 2005. A NFIP official noted that the adjuster community is
stretched thin when a major flood event occurs.
Adjusters and insurance companies are paid for claims settlements from
the National Flood Insurance Fund based on the size of the losses they
settle. The write-your-own company receives about 3.3 percent of the
incurred loss, according to FEMA's NFIP claims director. Adjusters are
to be paid at the time claims are settled based on a standard fee
schedule. For example, an adjuster receives $1,000 for a claim of
between $25,000 and $35,000.
FEMA Oversees Work of Insurance Companies and Adjusters:
FEMA's primary method of overseeing the work of write-your-own
companies is to conduct an operational review of every participating
company at least every 3 years. In addition, FEMA relies on about 10
general adjusters[Footnote 8] employed by its program contractor to
check the work of claims adjusters[Footnote 9] in reinspections of a
sample of adjustments done after every flood event.
According to the FEMA director of NFIP claims, one or two employees
from FEMA's NFIP Claims and Underwriting sections go on-site to review
the operations of write-your-own companies at least every 3 years. They
do reviews more frequently, if necessary, to follow up on any findings
from a previous visit.[Footnote 10] The auditors are to request that a
random sample of 100 files be pulled for them to review. Files that are
closed without payment and those with particularly large settlements
are to be included in the sample of files reviewed. Auditors are to
check the files for completeness and accuracy. For example, they must
make sure that there are photographs to document damage. Auditors are
also to look at internal controls in place at the company.
If a write-your-own company does not pass an operational review, FEMA
requires that it develop an action plan to correct the problems and
schedules a follow-up review in 6 months to determine whether progress
has been made, according to the NFIP director of claims. If the company
continues to have problems and fails to implement an action plan, it
can ultimately be withdrawn from the NFIP. According to FEMA officials,
a company has been asked to withdraw from the NFIP once in the
program's history. About 3 years ago, a write-your-own company was
withdrawn from the NFIP in part because of issues raised in operational
reviews and in part to other financial problems.
Three of the four flood program managers for write-your-own companies
whom we interviewed thought operational reviews were an effective way
for FEMA to ensure that the NFIP is run according to established
legislation and regulation. The fourth manager said that he had no
opinion one way or the other. Interviewees noted that the reviews
caught problems, and while FEMA had a small audit staff, the auditors
were knowledgeable and provided about the right level of review. Two of
the four flood program managers said that recent operational reviews
had identified problems on policies they had recently purchased from
other companies and that they were working to rewrite some policies and
address other oversight issues.
General adjusters are to do reinspections of open claims. FEMA chooses
a random sample of about 4 percent of the claims for every flood event
to reinspect, according to the NFIP claims director. If the general
adjuster determines that a company paid for an expense that should not
have been covered, FEMA is to be reimbursed by the write-your-own
company. If a general adjuster finds that an adjuster missed an item in
the original inspection, the general adjuster is to add it back into
the claims report so that the policyholder will be compensated for it.
The instructors at an adjuster refresher training session we attended
noted the following as common errors identified in reinspections of
claims:
* improper measurement of room dimensions;
* improper allocation of damage between wind and flood (homeowners'
policies cover wind damage, while the NFIP covers flood losses);
* poor communication with homeowners on the process they are following
to inspect the property and settle the claim.
Stakeholders Said the NFIP Has Many Positive Aspects but Implementation
Is Complex:
The flood program managers for the write-your-own companies and the
vendor managers we interviewed were generally supportive of the NFIP
and found many positive aspects to the program. One write-your-own
company program manager said:
"I am in the flood insurance business because I believe in the program.
It does a lot of good. Floods are horrible occurrences. A homeowner
sees the water coming but can do nothing to stop it. The smell is
horrible. Whole communities are affected, and the emotional toll is
tremendous. I have seen the NFIP do great good for many people."
Each of the interviewees, when asked how the NFIP could be improved,
said that FEMA should look for ways to make the program less complex
and more similar to other property insurance programs. For example, a
vendor manager noted, "if the customers, the agents, and the adjusters
all have difficulty understanding the program, it is too complicated."
A flood program manager said:
"As FEMA has tried to make the flood program more actuarily sound, it
has made it more complex. FEMA has required of us more information,
more forms, and more photos to be scanned into files. Those
requirements cost money to implement. As an industry, we are looking at
how the flood line might be more compatible with other lines of
insurance business to be more cost-efficient. Now the flood business is
so unique that it requires special handling."
FEMA officials said that some documentation (i.e., elevation
certificates) is required because the NFIP is part of FEMA's broader
flood plain management strategy that combines insurance protection with
hazard mitigation to reduce future flood damage to homes. The officials
noted that, while the NFIP has different requirements than homeowners
insurance, it is not necessarily more complex and that the more
familiar agents become with the requirements of the NFIP, the easier it
becomes for them to routinely handle documentation requirements.
FEMA Continues Efforts to Comply with Legislative Mandates:
Congress mandated that within 6 months of the enactment of the Flood
Insurance Reform Act, FEMA establish (1) insurance agent education and
training requirements, (2) new processes for explaining coverage to
policyholders when they purchase and renew policies, and (3) an appeals
process for claimants who are dissatisfied with the settlement of their
claims. The 6-month mandated deadline elapsed on December 30, 2004, but
FEMA is still working to complete these mandated efforts. According to
FEMA officials, in order to address the requirements to establish
insurance agent education and training and for explaining coverage to
policyholders, the agency must go through the rule-making process. FEMA
officials also said to address the requirement for explaining policy
coverage, they are waiting for DHS approval before finalizing the draft
materials that will accompany the flood insurance policy. When DHS
approves the draft materials, they will be published in the Federal
Register as part of the rule-making process. Regarding the requirement
for an appeals process, the agency must initiate and complete formal
rule making. FEMA officials said that this process takes more than 6
months and could not be completed within the mandated time frame.
FEMA Is Coordinating with the States to Establish Training and
Education Requirements:
To address the requirement in the Flood Insurance Reform Act of 2004 to
establish insurance agent education and training requirements, FEMA is
working with state insurance commissions. An official said FEMA is
still in the planning stages of meeting the requirement and is
discussing options with state insurance commissions, but has not yet
developed an action plan.
FEMA Has Drafted New Materials on Consumer Policy Information:
When a customer purchases a flood insurance policy, the main document
he or she is to receive from the insurance agent is the policy. A
congressional report accompanying the Flood Insurance Reform Act stated
that the NFIP did not provide "simple" forms or claims guidelines for
flood victims to follow, making access to information about flood
insurance policies difficult to obtain.[Footnote 11] To address this
concern, the act requires FEMA to provide simplified forms and a flood
insurance claims handbook to policyholders at the time of purchase or
renewal and at the time of flood loss.[Footnote 12] FEMA has drafted
new materials that would be provided to the policyholder at the time of
purchase or renewal of the flood insurance policy. The draft material
includes:
* a supplemental form that would explain the policy, such as the amount
of deductibles, the exact coverage being purchased, exclusions from
coverage, and an explanation of how lost items and damages will be
valued under the policy at the time of loss;
* a flood insurance handbook to describe procedures to be followed to
file a claim and provide detailed information on an appeals process
that FEMA is to develop; and:
* an acknowledgment form that the policyholder has received the flood
insurance policy and that the policy only covers building property for
the dwelling and does not provide coverage for contents or personal
property.
Before the materials are finalized, FEMA must go through rule making
and publish them in the Federal Register. FEMA expects to have these
forms and handbook finalized by October 2005.
FEMA Is Establishing a Formal Appeals Process to Address Consumer
Complaints:
If a policyholder has a grievance about a flood insurance claim, proof
of loss, or loss estimate, he or she may informally appeal to the
insurance agent, to the insurance adjustor's supervisor, or to a
hotline where a customer representative is to provide assistance. There
is currently no official recourse for the policyholder. To provide
official recourse to policyholders, section 205 of the Flood Insurance
Reform Act requires that FEMA establish a formal appeals process
through which policyholders may appeal decisions on their claims. FEMA
is developing a formal appeals process for a policyholder to follow if
he or she has a grievance. The proposed new appeals process must go
through the rule-making process with publication of a draft and a final
set of procedures in the Federal Register. A FEMA official was
uncertain when the process would be completed, but said that it would
be after October 2005.
Mr. Chairman and Members of the Committee, this concludes my prepared
statement. I would be pleased to answer any questions you and the
Committee members may have.
Contacts and Staff Acknowledgments:
For further information about this statement, please contact William O.
Jenkins, Jr. Director, Homeland Security and Justice Issues, on (202)
512-8777 or jenkinswo@gao.gov or Christopher Keisling, Assistant
Director, Homeland Security and Justice, on (404) 679-1917 or at
keislingc@gao.gov.
Major contributors to this testimony included Christine Davis, Pawnee
Davis, and Deborah Knorr.
[End of section]
Appendix I: NFIP Payments Made to Claimants and Policies in Force,
1972- 2004:
Figure 1: Total NFIP Payments to Claimants, 1972-2004:
[See PDF for image]
Note: Data compiled and available as of February 28, 2005.
[End of figure]
Figure 2: Policies In Force, 1978-2004:
[See PDF for image]
Note: Data compiled and available as of December 31, 2004.
[End of figure]
FOOTNOTES
[1] FEMA, the agency responsible for coordinating the federal response
to disasters, manages and oversees the NFIP. In March 2003, FEMA and
its approximately 2,500 staff became part of the Department of Homeland
Security (DHS). Most of FEMA--including its Federal Insurance and
Mitigation Administration, which is responsible for administering the
NFIP--is now part of the department's Emergency Preparedness and
Response Directorate. However, FEMA has retained its name and
individual identity within the department.
[2] P.L. 108-264 (June 30, 2004).
[3] 42 U.S.C. 4001, et seq.
[4] 42 U.S.C. 4001(b).
[5] See P.L. 108-264, Sections 202-205, 207.
[6] We plan to issue a final report in September 2005 on the issues we
discuss today and the results of our examination of actions taken by
FEMA on a representative sample of Hurricane Isabel claims for which
claimants requested reviews of initial determinations.
[7] The other 5 percent of policies are sold and serviced by state-
licensed insurance agents and brokers who deal directly with FEMA.
[8] According to the FEMA director of NFIP claims, general adjusters
are experienced property adjusters who operate in the manner of
supervisory adjusters. Resident general adjusters are responsible for
surveying an area that has flooded either immediately before or after a
flood event to estimate the number of claims that will be made. General
adjusters coordinate claims adjustment activities at disaster
locations, do adjuster training, and respond to questions from
adjusters in addition to their oversight roles.
[9] In addition, financial reviews of the write-your-own companies are
done and data submitted for payment and statistical reporting are
edited.
[10] Some operational reviews are done at vendor locations rather than
at the write-your-own company.
[11] Senate Report No. 108-262 (2004).
[12] See P.L. 108-264, Sections 202-204 (June 30, 2004).
