National Flood Insurance Program
Preliminary Views on FEMA's Ability to Ensure Accurate Payments on Hurricane-Damaged Properties Gao ID: GAO-07-991T June 12, 2007Disputes between policyholders and property-casualty insurers over coverage from the 2005 hurricane season highlight challenges in determining the appropriateness of claims for multiple-peril events. In particular, events such as hurricanes that can cause both wind and flood damages raise questions about the adequacy of steps taken by the Federal Emergency Management Agency (FEMA) to ensure that claims paid by the National Flood Insurance Program (NFIP) covered only damages caused by flooding. As a result, the Subcommittees asked GAO to provide preliminary views on (1) the information available to and obtained by NFIP through its claims process in determining flood damages for properties that sustained both wind and flood damages, and (2) the information collected by FEMA as part of the NFIP claims reinspection process. GAO collected data from FEMA, reviewed reinspection reports, reviewed relevant policies and procedures, and interviewed agency officials and others knowledgeable about NFIP.
NFIP does not collect and analyze both wind and flood damage claims data in a systematic fashion, which may limit FEMA's ability to assess whether flood payments on hurricane-damaged properties are accurate. Instead, NFIP focuses only on the flood claims data to determine whether the amount actually paid on a claim reflects the damages caused by flooding. Flood claims data, collected by NFIP through the write-your-own (WYO) insurers--including those that sell and service both the wind and flood policies--do not include information on total damages to the property from all perils. That is, NFIP does not systematically collect information on wind damages from the WYO insurer when a flood claim is received. FEMA officials state that they do not have authority to collect wind damage claims data from WYO insurers, even when the insurer services both the wind and flood policies on the same property. As a result, for hurricane-damaged properties, such as those damaged by Hurricanes Katrina and Rita, NFIP does not have all the information it needs to ensure that its claims payments were limited to damage caused by flooding. Concerns over the processing of these flood claims are heightened when the same insurance company serves as both NFIP's WYO insurer and the property-casualty (wind) insurer for a given property. In such cases, the same company is responsible for determining damages and losses to itself and to NFIP, creating a potential conflict of interest. The lack of both flood and wind damage data also limits the usefulness of FEMA's quality assurance reinspection program for NFIP flood claims. GAO found that the NFIP reinspection program did not incorporate a means for collecting and analyzing both the flood and wind damage data together in a systematic fashion to reevaluate the extent to which wind and flooding were deemed to have contributed toward damages to the property. Further, we explored whether the wind-related claims data collectively gathered by state insurance regulators would be useful to NFIP to reevaluate damage assessments. We determined that this information would be of limited value to NFIP in reevaluating wind versus flood damage determinations made because such data is not collected in enough geographic detail to match with the corresponding flood claims data on a property- or community-level basis. Without the ability to examine damages caused by both wind and flooding, the reinspection program is limited in its ability to confirm whether NFIP paid only for losses caused by flooding.
GAO-07-991T, National Flood Insurance Program: Preliminary Views on FEMA's Ability to Ensure Accurate Payments on Hurricane-Damaged Properties
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Testimony:
Before the Subcommittee on Oversight and Investigations, Committee on
Financial Services, and the Subcommittee on Management, Investigations,
and Oversight, Committee on Homeland Security, House of
Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 2:30 p.m. EDT:
Tuesday, June 12, 2007:
National Flood Insurance Program:
Preliminary Views on FEMA's Ability to Ensure Accurate Payments on
Hurricane-Damaged Properties:
Statement of Orice M. Williams, Director:
Financial Markets and Community Investment:
GAO-07-991T:
GAO Highlights:
Highlights of GAO-07-991T, a testimony before the Subcommittee on
Oversight and Investigations, Committee on Financial Services, and the
Subcommittee on Management, Investigations, and Oversight, Committee on
Homeland Security, House of Representatives
Why GAO Did This Study:
Disputes between policyholders and property-casualty insurers over
coverage from the 2005 hurricane season highlight challenges in
determining the appropriateness of claims for multiple-peril events. In
particular, events such as hurricanes that can cause both wind and
flood damages raise questions about the adequacy of steps taken by the
Federal Emergency Management Agency (FEMA) to ensure that claims paid
by the National Flood Insurance Program (NFIP) covered only damages
caused by flooding.
As a result, the Subcommittees asked GAO to provide preliminary views
on (1) the information available to and obtained by NFIP through its
claims process in determining flood damages for properties that
sustained both wind and flood damages, and (2) the information
collected by FEMA as part of the NFIP claims reinspection process.
GAO collected data from FEMA, reviewed reinspection reports, reviewed
relevant policies and procedures, and interviewed agency officials and
others knowledgeable about NFIP.
What GAO Found:
NFIP does not collect and analyze both wind and flood damage claims
data in a systematic fashion, which may limit FEMA‘s ability to assess
whether flood payments on hurricane-damaged properties are accurate.
Instead, NFIP focuses only on the flood claims data to determine
whether the amount actually paid on a claim reflects the damages caused
by flooding. Flood claims data, collected by NFIP through the write-
your-own (WYO) insurers”including those that sell and service both the
wind and flood policies”do not include information on total damages to
the property from all perils. That is, NFIP does not systematically
collect information on wind damages from the WYO insurer when a flood
claim is received. FEMA officials state that they do not have authority
to collect wind damage claims data from WYO insurers, even when the
insurer services both the wind and flood policies on the same property.
As a result, for hurricane-damaged properties, such as those damaged by
Hurricanes Katrina and Rita, NFIP does not have all the information it
needs to ensure that its claims payments were limited to damage caused
by flooding. Concerns over the processing of these flood claims are
heightened when the same insurance company serves as both NFIP‘s WYO
insurer and the property-casualty (wind) insurer for a given property.
In such cases, the same company is responsible for determining damages
and losses to itself and to NFIP, creating a potential conflict of
interest.
The lack of both flood and wind damage data also limits the usefulness
of FEMA‘s quality assurance reinspection program for NFIP flood claims.
GAO found that the NFIP reinspection program did not incorporate a
means for collecting and analyzing both the flood and wind damage data
together in a systematic fashion to reevaluate the extent to which wind
and flooding were deemed to have contributed toward damages to the
property. Further, we explored whether the wind-related claims data
collectively gathered by state insurance regulators would be useful to
NFIP to reevaluate damage assessments. We determined that this
information would be of limited value to NFIP in reevaluating wind
versus flood damage determinations made because such data is not
collected in enough geographic detail to match with the corresponding
flood claims data on a property- or community-level basis. Without the
ability to examine damages caused by both wind and flooding, the
reinspection program is limited in its ability to confirm whether NFIP
paid only for losses caused by flooding.
What GAO Recommends:
This testimony is based on an ongoing engagement and, therefore,
includes no recommendations. GAO anticipates making recommendations in
its final report.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-991T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Orice M. Williams at 202-
512-8678, williamso@gao.gov.
[End of section]
Mr. Chairmen and Members of the Subcommittees:
I am pleased to be here today to discuss our preliminary views on the
National Flood Insurance Program (NFIP) and its access to the data
needed to assess flood claims on properties damaged by both high winds
and flooding in the aftermath of hurricanes. As we begin the 2007
hurricane season, disputes over coverage between policyholders and
property-casualty insurers from the 2005 hurricane season continue to
highlight the challenges of determining the appropriateness of claims
for multiple-peril events. While these disputes center on the extent to
which homeowners' insurance policies covered damages that resulted from
wind, flooding, or some degree of both, they also bring to light the
issues NFIP faces in servicing and validating flood claims from
disasters such as hurricanes that may involve both flood and wind
damages.
Key concerns raised from the 2005 hurricane season include whether or
not some property-casualty insurance claims for wind-related damages
were improperly shifted to NFIP at the expense of taxpayers. For
properties subjected to both high winds and flooding, determinations
must be made to assess the damages caused by wind, which may be covered
through a property-casualty homeowners policy, and the damages caused
by flooding, which may be covered by NFIP. The property-casualty
insurer, NFIP, and the consumer all have a financial stake in the
outcome of these determinations. Under NFIP, most flood damage claims
are adjusted by private property-casualty insurers, known as the write-
your-own (WYO) insurers, which sell and service flood insurance
policies on the program's behalf.[Footnote 1] Concerns over the
processing of these flood claims are heightened when the same insurance
company serves as both NFIP's WYO insurer and the property-casualty
(wind) insurer for a given property. In such cases, the same company is
responsible for determining damages and losses to itself and to NFIP,
creating a potential conflict of interest.
Accordingly, questions have been raised about the information NFIP
collects or has access to in these types of claims that would allow it
to understand and validate the extent of damages caused by wind and
flooding as a way to ensure that the allocation of damages and, as a
result, the claims paid for flooding are accurate. As I indicated,
knowing how both wind and flooding contributed to damages is
particularly important in addressing the potential conflict of interest
that can arise when the same company is determining the wind and flood
damages for itself and for NFIP, respectively. My remarks today focus
on two aspects of the NFIP claims process. First, I will discuss the
information available to and obtained by NFIP through its claims
process in determining flood damages for properties subjected to both
high winds and flooding. Second, I will discuss the information
collected by the Federal Emergency Management Agency (FEMA) as part of
the NFIP claims reinspection process.
My remarks today are based on our preliminary review of hurricane-
related claims data systematically collected by NFIP for flood losses
and by state insurance regulators for losses reported by property-
casualty insurers for the 2005 hurricane season. Due to broad-based
interest, the work supporting this statement is being done under the
authority of the Comptroller General and is part of a larger effort
being completed for the Ranking Member of the House Financial Services
Committee. Our ongoing work addresses insurance issues related to wind
versus flood damages and includes a review of how such determinations
are made, who is making these determinations and how they are
regulated, and the accuracy of claims payments based on the wind and
flood damage determinations.
To complete our work, we have identified and reviewed the specific data
elements and level of geographic detail available to NFIP on hurricane
claims payments. In addition, we reviewed a statistically valid sample
of files of reinspections that NFIP conducted on selected properties.
We have also discussed information and issues associated with claims
processing activities with NFIP, state insurance regulators, the
National Association of Insurance Commissioners (NAIC), property-
casualty insurers, state-sponsored wind insurers, insurance agents,
claims adjusters, and industry associations. We conducted our work in
accordance with generally accepted government auditing standards.
In summary:
Limited information is collected by NFIP to understand both the wind
and flood damage determinations made for hurricane-damaged properties,
limiting NFIP's ability to know whether claims paid under the flood
policy were always limited to only flood damages. For a given hurricane-
damaged property, because NFIP does not know how much of the damages
were caused by wind and how much were caused by flooding, NFIP cannot
determine whether the amount it paid accurately represents payment only
for flood damage. This information is lacking even when the same
property-casualty insurance company serves as both the NFIP WYO insurer
and the wind insurer. For properties experiencing both wind and flood
damages, NFIP does not consistently collect information that would
enable it to determine, either at the time the NFIP claim was paid or
later, whether the amount paid on a flood damage claim reflects only
the damages caused by flooding. Claims data collected by NFIP from WYO
insurers, including those that sell and service both the wind and the
flood policies, do not include information on total damages to the
property from all perils--that is, they do not report the existence of
wind damage nor the amount of damage caused by wind when servicing a
flood claim on the same property. FEMA states that "claims paid by a
WYO company that do not involve flood insurance proceeds (and the data
related thereto) are not accessible by FEMA." Hence, NFIP does not
systematically collect data on wind damages for properties for which a
flood claim has been received. As a result, for hurricane-damaged
properties subjected to both high winds and flooding, NFIP may not have
all the information it needs to ensure that its claims payments were
limited to only flood damages.
We found that the lack of both flood and wind damage data also limited
the usefulness of FEMA's quality assurance reinspection program on NFIP
flood claims when wind damage was also a factor. Specifically, the FEMA
reinspection program did not incorporate a means for collecting and
analyzing both the flood and wind damage data together in a systematic
fashion to reevaluate the extent to which wind and flooding were deemed
to have contributed toward damages to the property. We also explored
whether the wind damage claims data that were collectively gathered by
state insurance regulators after the 2005 hurricane season could
provide information useful to NFIP to reevaluate damage assessments
made and how they were apportioned between wind and flooding. We found
that such data were not collected in sufficient geographic detail to
match with corresponding flood claims data for a particular property,
or even a neighborhood or city. Without the ability to examine damages
caused by both wind and flooding, the reinspection program is limited
in its usefulness as a tool to assess whether NFIP paid only for losses
caused by flooding.
Background:
Property owners in certain coastal regions subject to hurricanes and
flooding may have to purchase at least two, and sometimes more,
different types of insurance policies. Flood insurance is offered by
NFIP, while insurance for wind-related damages is generally offered by
private insurance companies or state-sponsored insurers. NFIP was
established in 1968 in part to provide some insurance protection for
flood victims because the private insurers were and still are largely
unwilling to insure for flood risks. The National Flood Insurance Act
of 1968, as amended, allows homeowners to purchase up to $250,000 of
NFIP coverage on their dwellings and up to an additional $100,000 for
personal property such as furniture and electronics. Business owners
may purchase up to $500,000 of coverage for dwellings and $500,000 on
the contents. Exclusions under the flood policy include damages caused
by wind or a windstorm. FEMA, which administers NFIP, is responsible
for the management and oversight of NFIP and is assisted in performing
these functions by a program contractor.
While NFIP provides the flood insurance policy and holds the risk,
private property-casualty insurers, known as WYO insurers, sell and
service approximately 95 percent of NFIP's flood policies. WYO insurers
retain a portion of the premium for selling flood policies and receive
fees for performing other administrative services for NFIP, but do not
have any exposure to claims losses. A WYO insurer may or may not also
provide coverage for wind-related risks on the same property.[Footnote
2] After an event occurs, policyholders normally contact a WYO insurer
to initiate a flood damage claim. If the claimant also has a policy for
wind damage from the same WYO insurer, the company generally adjusts
losses pertaining to both types of damages, those caused by wind and
those caused by flooding. In such cases, the WYO insurer must determine
and apportion the damages caused by wind that it insures, along with
those caused by flooding, insured by NFIP.
To settle flood claims, insurance companies work with certified flood
adjusters. When flood losses are reported, the WYO insurers assign
flood adjusters to assess damages. The WYO insurers may use their own
staff adjusters or contract with independent adjusters or adjusting
firms to perform the flood adjustments. These adjusters are responsible
for assessing damage, estimating losses, and submitting required
reports, work sheets, and photographs to the insurance company, where
the claim is reviewed and, if approved, processed for payment.
Both the insurance industry and NFIP incurred unprecedented storm
losses from the 2005 hurricane season. State insurance regulators
estimated that property-casualty insurers had paid out approximately
$22.4 billion in claims tied to Hurricane Katrina (excluding flood), as
of December 31, 2006.[Footnote 3] However, industry observers estimate
that insured losses tied to Hurricane Katrina alone (other than flood)
could total more than $40 billion, depending on the outcome of
outstanding claims and ongoing litigation. NFIP estimated that it had
paid approximately $15.7 billion in flood insurance claims as of
January 31, 2007, encompassing approximately 99 percent of all flood
claims received.
NFIP Does Not Systematically Collect and Analyze Data on Related Wind
Damages When Collecting Flood Claims Data:
For hurricane-damaged properties, NFIP does not know whether both wind
and flooding contributed toward damages nor the apportionment of
damages between them, limiting its ability to monitor the accuracy of
flood payments and address potential conflicts of interest that may
arise in certain damage scenarios. Based on our preliminary review, we
found that NFIP did not systematically collect and analyze data on wind-
related damage when collecting flood claims data on properties
subjected to both high winds and flooding, such as those damaged in the
aftermath of Hurricanes Katrina and Rita. Further, such information is
not sought even when the same insurance company serves as both the NFIP
WYO insurer and the insurer for wind-related risks, posing a potential
conflict in certain damage scenarios where properties are subjected to
both types of perils. Without information on both wind and flood
damages to the property, NFIP may not know on certain hurricane-damaged
properties whether the amount it paid for a claim was limited to flood
damage.
As mentioned earlier, NFIP's WYO insurer may also insure the same
property for wind-related damages. In this situation, a potential
conflict of interest can materialize because the WYO insurer has a
financial interest in the outcome of the claims adjustment it performs
on behalf of NFIP. Conversely, if the policy for wind-related risks
were issued by another insurer, the same potential conflict of interest
would not exist because the flood and wind damages would be assessed
and determined separately by different insurers.
WYO insurers are required to submit flood damage claims data in
accordance with NFIP's Transaction Record Reporting and Processing
(TRRP) Plan, for inclusion into NFIP's claims database.[Footnote 4] In
our review of data elements in NFIP's claims database, we found that
NFIP does not require WYO insurers, which are responsible for adjusting
the flood claim, to report information on property damages in a manner
that could allow NFIP to differentiate how these damages (to the
building or its contents) were divided between wind and flooding, even
when the WYO insurer is also the wind insurer for the property.
Specifically, the TRRP Plan for WYO insurers instructs them to include
only flood-related damages in the data fields on "Total Building
Damages" and "Total Damage to Contents." Further, the "Cause of Loss"
data field does not incorporate an option to explicitly identify
property damages caused by wind or partially caused by wind (e.g.
combined wind and flood, hurricane, windstorm, etc.) As a result, WYO
insurers do not report total property damages in a manner that 1)
identifies the existence of wind damage or 2) discerns how damages were
divided between wind versus flooding for properties that were subjected
to a combination of both perils. Further, NFIP program contractors
stated that they do not systematically track whether the WYO insurer
processing a flood claim on a property is also the wind insurer for
that property. This lack of transparency over both the wind and flood
damages on hurricane-damaged properties limits NFIP's ability to verify
that damages paid for under the flood policy were caused only by the
covered loss of flooding.
NFIP's normal claims processing activities, which do not incorporate a
means to systematically collect information on wind-related damages,
were further stressed during the 2005 hurricane season. For both
Hurricanes Katrina and Rita, FEMA estimates that it has paid
approximately $16.2 billion in claims, with average payments of over
$95,000 and $47,000, respectively. As we reported in December of 2006,
in an effort to assist policyholders, NFIP approved expedited claims
processing methods that were unique to Hurricanes Katrina and
Rita.[Footnote 5] Some expedited methods included the use of aerial and
satellite photography and flood depth data in place of a site visit by
a claims adjuster for properties where it was likely that covered
damages exceeded policy limits. Under other expedited methods, FEMA
also authorized claims adjustments without site visits where only
foundations were left and square foot measurements of the dwellings
were known.[Footnote 6] Such expedited procedures facilitated the
prompt processing of flood claims payments to policyholders following
the unprecedented damage of the 2005 hurricanes. However, once these
flood claims were processed, as was the case for other flood claims on
hurricane-damaged properties, NFIP did not systematically collect wind
damage claims data tied to flood-damaged properties on an after-the-
fact basis. Hence, NFIP does not know the extent to which wind
contributed to total property damages.
FEMA officials stated that they do not have access to wind damage
claims data from the WYO insurers. Specifically, a letter from FEMA to
GAO stated that:
"FEMA's opinion is that, where flood insurance payments have been made,
FEMA is permitted to review the background claims data in order to
ensure that insurance claims payments are appropriately allocated to
flood losses as opposed to wind-related losses. Such data may include
the adjuster's report(s) and any engineering reports that support (or
fail to support) the allocation of loss to flood versus wind damage.
FEMA may request summaries and analyses of this information at any time
to ensure proper processing of flood claims. Conversely, claims paid by
a WYO company that do not involve flood insurance proceeds (and the
data related thereto) are not accessible by FEMA, and indeed, do not
need to be, as there would have been no improper allocation of flood
insurance proceeds for wind losses. Moreover, the attempt to access
this unrelated data may be found to violate various privacy
protections."
Hence, NFIP does not systematically collect data on wind damages for
properties for which a flood claim has been received. As a result, for
hurricane damaged properties subjected to both high winds and flooding,
NFIP may not have all the information it needs to ensure that its
claims payment was limited to only flood damage.
FEMA's Reinspection Program Has Limited Ability to Validate the
Accuracy of Payments on Hurricane-Damaged Properties:
FEMA's reinspection program, which helps validate the adjustment
process and flood payments made, provides limited information that
could enable FEMA to better validate the claims payments it makes for
flood damage when wind is also a factor. Based on our preliminary
review, the reinspection program does not systematically evaluate the
apportionment of damages between wind and flooding, even when a
potential conflict of interest may arise with the WYO insurer. Along
with flood claims data collected from WYO insurers that service flood
policies, FEMA, through its program contractor, operates a reinspection
program to monitor and oversee claims adjustments and address concerns
about flood payments. The stated purpose of the reinspection program is
to reevaluate the flood adjustment and claim payment made on a given
property to determine whether or not NFIP paid the correct amount for
flood-related damages. This is accomplished through on-site
reinspections and reevaluations of a sample of flood claim adjustments.
However, we found that FEMA's reinspection program did not
systematically incorporate a means for identifying whether nor the
extent to which wind-related damages contributed to the losses. Without
the ability to examine damages caused by both wind and flooding, the
reinspection program is limited in its ability to assess whether NFIP
paid only the portion of damages it was obligated to pay under the
flood policy.
During our study, we reviewed hundreds of reinspection files for
properties with flood claims tied to Hurricanes Katrina and Rita. We
found that the reinspection files did not confirm that the claim paid
actually reflected only the damage covered by the flood insurance
policy versus damage caused by other, uncovered damages, such as wind.
Rather, the reinspection files generally contained limited and
inconsistent documentation concerning the presence or extent of wind-
related damages on properties without additional documentation that
would enable FEMA to evaluate both the wind and flood damage
information together.
Specifically, the reinspection files reviewed did not consistently
document whether or not damages were caused by a combination of both
wind and flooding. The reinspection activities focused on reevaluating
the extent to which building and content damages were caused by
flooding. While some of the reinspection files included documentation
as to whether or not damage was caused by a combination of wind and
flooding, most did not. Information reviewed from 740 reinspection
files revealed that nearly two-thirds of these reinspection reports did
not include documentation to indicate whether damages were caused by a
combination of both wind and flooding or only flooding. We found that
approximately 26 percent included documentation indicating damage was
caused only by flooding, while approximately 8 percent of the
reinspection files included documentation that damages were caused by a
combination of wind and flooding. In cases where reinspectors indicated
that damages were caused by a combination of wind and flooding,
insufficient data existed to assess the extent that wind contributed to
the damages. That is, information about the wind damage during the
reinspection process was not documented or analyzed in a systematic
fashion. Hence, the reinspection activities did not systematically
document or validate the presence or extent of wind damage in
combination with flood damage in order to verify that flood payments
were limited to flood damage. Moreover, as we have previously reported,
FEMA does not choose a statistically valid sample for its reinspection
process. Therefore, the results could not be projected to the universe
of properties for which flood claims were made.[Footnote 7]
We also noted that on-site reinspections of properties with flood
claims tied to Hurricanes Katrina and Rita were generally conducted
several months after the event. Such delays, while understandable
considering the scope and magnitude of devastation resulting from these
hurricanes in 2005, further limited NFIP's ability to reevaluate the
quality and accuracy of the initial damage determination, given the
ongoing natural and manmade events that continued to alter the damage
scene.
Finally, we explored whether NFIP could use data collectively gathered
by state insurance regulators on property-casualty claims resulting
from the 2005 hurricane season to match with NFIP flood claims data. We
found that while Florida, Mississippi, Louisiana, Alabama, and Texas
collected some aggregate information about claims from the property-
casualty insurers, such data would have been of limited value to NFIP
to evaluate the accuracy of its flood claims payments in any systematic
way. Except for Florida, which had previously collected aggregate claim
data from property-casualty insurers for major hurricane events, the
other states used a special data call, based on Florida's system, to
collect this aggregate claims data from the property-casualty insurers.
However, the information collected was not in sufficient geographic
detail to allow a meaningful evaluation of wind versus flood damage
assessments and apportionments made by insurers.[Footnote 8] That is,
claims data reported by property-casualty insurers through this
mechanism were either reported on a statewide or county/parish-level
basis that did not allow it to be matched with corresponding flood
claims data on a community-level (e.g. zip code) or a property-level
basis.
In summary, based on our preliminary review, NFIP does not collect the
information it needs to help evaluate whether it has paid only what it
is obligated to pay under the flood policy for properties subjected to
both high winds and flooding, such as those damaged by hurricanes
Katrina and Rita. For these properties, NFIP did not systematically
collect enough information to know whether there was wind damage, much
less enough to understand how much of the damage was determined to have
been caused by wind and how much was caused by flooding. Without the
ability to collect information that documents both the flood and wind
damage, NFIP's capacity to evaluate the accuracy of its payments is
limited. As mentioned earlier, this is particularly important in
situations where the WYO insurer also insures the property for wind
damages. This creates a potential conflict of interest when the same
insurer makes both the wind and flood damage assessments, because the
insurer is effectively apportioning losses between itself and NFIP.
Obtaining both the flood and wind adjustment claims data, whether from
the same WYO insurer that services both or from different insurers,
would be necessary to NFIP to verify the accuracy of the payments made
for flood claims.
Information collected and assessed through FEMA's claims reinspection
program is also of limited usefulness in confirming or validating the
accuracy of flood payments made by NFIP on properties damaged by both
wind and flooding. Without the additional information about wind damage
on properties for which flood claims were also filed, NFIP may not be
certain whether it has paid only for the flood damages to these
properties. Finally, we determined that using hurricane claims data
collected by state insurance regulators would not have provided data on
a property-or community-level basis to help NFIP determine how much
damage was caused by wind versus flooding, and how these damages were
apportioned between the two perils. The lack of both wind and flood
claims data limits NFIP's ability to assess whether payments made on
flood claims from the 2005 hurricane season were accurate.
Mr. Chairmen, this concludes my prepared statement. I would be pleased
to respond to any questions that you or other members of the
Subcommittees may have.
Contacts and Acknowledgments:
For additional information about this testimony please contact Orice M.
Williams on (202) 512-8678 or at williamso@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this statement. Individuals making key
contributions to this testimony include Lawrence D. Cluff, Assistant
Director; Tania Calhoun; Emily Chalmers; Rudy Chatlos; Chir-Jen Huang;
Barry Kirby; and Melvin Thomas.
FOOTNOTES
[1] NFIP contracts with private insurers to sell and administer flood
insurance policies through the WYO arrangement, allowing the insurers
to write flood policies backed by the federal government.
[2] NFIP program contractors stated that they did not know how often
the same WYO company also insured the property for wind damage because
they did not systematically collect that information. However, a FEMA
official we contacted stated that such a circumstance likely occurs in
the majority of cases.
[3] Claims paid as reported to NAIC by property-casualty insurers as of
December 31, 2007, for multiple lines of business, including fire and
allied lines, farm owners, homeowners, mobile homeowners, commercial
multi-peril, commercial auto physical damage, private passenger auto
physical damage, ocean marine, and other lines (excluding flood).
[4] NFIP requires each WYO company to meet the requirements of the WYO
Transaction Record Reporting and Processing Plan and to submit monthly
financial and statistical reports as required in FEMA regulation
44C.F.R., part 62, Appendices A and B.
[5] GAO, National Flood Insurance Program: New Processes Aided
Hurricane Katrina Claims Handling, but FEMA's Oversight Should Be
Improved, GAO-07-169 (Washington, D.C.: Dec. 15, 2006).
[6] Approximately 11 percent of all Hurricane Katrina claims were
adjusted using expedited procedures, according to the FEMA director of
NFIP claims.
[7] GAO, Federal Emergency Management Agency: Improvements Needed to
Enhance Oversight and Management of the National Flood Insurance
Program, GAO-06-119 (Washington, D.C.: Oct.18, 2005).
[8] In the aftermath of Hurricanes Katrina and Rita, state insurance
regulators in Mississippi, Louisiana, Alabama, Texas, and Florida
jointly established a data call mechanism to collect aggregate claims
data tied to the storms reported by property-casualty insurers. These
states collectively referred to the entire data call mechanism as the
Insurance Disaster Reporting System (IDRS). It enabled regulators to
better understand the total number of claims tied to the storms, the
type of claims, the extent of losses, and the number of claims
considered closed by property-casualty insurers. In general, the
aggregate claims data were collected either at a state or county
(parish) level depending on the phase of reporting. The IDRS data
capture mechanism was originally developed by the state of Florida and
was undergoing a redevelopment when Hurricanes Katrina and Rita hit.
State insurance regulators, with the assistance of NAIC staff, decided
to use this data capture mechanism because it was readily available,
even recognizing its limitations. IDRS was not designed to monitor
damages on a property-by-property basis.
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