Department of Homeland Security 

Office of Inspector General 

National Flood Insurance Program 
 

Management Letter for DHS' 
 

FY 2008 Financial Statement Audit 
 

OIG-09-58 April 2009 
 

 

 

Office of Inspector General 

U.S. Department of Homeland Security 

Washington, DC 20528

 April 16, 2009 

Preface 

The Department of Homeland Security (DHS) Office of Inspector General (OIG) was established by 

the Homeland Security Act of 2002 (Public Law 107-296) by amendment to the Inspector General 

Act of 1978. This is one of a series of audit, inspection, and special reports prepared as part of our 

oversight responsibilities to promote economy, efficiency, and effectiveness within the department. 

This report addresses the management letter for DHS’ FEMA National Flood Insurance Program FY 

2008 financial statements audit. It contains observations and recommendations related to internal 

control that were not required to be reported in the financial statement audit report. The independent 

public accounting firm KPMG LLP (KPMG) performed the audit of DHS’ FY 2008 financial 

statements and prepared this management letter. Material weaknesses and other significant 

deficiencies were reported, as required, in KPMG’s Independent Auditor’s Report, dated November 

14, 2008, which was included in the FY 2008 DHS Annual Financial Report. KPMG is responsible 

for the attached management letter dated November 14, 2008 and the conclusions expressed in it. 

We do not express opinions on DHS’ financial statements or internal control or provide conclusions 

on compliance with laws and regulations. 

The recommendations herein have been developed to the best knowledge available to our office, and 

have been discussed in draft with those responsible for implementation. We trust this report will 

result in more effective, efficient, and economical operations. We express our appreciation to all of 

those who contributed to the preparation of this report. 

Richard L. Skinner 
 

Inspector General 
 
NATIONAL FLOOD INSURCE PROGRAM 

Management Letter for the 

Year Ended September 30, 2008 
.. KPMG LLP 

2001 MSlreet, NW 

Washington, DC 20036 

Offce ofInspector General, U.S. Departent of 
 Homeland Security, and 

Acting Administrator, Mitigation Division, Federal Emergency Management Agency, U.S. 

Departent of Homeland Security, 

Washington, DC 

November 14,2008 

Ladies and Gentlemen: 

We. were engaged to audit the balance.sheetof the U~S..Department of Homeland Security (DHS) asöf September 30, 2008, and the related statement of custodial activity for the year then ended 

(referred to herein as "financial statements"). We were.not engaged to audit the statements of net 

cost, changes ¡nnet position, and budgeta resources for the year.endedSeptember 30,2008 

herein as "other financial statements"). Because of matters discussed in our 

IndependentAuditors'Report dated November 14, 2008, the.scope of our work was not suffcient 

to enable us to express, and we did not express, an opinion on the financial statements as of 

(referred to 


September 30, 2008. 

In connection. with our fiscal year 2008 engagement, we were also engaged to consider the 

Federal Emergency Management Agency's (FEMA) internal control over financiàl reporting

(internälcontrol) and totestFEMA'scompliancewith certain provisions of applicable .laws, 

regulations, contracts, and grant . agreements that . could. have a direct and material effect. on the 

financial statements. Our procedures did.notinclude examining the effectiveness of internal 

control and do notproV'ideassuranceon internal control. We have not considered internal control 

since the date of our report. 

During. our audit engagement, we noted certain matters involving National Flood Insurance 

Program (NFIP) internal control . and other operational . matters that . are presented for your 

consideration. These comments andrecornendations, all of which have been discussed with the 

appropriate members of management oft he named insurance companies, are intended to improve 

internal controlorrestilt in. other operating effciencies, and are summarized in Exhibit Iofthis 

letter. 

In addition, we identified certaindeficienciesin.internalcontrolthat we consider to be signficant 

deficiencies and material wealesses, and communcated them in our Independent Auditors' 

Report, dated November 14,2008,. includedinthe FY 2008DHS AnnualFinancial Report. Our 

findings relatedtoFEMAinformationtechnology (IT) controls wil be presented in . a separate 

lettertotheDHSOffce oflnspectorGeneraland the FEMA Chief Information Officer, and .our 

findings related to FEMA's internalcontrolsexc:lusive of our IT and NFIPfindigs wil be 

:presented in a separate letter to the DHSOffce ofInspector Generäland the DHS Chief Financial 

Offcer. 

KPMG LlP. KPMG LlP. 8 u.s. rimitsd liabilily psnnersh,p. fa 

B men,ber or KPMG lilsrlllioll8l, 8 3wiss COOP9rAliV? 
.'"
 

As described above, the scope of our work was not suffcient 
 to express 
 an opinion on the balance sheet or 
 statement of custodial activity of DHS as of September 30, 2008, and we were not 

engaged to audit the statements of net cost, changes in net position, and budgetary resources for the year ended September 30,2008. Accordingly, other internal control matters and instaces of 

non-compliance may have been identified and reported 
 had we been able to perform all procedures necessary to express an opinion 
 on the 
 fiscal year 2008 financial statements and had we been engaged to audit the fiscal year 2008 other financialstatements. We aim, however, to 

use our knowledge of NFIP gained during our work to make comments and suggestions that we 

hope wil be useful to you. 

We would be pleased to discuss these comments and recommendations with you at any time. 

Management's written 
 response to our comments and recommendations has not been subjected to 

the auditing procedures applied in the fiancial statement audit engagement and, accordingly, we 

express no opinion on it. 

This letter is intended solely for the information and 
 use of DHS management, DHSOffice of Inspector General, the Office of Management and Budget, U.S. Governent Accountabilty Offce, the U.S. Congress, and management of the 
 named insurance companies, and is not 

intended to be and should not be used by anyone other than these specified parties. 

Very.trly yours,
 

KPlVCå LL-P 
.' .E~bibit I 

Á.
 

. . . .
 . .. . . '.' .

..1. . LOssreserves 

. .


. . .
 werenotproperly eStablished. 

.. ."... .. .. '. . .. . . . - . . .. . . . . .
 . .. .
 

. . .
 . .

2. CltÚm amounts per the Final Report l-ere not within policy limits; . . . . . '.' . '.' .
 . .

. . -. '. . ". . " . :.. .


. ..
 . .' .. ..
 . . .' .
 . .. .. lClaimfUe and thè Final Report were not approved 
 before claim payment was 

processed and issued; 

! \ , ' ) . : i I ) I .! i i ,I, r i I , i, i 'i " ,) ,l ~ :. i :', I ¡ i, I, i, I, \ ,i, L f I' ;
 

. State Fa: 

Allstate. 

OOORF7641 . 

OOOM5788 .. 

'. OOORB4365 '. . 

OOORP5433 

. 000R.4172 .. 

. OOORL7387
 

OOÖRD3900 

.OOOR 3114 

3801417803 . 

0805145489 

1803589405 . . 

.1805296124 . 

1.801562172 

.1804514923 

l806134Ül3 

1807456023 

. 2800385011 

"3801310404 

.'3801522842: . 

08/29/2005 

. 09/19/2003 

. . 08/29/2005 

'09/24/2005 

0812912005 . 

. '08/29/2005 

.. . ,.12/31/2005. 

08129/2005 

.08/06/2007 

08129/2005 

.: .. .05/24/2007.. 

.. .. .....08/29/2005 ... 

. .'.08/1(,12007 

08/25/2007 

...07/06/2007 

.. 08/16/2007 

08/28/2007 

08/0t)/2007 

08/08/2007 

.0809045024... . 08/29/2005. '. . 

.$10,100.00 

$15,00.Q;00 :. 

. . $3 ;86452 

$83;599;74 

$100,090.00 

.... $110;000.00 

. . $4;661.65 

. '..-$25;000.00 

...$58;116.00. . 

. $6)32.00.. .... 

$15,000.00 . . 

'$3.;268.00.. . 

'$6,443.68 

$11,790.90 

.' $8,532.92 

$20,934.4l 

$14,861.52 

,$1,072.98 

. '$6,627;83
 

".:15 000,00..... ... . . 

. :',' , ..... .' : .,::_":" '--.:;:. ...:._,,:, - '.' "," '. ." .. .... . . "-". : - ""'" ". '.- _: ." ..'.' '. . .' 

i As definèdby FEMÅ;tlie Firial Report isa fonntltt 
 IS cOIIpÍetecibythe insurd aridtheciaïms iiJiiste~, 'enabliiigthe . .. . . insured ú;cläiiilosSèStoJiroper due to tininhbitabilty; water daÏnageand claiIIsagainst arexistiig mortgage. The. ... . 

. . NFIP reiiir~ ~thldii .prelimina report .be rècèiv~ Vi~thin 15~:iirs. of assigneit,. and. d~n:?ntèrirn. ~r., F iii~IRepQrt. not. . . 

laterlhanevely.30daysiherefter. .... ......:. .:.' . . .... ........... ... ..... ..... ....
 

':'('. 

..11; 

'(, . 

~ . . :. ...... 
: , ~ l ' i \ , , :, ' \, ¡ '.: i ". c \ I I, , : i ; i t i ; ~ ,:
 

.0809375629 .. ....03/01/2007 $3;755.28 

L804748893. .04/l5/2007 . $2,257.35 

. 1803287489 ....08/21/2007 $11,222;00 

. l807508.591 .08/16/2007 $2;061.25 

..0804209427 . Oc)124/2005 $.15;000;00 

. . 1802052082 06/28/2006 .... $6;000;00 

. 1803616240 08/29/2005 $3,337.23 

Q806794772. 08/29/2005 . .$10,000.00 . J80620416 06/2712006 . . $l3,558.71 

. 0800992661 10/1912007 $6l2.96 . 

0804013696 . 05/iO/2007 $8,068~67 . 

l806l43945 . . 04/15/2007 $2;877.37 

3801326896 07/16/2007 $9,916,00 . 

0800599698 . .. 08¡i912()5 ... . ... $70.00 

0803117746 08129/2005 $64,000.00 . 

0804013696 05/10/2007 .$8,068.67 

0806525085 08129/2005 $6,662.00 

1806296214 .04/L5/2007 . . ... $508.29 

0809212780 08/29/2005 .$13,748.63 

2800011450 08/23/2007 $2,340.50 

l807628548 03/06/2008 $3,000.00 

1805364229 08/29/2005 $4,956.00 

0807570049 12/0312007 . $29,i40.28 . 

1804736823. . ...08/29/2005. .$15,000.00 

1800049742 · ..10/22/2007 $8,178.22 

1803234820. .. .02/06/20('8 . .$6,520.07 

1803615853. 01/08/2008 . $2,565.00 

1805219829 01/08/2b08 . .$4,489.70 

3801370796 .. ... 04/15/2007 ..$l,561,65 

l8036Q5599 .. 02/07/2008 . $9;831.49 

. ... J806817043 . . .... 02/21/2008 $33,754.93 

. 180l5~502i 02/21/2008 . . $4,201.81 

.. 0807580535 .. . .. 03/05/2008 .. .. 

.. ....,
.$1,945.76

4, ..1'otälamount paidd.id.iiotag~eeto~miJimt on Final R~portor'popuiåtionßlè(or to.: 

. àne check amountifclaim had multiplëpayments), .. 

, ,. " " .
 "p '" ... . .
 . . . '., ." ". . .' - . ,". .
 . ... . , '. .
 . . ....t. claim pàYnienl was notpropërlj/ authorized~ ....~~_. . " .'. ". . -', .' . .. .' . ...... . 

" . .' .,: .~. 

.., .' 

.~.. . - 7';' t.. . 

: .'. I. 
Exhibit I
 

: i I, I," \ I I
 6.. Loss adjustrnentexpimseswere not tn compliance with NFIPF'eeSchedule. ...

i i ¡ ¡. i I' . I
 , , ,
 , :. II'. ¡ 'i L I ! ;' ,i, ii' I. L ," I ,'I I 

Covans s . 4000039529 . 02107/2008 .$7247.56 

Allstate ... . 38OI3 i0404 08)09/2007 . . $0.00.. 

3801522842 . 08/08/2007 $0.00 

1803287489' 08/21/2007 $0.00 

18075Ò8591 ..08/16/2007 $0.00 

0800992661 .. . ..10119/2007 $O~OO .' 

3801326806 .. 07/i6/2007 $0.00 . 

. ... _.


.0800599698 08/29/2005 $60.00

. . ,
 . . .. . . ..
 '.. .
 . .
 . .. .
 . 7; Los$ reserve amounts were notadju$ted as claim payments were made. For closed . claims, loss resere amourits were niJtreduced to zero, .
 

R~co1r~e1idatiqÍt' . . . . ".
 

We recommend that the Federal Emergency Management Agency;s (FEMA) Mitigation 

. Division: . 

1) Foiiow~upwitleachof the iisuriice companies noted,above to deteriiiethatappropriate 

. ..
 

cOrrectiveactioIi has been implemented to addres~ 'tleexceptions .Iiotedin ourtestwork. 

2) Proyideincreasedovefsight tö insurance compaIiiesparcipatingiii 'the ..NIP to ensure 

clairris. fies are being processed ànd reviewed inacporc4ce with NFIP gudelines before
 

approval .and isslUÚicéof claii: ,payfeiits and' tQenslÌe the i¡peCific and consistent . 

. .. .
 establishientand-reporttig of loss reserves and subi¡ecuentadjustmentStothelöss reserves. . . . .. . 

Managem.entResjJonse . ......... . ..... .. '........ ... .... ...... .
 

developed 'a Management Action'-,P1in .toresolve . the .. deficiencies; 

Management' sinHalattemptS to contact the companies with regard tö,the findings were nietwith

reqiiests for policy Iiumberiii:iddate of loss.. Now that.KfMG hasprovided policy nw1be~s-iid 

. ,dåtesÓfloss, management wülwithin60 dayspnceagaincorifact.thecompanei¡ to,detemiîriethe 

Management . has 


'. .. :appropriate corrctive action.. Management will foIkiw- uP with each company to detemiine that 

tleappropriate ,c~rtecti:VeMtion haS been iniplementedfor. eacliof:tie. areas of.déficiency, . 

Mim!lgement wil emphåsistheisiues identified 
 durng theiiuditJnits'next cycle of Claims .. .,OperationReviews. ... .
 

.Jii addition, on 'December22;2008,BtietinW~08095 wasserit to'WrittiYour Own 
 (WYO) .CompimyPriCipal Coordinators; theNFIP Servicing Agent, and Selected. Clàims Adjusting, . 

FirsCompanies; This,BtiUetincorrecied and clarified case reserViigproc:edul-f:i¡ the insurers 

m1,st töfollöw .ltiIusthe statèdthatcase tf:serves createdbycömpärìeshaveno. significait
 

iipactonreserve,smcludetl iti 'the-BalanceSheet. . -BalantièSheetreservesatt:developed by the
 

...~ NFIl .Btieaii a.~StätistlÇil¡.~g~nt actUårälstaffand ia iliipJecttQan indepetidehtpeer _rey~ew~ .
 ,'. . '.. . . . 

. ... " '';'"1 . ...'...~ :'.~-: ;. ~.". .' ,. ~. ';' .,..~. .. ~ . 

. ." '.' i ~ .." ....... I
 .l3 . ;:.­ .' .: ~ 

. f. ...... 
Exhibit I
 

'B. Internal Control Deficiencies Identitied over ClaisPaid"'oFnal Testing

Observation . .. ,,' ..... . .... . . . .


We randomly 

. . .
 selected 9 insurance compäniesto 


, . .
 perfoml procedures over claims paid from the

period May 1 though July 31, 2008. For each of the 9 companies selected, we testep a random

sample of.45.chÜms päiddurig this three month period. Diing ths testing of 40scIaini
 

payments, we 


.1. TotaIåmoùnt p~iddìdnot ~greéto amountqn FinalReport orftopulationfile (or to 

noted the follöwinginternalcontroldeficiencies 'and enms: . . . '. . ...
 . ' .. .
 ... .. .
 . . ..
 . '"


qne check amount if claim hadinultiplepdymenrs). . . .
 

I \ , ï I I ~,( I , i i ll' ¡ I " I. ' I, ; : t ,f : (, ~, ,I ~ i. , L i I J " ' ' 'il i ~
 

" .. Fidelity. . . . .2510091424 06/13/2008 $8,53L28 

i700718599 ' .. . . . 0410.9/2008 $2,Ò65~:87 

. American :aånkers, iu00511 094 , .. 03/19/2008 $1,064:50 

,llford.' Underwriters ..' 72~oooi9512~2008 06/l2/20.08 $8,809.40 

, . ,
 - -. .
 72-00012670-2008 , 04/13/2008 . ,$lO,04(;~94

2;. Loss adjustment expenses were,notÚièomplÙinceWith the NFIPF'ee SchedUle; , 

. .. . .. ..
 . .. .' .
 

, ! ii i ,\ 'i , ' :,' i' ,i' ~
 : i , i " I , , ,~ i
 ~ r i ì' i ,~, i I i J I ' I ' ; l; ( \:1' i i l ); I . i': i , . ') i I L " . I ~ I ,~ ¡ 

Allstate 

Còvans s' 

. Fideli 

Aiericaii Elaiers ..' 

.. . . 0802911032 ..

1805895974 . 

, 20241 öi657 " 

7700718599 ' 

2023977000 . 

2027539600 , 

0790Ö.16823 ... . 

ASOOO 10554 '. 

... 08/29/2005 . $0.00 

..08/29/2005 $250;00
 

. '03/19/2008$13,295;42 

04/09/2008 ' $500;00.
 

03ï2112008$1,980~S6' 

.05/13/2008 ' , $3,545.80, . 

, 03/17/2008 $1,764.18
 

06/08/iOQ8 .. $2,091.03.. 

3019033500 ' . . .
 .,.07/01/2007" $5,,469~94

,79()016823 03/17/2008 $1,764.18., 

ASOOÖIQ554 06/08/2008 ";, $2,091.03 

.lIaitfoid Urid(liters . .... . . ... .' . .
 72~6òö184-i1-2Öo8 ' . 0311812008 . ' .. .. $850.00 ,,",.. '. .' :.' : ":'.' .".. .:,'. .' 3; Loss reserve aTnounts were notaW"uted.asclaimpaymentswere' matie,F'or closed 

.' claims, loss 1"eserveamounts We1i!not redupedto ~erQ: .
 

. 01/08/2008 . 

03/2212008- ·
 

, ... Allstà.tè, . ' 05/13/2008 '. ' 

Recommendations . . " . ... . ., . .
 

. We recoinmend that FEMA' s Mitigation Division: . . . '. .. -,. .... :' ':.: ;: .",. " 

. . . ",.~ . : . ;,.:-,
 

. ..... 

",,­

~ . " ,:.., ~ .
 

. . . ~, ~. . I . 

. :" -, ~ ..~' . . ~ "" 

-J; ',.. 

. ',' :'. . 
'. '.. '.
 . . . '.
 . .	 . Exhibit! . '. .


. ..


approval and issuance oCclaim payments and toensure the specific anclconsiStent 

. -'. ..
 '. . . .
 . . . . . . . . . . .

. . . . 

. .


. . '. '. ..
 '. .. . - . . .
 establishment and reporting of loss . . '. . '. . .
 reserves and subsequent adjustments to the loss reserves;

Management Response .'. . . '.. .... .. . .... . . .. .
 

. . . .
 . . . .. .
 MàrageInent . has developed ä Management .Action Plan 
 to resolve the defciencies.
 

.:ManageIIent's initial attempts to contact the 
 companies with regard to the findings were met with . . requests for policy pùilierimddate ofloss. Now that KPMG has i)l'ovidedpolicynumbersand 

. . dates :of 10ss;niaiagement will within: 60 days once agaiiicontact the cömpaniestodeterme the 

appropriate corrective actión, ..:Management willfollo\V.; up with each cotiany to deteine that the appropriàte c:orrective.åètiiinhas. been implemented for each Of the areas . oLdéfiCienc;y. 

ManageIneit wil emphasis 	 'the issues identified during the audit inlts riextcyèle of Cliirn 

Operation Reviews. . .
 . . .. . .' .
 . . .. .
 . . '.. . '.
 . . .
 ... . .
 . ..' - .
 . .. - . . . . . ."
 . . . .
 In addition, on December 22, 2Q08, .aulletin W-08095 was 
 sent to Write Your Own (WYO) 

Company Principal Coorditors~theNFIPServicing Agent, and Selected Çlaims AdJustig.' . 

. Fins Companies. This Bulletinc()rrected iud clarified 	 case resering procedures the insurers ..

. . .'miÜ;t to follow. It must be stated 
 tht casereserves creåtedbycompanies have no signficant. impact on reserves included in the Balance Sheet. Balance Sheet reserves are developed by the 

NFIP Bureau and Statistical Agent actùariiilstaff and is subject to an independent peer review. 

C. . . . Inaccuracies in Interim Claims' Loss Reserves
 

Observation .,April 30, 2008 .... . . . . .
 

. We randomly selected 9 insurance companes to perform procedùres over the 	 accuracy and . 

completeness' of loss reserVes establiShed as of April 30,2008. For 	 eâch of the 9 companies' 

selected? wetesLed a random sample of 30 loss 
 reserves reported as of April 30,2008. During 

. ths: testing of 270 .items, we identified linstärcewhere . the appropnateam0uot of tle loss 

reserve was not established as cÓiipared to the inormation obtainediri the 	 claim fie and3. 

'instances'whèletheJoss reservewåsnot closed inä ti:ely man~r äftetÎu payment of the 	 claim 

wiiniádeto thepolicyholder.See belowfor.defails: .. .


. . 1. . i()$$re8erven~t established as compared to the inforinåtion' in 

.', ," '.' ',' - - '," ,,". .... .'. . . '. '. ," -. ..." ....... '." .' ."..­ . '.
 . . . .


the clairnfile: 

.: ," ':" .",". ,". ,",. .. : . ...... :. ",,' .:....- . ."... ::. . . . ..". ,",. ,"... - .' 

2: Loss reNerVBwas tiotcl6sedin a timayrnannerafter fullpaymerit ofthedaim'las rnadé tó:thé policyholder: . .


"-", 1 ,I"~ \ I tiil ! ' I I ! ':,11'(' , . i ,I 

-Fidelity -FNIC	 2510057861 .. .' 08/29/2005 $97,493,46 

ZSlOO7l183 . .. 08/29/2005. . . -. .. '., , $34 60Q.OO. . Hartord UIiderWriters .71-Ö042S700~2004 08/29/2005 . $30,000.00 . . 

~ ".. . 

., ~ '. . '. ", .:,~... ~ 

.... ,"\. ".,.,' :',:"'.: j,":- "l; . 

.. ....1.5
 

.r, " 
. Exhibit I 

Obiervation~Jiilji31, 2008 . .. ... ... . . . .. .. ...
 

. We rand6inyselectèd 92 inurance companies toperforniprocedures over the acciuracyaId 

cotnpletenessoflossreserves. established 
 as öfJuIy31,2008... For each of the 9 companies
 

.selecte4, we tested a raIdoin sample of 3 5 loss 
 reserves reported as of July 3l, 2008. During this. testmg .of315 items, we identified.13 instances where the supporting documentation received did iiotsupportthe loss reserve balance, 
 2 instances where the loss :reserVe was not updated based on reCeipt of the Prelimiar Report 12 instances (1 Qof 12 related to Increased 
 Cost òf Compliance

(ICe) claill) where the . loss reseI'e wasnpt reduced for art adväncedpayirent .or parial payment, 1 instance where the loss iese.tve Wàs not. closed in a tiely 
 inaner after ful payment of the claim wasmade to thepolicYliolder~ iud,J instances where the inaccuratëämoimt ofthe 

loss reserve was ca\1ed by a data input errpt. Seebeldw for the c:ai numbers àssociate~with . 

.thesè exceptions at the 

. . .. . . .
 

. . . .
 .' . . '.".... .
 . . '.


. .
 . . . . .
 . .. . .
 respective insuiancecompames: . . . .
 . ".
 3. Supporting documentation r.eceiveddidnotsupport the loss reserve balan. ce.;.

I ,\ l' i' ,): . i \ :' ~'i t" \ .. (I I ~ ,l'" j I '~I i. ",' i" I $' ~ l',' ~, " (, ,;: t L" ; i
 

Allstate 1804402285 08/29/2005 $800.00 

1801847615 08/28/2005 $15,000.00 . 

0808910347 08/29/2005 $100.00 . 

1802762136 OS/29/2005 . . $160;00 . 

1807230055 08/21/2007 $9,250,00 

1803908837 08/29/2005 . $12,000.00 

3801039797 06/07/2008 $44,000.00 .. . 

0805784279 06/07/2008 . . $19,500.00 

1806533137 06/13/2008 . . $20,000.00 

.. 1805201629. . 06J04/2008 $15,300.00 

0801554486 - 08/21/2007 . $1-,000.00 

. _ 08078731S3 ...... Q8/22/2Ö()7_ $12000..00 

Travelers . 6ofo0429i6- .. 06118/2008 .$11,385.00

. ... .. ... . .. .... "."
 ". ..... - ",- . . - . '. '. . .
 .. .
 . - .
,.

4. Loss reserveWiinot updated based ~n receipt of the Preliminary Report: . ". . '. . - ',. . '. '.. .. . . .


. . . . ., . .
 .. , . . ..
 , '. . .' . .... . ..

. .5.. Loss rêserye was not ;.edu~edforaiiadvånc,edjiaymento;partiaiiitzym,ent: .......
 

. i' , I " r, t, , : .¡ , i, I , , " I" ~;.. , I ' "i ' , i i / ! 

_Hartford Fire- . 99013809642005:: .08/29/2005 . $.30,000.00 .. 

87040381452007. 08/24/2007 $30,000;00 

.1240922972004 - 08129/20Ö5 .. . $30,000,00 

. -8702l341032007 06/20/2008.. . $33,692;64 

.....990278573l2007 06/0S/20Q8 . ... $78 000;00 

, .... 'r,_._,.,'
 ,. .. . 2ün JIÜyl, 2008, Fide1itYNatión~llnsuraceComplUY(FC) merged with 


Fidelity National:Propert & 

. Casuaity Insurace(f' ACL As a result; thelOs, resetvt testwork as ofJulyJ 1, 2008 forbothcompiies . selectedw~jjerto~f:~~_~~rFNPAC.. .... " ." .. ...__,:~_" ..
 ..' 'c:..' .':.~ . .. ;- , , ~... ' , ,n . . .'" ._~ ;'_. . . , ;. -.~' ';". " ¡.?'. . .'\.-:/ 1.6 .­ ~ . ',.: .r 

., .' i. ~..
 "~ '. -) , 
. Exhbitl , I , ; ,
 i ' l i
 i f ' I f i I, ' r i r ~ i I , I i' L i ~', I\. 
 " I I' . i, 'r ,", \. :

Hartford Underwriters 71 004287002004 08/29/2005 $30;000.00 

, 72000074472Ö05 08/29/2005 .$30,000.00 

700003027,52005 08/30/2005 . .$30;000.00 

71000166202005 ' 08/29/2005 $30;000.00 

72000205.872005 ' 08/29/2005 ' $30000,00 . 

OOORB4278d ()8/29/2Ö05 - . , $30,000,00 

000D60066 ,08/31/2005 $:10,000,QO, ,

."' . . . ." . .'. ..... . "'.. . .
 6,. . Loss. reserve was not cl(Jsed in ii timely manner after full payment of the claimwcls

made to the PbUcyhoIdei',; . . . ,
 

7.

. . .. ." .
 Inaccurate amount of the toss resérve was caused by a data input error: 

" 

c ~r I r J -, tl'l , ~ ' ~ ~ '", 'it (', ,"r II I ,i I ~ hil J Ii 1 ~ i " ,~ '': ~; i r' , " \. ii ~ I' 'i i ; 

i I 

Cóvansys 400005'1600... . , M/l 5/2008 . ..'$17:000.00 

. 

Ti-avc:iers ' ,6.oó5~12542.. ..' 06/Q4/2008 ..$70;000,00 ., .. d 

. Hllrtford fire 99014551022008 . .06/16/2008 $35;848.32 " 

RecOmmendations .. '
 

, We reconii:nd thatFEMA's Mitigation 

1). .. F ollow- up, with.. eacliof the insurance . 

. ". . '"
 . . . . . . .
 . . .. . .' .'.
 . ." . .. . ..-." .... .
 . .'. . '.' . ". . - .
 Division:

companies noted ' above to deteriine 

, ,
tiiàt appropriate 

.correcnveactionhas been impleiiented to address the,exceptions Il0tèd ii OUr testwoik ..... ..
 

2)' Provide itlcreased. oversight to ensure the specificiidconsistent document~tion. over the .
 

establishienf oftlie loss reserve 'and subsequentadjustient to the loss reserve per Claim in 

theclaIin:fle at the insurancecoinpaniespartcipiiting intheNFIP. c .
 . ', . Managem~ntResponse . . . '. ' ,,' .
 

Managemep.t hasdeveIòped.it Manågetnent Action Plan to resolve the deficiencies. 

Manägeniepts initial atteinptsto.contactthe:companes with,regard tot1è findigs were met with. 

requests fór policy nwnberanddate ofIÓss; Now that KPMG hasjiròyided policy numbers and 

dates ofloss, manageinent wilwitiin60 days once again contact the companies to determine the, 

'. ...appropriate corrective 'action. . Managem:enLWil follow- up .with each 
 company to deteriine that'

, . . the appropriate corrective action has beeninplementedror eàch of the areas of deficiency. 

Mangemeiit wil emphasis the issues identified durng the audit in 

. its next cycleoLClaims Operätíoii~Revíews~ .,.. ...."
 . ." . . . . '. . . . .
 . . .. '.
 . '. . '. . . . .... Inadditiori, on December 22, 2008, BulletinW~08Ö95was sent to . Write YoUr OWIl'(wyO) 

CompanyPiincipal,Coordinators, the NPIP SerVicing Agent, and ,Selected Claims Adjiisting .. 

Firs. Companies. . This Bulletin corrected and clarified case reserving procedures theiiurers are ..... 

to fòlló\y; 'Itinustbe stated tIatca'se re~ervês èT(;!lted by companiesäv.eno si~nifìtiipacton .:' '. . 

reserve¡ ., included. in the .. Balance Slie,êt.. .. BalaiceSheet,rësetves:iie': developed by. the' NRIP: ". " 

. -aurea'uiid StaüsticalAgenfactuariâJsfaffíidissubjectto:iirïihdêperidentpeerieview; .. '.. .'
 

, i..", ~ .. .... j-,' 

1.7 . .:.i. ., . .., 

.-t....; . t.....:. . 

...;' 
. ,


Exhibit I
 

D.Internal Control peliCienciès in the Claims Reinspectión Program
 

.. ,


Observation . ' , , . . . .. .
 

Throughout the year, the NFIP thrd pary service provider conducts a Claims Reinspection
 

Program. The reinpection process involves reviewing existing flood clitinisfor propriety and 

accuracy. . Requests for reinspectiòns come from the insurance companies participating in the 

. NFIP. or FEMA; or. if 400 or more clais. are reported under a single flOòdevent;. the. service 

.. prQvider is reqi.ea to select a random sämple of open and closed clåims for r~inspection. 

, 'Duriigourtestwork as of Apn130; 2008 over a sample öf35 claim reinspec:tions,we iClentified , ..thè following eiÚ:èptiöns: .." ,


. ,For 15 sample items,thèNFIPinsurance compary did not 

. . . ,- . ". ", . .
 . . . .
 . ... . .
 . . .' . .
 .. . .
 . ... . ..
 . .. .
 . . . . . ..
 . .... . .
 , .. . .
. ..
 

receive the claims reinspection
 

report fromFEMAor iìSserviceprovider as required in th,e Financial Còntrof. PlCm 

Requirements and ProcedUres. See below forapplicabledaimnumbers.
 

RL00035682 

6005402802 , 

3000279117 

7700094227. 

1803603362 

6004202740 

6002670898 

6005007247 

60 io05083l 

6010042029 

6001909347. 

6010055601 

2565845043. 

6001444659 

, .,4000001545.. 

. . . . . ... .
 . . .. . . , .
 . ..' . . , . ..Fm2saiple items, reqiiiredfollow-up wäsnotperforred on the reSults of thereinspections,
 

~erevie\Ved the ,results C!f these reinpectIonsand;identified that the service provider's 

. .. claitiis adjustetmade recommendationsthiittl¡éNtIP insurance cÒÌ1panys~ouldhave taken 

. aÖtion OQ. See below fórapplicable cla.irniiuibers; .


. . . . , . . , . . ü615lf3085 

. . . .. . .
 . . . .. .. . . " - .. . - .
 , . . ,. . .. ..
 . ..
 .. _.. .
 , . .


1927557646 . . . .

. ' ForJsample Ììem(claimnumber 7700635553),adeqtiâtë follow-up was not performedwÍth. , 

the .insurancecolIpanytoensiire the company Jollçiwedthe conclusions reacht)din'the
 

reinpection:The insurce ¿oIOany did not follow the cOnclusions reached bY:FEMAaiid . 

instead decidedtomaintaih, its priòr decision.

. , ..' Recommendations ' .... ., .., - - .",

Wereconiendtlat FEMA' ~ Mitìgåtiòn DivisÜ~n::

.. . . .. . .
 .. -' . . . . ". " ._ . .. 't.. .'. ". . . .... _ . . ., . '. . _ "," ~, ..; . . .' ..­

".'J) Inconjunctionwiththe'servic:eprovicler, workvvithtlte N extGensystem'developer to'ensure' , 

the new syste!l addt~ss,es thefuctiöIliilityaiddata rf3ortingrieeds oftheclaims!ldjusters to . pioperIy carrout the:ClàimReinspec:ÙonPi:ogräm:;. , 

. ,;, ',. ~ :. :.' . ,"
 

"';':'. 

l.g. ,¡.i 

. .~~, 

~ ._ - . . "",'. ':'" ~ ~.~ . I ; 

~ '!~. '.":"':" 
. . . .
 . .. ..

. . . . . .
 . .. '
Exhbit i

.. . .. . .
 . . . 

2) Provide increased oversight to 
 ensure the. Claims Reinspection.Progtam is operatig

. according to policies and procedures outlinedfu Par 3 of the Financial Control plan 

. Requiremints and Procedures. . 

Mana~ment Response. .. . . .'. . ..
 

Management wil ensure that the required coordination between the nf;w B&SA .contractor and .' 

the new NFIP servicecÖntràctor occurs. These contractors are inthe.Iirocess of transitioning and 

when the .tranition is complete, management wil address. ths recoriendation.SiIice October 

2008, the ci.ent contractor (CSC).is using systems developed by the new contractor to randomly 

select cllliI files for reinspectlonusingthl:defitionprovidedby the of the Offce of Irtspector 

. General. By Julie 2009 new standad operating procedurè~, reporting of findings, andtrackirig of 

.reinspections wil be in place. .All of these and otheisystèir enhancements should be available 

n.. INTERNALCONTROLJ)EFICIENCmSRELATED TO PREMIMS WRTTEN.


t1öugh the neW 


... .
 . contractor, IService; . .. . .
 .. . . .
 .' . '. .... . . . . . . .
 . . . . .... .
 A. Internal C()iitr()l :Deficieiici~si:dentifed ö"crPremiuisWritteii 

Observation '. .... .. '. . .
 

We randomly selected 9 insurnce 
 companies to perform procedures over flood insurance.

prenÜums written diiing the period October 1;2007 though April 30, 2008. For the 9 

companies selected,.wenoted the fòllowing intemàl control deficiencies related to our 405
 

sample item.s: . 

1. Check did not agree with the appropriate policy. 

t i '(, ~ I: II r) dir'~ l\ir."I,~'1 i
 

Statf; Fan l3103852950RAQ 

.. J960980821 00J7 

19609861220RV4 

. 2~609859r60D02 

253.0~30607QRR6 . .. -. -..
 . ;
 

13 t0385295U:RO. 

19.6098082100. J7 . . . 

19609861220RV4 

2260985916ÒDÖi . 

25305306010RR6 

....21 fiQ9055fíQRA 1 

. Recommendàtions... '.' . ...... ...... ..... .. ...... .. .
 

.We reco1lèadthat FEMA's Mitigation Uiyision:
 

',- ..;...' , . ~ . .~. . ..:' .. . .­ .. ...1) 'F~llòw~up:with thein.suratce.c~irpaiynMed above. to deÚmnine tlìlitapjJl~opriatecoiTective ... . ­

action ha been iinplementedtò address the'exceptioi:ootedin oi. testwOlk .... .. .... 

..2) Provideh'iëreased oversight to inutapce companiespartjcipàtingindtheNFIP to ensUre 

."pòlicies.y;ì:tt~ri are'beingproce$sed: .andreviewedin ac.cord¡ice.lVith NFIPguideli1es .... 

. .
 . ...:.",,/ ~ .'~.

. ::.,."- j;;... ... ' . . ... 

." .~..
 '.r9 

'. . 
. .- . .' Exhibitl .

. . .' . .... .. ..
 . . .. . . .

. ... .
 . . .relatlng to preniiiim payments received from pòlicyholdersand to ensure NFIP insurance 

.' . . .' -, .," .
 . . .
 .. . . , . .. .
 companies are maintaining supportig documentation relating ..' .. .
 . .
to premium receipts.

.. ..ManageffentResponse. . ....... ..... ......... ... .. · .. . ....
 

. . Mangementwil fòHöw~upwiththeinsurarcecompanyto dete1"ine. that appropriate corrective 

. .

Managt;Inent wilprov~de 

. increased oversight to insurance companies partiCipating in the NFIPasiioted in ths NFR. . .... 

action haslieen implementedtoiiddress the exceptions noted.


B. . . . InterIialCoiitròl Deficiencies hi. the S1lbmit for Rate Program... .... .
 

. . . .' .
 . .., ",.
 .. . ..
 . .
 .

ObserVation . .... ... .. . ... .... . . .... ..... ... ... . ..
 

The NFIP third part service provider conducts a Submit for Rate Program over .the insurance . 

ccimpatiÏes participating in the NFIP for all new subm.iifor rate policy bliiness for the fiscal yeàr. 

(approxii;tely 12,000":14,000 policies). The serviceprovidetreviews thèpacka,ges to determine 

if the 
 policies were underwritten corrctly; . Durg our testWork as of April 30, 2008 over à . 

. sample of 35 Subriit for Rate policies under 
 the Submit for RatèProgram; we identified that the .

service provider's documentation of the Siibmit for Rate underwriters' review and follow~up on 

uoderwriting errors Was not consistently maintained for ali items tested. See below for applicabie policy numbers. . .
 

r) r.o., ,",tii: II'" I 

7700903569. 

4100351602 

6010098957 

. at71230357 

2108RC15363 

. 9904146152 . . 

. .8703041789.
 

.AB00014502 

. .1338RC2891S 

.. ..... .FL11036788 

.. .... AF73120267. 

. .FLll033897 

......2740R.28528 

3801740220. 

. .. 9903011684 . 

.1756RB49119. 

1531ltC75700 

A197l43759. . 

135476000 ... 

9904064102....... 

.9904047983 

.9770121310600 

1995dk67365 

8702889672 

. ... .~. .. ..81:02950237 ( ... ... 

,r,';.. .;:¡:i9~ 7701407290-:00 

9251010943503 . 

FLDi213988 ... . 

',' .. '~-' .' FLP1214345.... 

".: '. .
 . .; 

~ ..; " 
Exhibit I
 

6(J8025225 

09770116373900 

5050210987 

7701410985 

03073l22l F 

FLD12QiS55

. . . .. . . .

Recommendations 

W erecOIIend that FEMA's Mitigation 
 Div'ision: . . -'. '" . ".. .
 ' , .. '. . 1) Develop andiipletnent policies and procedures that require 
 'the serVicing agent LOIIaintai. specific documentation evidencing the 
 procedures perfoimedduringtheservicing agent'~', 

review of and follow-up on Submit for Rate policies. . . . .
 

2) Develop and implement a process to adequately monitor the review 
 procedures performed by , the servicing agent under the Submit for Rate Program. .. 

Management Response, " ... , '


Management does no't agree with ths deficiency because the BlueauardStatistlc¡il Agent (BSA) . 

reviews Submit for Rate (SFR) fies for 
 all risks that meet 
 the SFR 'criteria; Many SFRs are quotes. that never become actual flood 
 insurance policies; It would be tiIIe consuming and 
 costly , for ,the BSA to identify 
 and compare quotes with that the actu insurance policies that result from 

them. This would entail à monthly searèh of the policy master fié by propert address to 

determe whether a policywasäctualyissued. . .


. .....
 . .. .
 ' 
 . . .


.. .
 ,
 .. . '.
 . . InStead; BSA underwriters have been 
 instrcted to advise FEMA when a WYO company or vendotcotisistently inake errors 
 in calculating rates: When a trend is identified, F?MA's and the BSA's, undetWterspròvide trai~g tó the WYQCompany 0'1', if the situation Ís not resolved, do 

not a:ilowthecompary to have SFRauthority. When'a SFR issue surfaces,FEMA may 
 chose to
 

,examiea company' s,SFRpolicés, as. part of aiiundeiwriting operational review;


. ," - . " . ," ", - . . .
 . . . .... .
 . . ..... . .' . '. . . '. .
 . . . .
 . . '.
 . .... .
 We expect this issÜe-.tobere~olvedwhen'theIle:WNextGèii system is operatiortal.: All SFRs 

submitted tothe:BSAwill becalciiliited by the;newiatingengieand,when the 
 property address
 

is :ènteredinto thesystenfas 'apolicyinforce, theactial:ratewil be matched to thèqiiòted rate;


m~ Ol'HERINTERNAL,CONnÖL,DEFIC;IENCY'. ..

'. . .. .
 . ., , ,


A.	 insuffcient D~cuieiItatioiiof MethodtilQgyU sèdto Calcuhite NFIPEstiÍat~s. .
 

. , .. . ". . ..... '.' . . . . _......
 ". .


Reported inthe FEMA Financial Stateml;nts .
 

Observation. .. .,.". ' .. . .'. .. . ... .', .".. . 

We reviewed the. estlate inetho401()gyfor defeiTed revenue; deferredacq¥isítioncost, and
 

àccouitspåyable~: The methodológy used by the serice ,provider is insuffcieiitlydocumented. to
 

'..a1l9wiireasoiiáblep,eisori,to re~perfotm the year-endèstIates andyje,ld thesaie results. The
 

final estimates relY:h,eiivilyöiiUidöctiente(:IÌaqagement judgment, histQrical.knowledge;
 

ahdlorassúIPtiorts'tó.:deteinIm: thê:flvãlüe"'Of'a.ccÖtmt balà.ce~. repÖrteâin the NFIP
 

.fianciar statementsand'Ultimitely recorded in thêFEMA finaicial statements. .
 

". .": " 

. ,- ~ ~ '. 

,",- !	 ,. .~ ,. . 
ExhibitI 

Recommendations. . . ... .
 

J) The NFIP third pary 

We.recommend ilat FEMArequire:.

. . .
 service provider to suffcieritly document theestiiration methodology to 

deterIine theyear~end NFIP financial statement amounts by incorporatingquantitative 

.. factotSto use basedön the leveL.ofyear-endhuIicanelfooding activity, when 
 appropriate. . 2) . A formal review and approval of this methodology by a 
 knowledgeable individual.Vlithin 

.iiEMA'sOfficeciftheChiefFIianciàl Officer oncetheniethcidology is fuly documented and 

:whenchångesareniadeto it. . '.' .. . .. Management. 

ManagemenfwiIlrevièwandas iiecessary updàie the documenfationof th!l. estimation process 

ResponSe .. . ..... .. ..... ..... .
 . '"


. .

prior to the next audit cyde. . . .
 . . . .... ..... . . .
 . . .. . '" . . .. .
 It is recommendedthattheNFIPincorporate"..~quantitative factors to use based oIdhe level of 

year-end hurcane/flooding. activity." Mangement does not concur with. this. recommendation, 

however Management wil review and as necessa;ry update the docuientationof .theestiration 

process which curently incorporates estimated 
 amounts based on the level of year-end iiurricanè/floodingactivitY provided 

. ..

. . .
 

'. - .
 . .. .
 . ..
 . . . .


directly by all reportirigentities. .


The management letter is not accUrte in stating that the .curent estimation process omits
 

. "qùàrtitaìÏve factors to use based orithe level of year~end hurricane/flooding activity." It is also 

not accurate to state that "Althoughthè methodology discussed above is used toestimafe all line itefnÙmthe. NFIP balance. sheet and NFIPincome statement exceptfor the actuarial estifntefor 

thelossl'eserve..." These are notacctiatebecause each WYOCompany, the Servicing 
 Agent, and theacwar separately providëdeStimated amotits. for September 2008 which include 

"qUàntitatlve factori¡ based on theirlevelof year-end hiiicaiie/flooc:ing activity. In this r!lgard; . 

KPMGwasprovided a copy of the lètterwhich specifically requested that the following selected. .. 

estiniatesbërepoited for September 2008; . .. . .
 

From Aii Compimes .. 

· . W rlttenprémium . 

.;.. .. Claimsl?aid ... .... 

· . Accounts payablè .. 

· Clais payable .
 

From the ActuarY 

· Actual 10ss reserves ...... .. . . 

. Actuanallossadjlstmentexl'enses
 

.~. . Actuaria;l development of 

. . .. . . .
 . . .
 paid claims .

. The iihòvedataestimatesrepresent thematerialIine itetIson theestimäted finaiiCialstatements 

àndareptovided.directlybythe WYO Companies, theServiclig Agent, and .theacfu. Each
 

data estimate 'includes the ~leV'elÖfyea.r~end huricane/flooding activity" . for. Septeirberand it 

was reported. àsieceived by the :NIPthirdparty service 
 providèi:. Neither trending nor analytic judgIreiIwåsapplied to these dátå,estimates. . .. .. .
 . .' . .' ~... ;~. - _::- ~ .; . .
 . '-' . .

The)iiâràgement letter statês tht "0'.; 'we focusedoii ieviewófthemethodology on deferrd ,. 

revenue, deferred acquisition cost; and accQunts payable;" . Deferrd ievenueand deferrd , 

."..-'ô..... 

... L12 .... 

.." ; ~'. ~ . 

,..'- "" 
Exhibit I 

acquisition costs are a fuction of premium and are not impacted by year-end hurrcane/flooding 

activity as inferred as a resulting Condition by th NFR. 

Finally, the accounts payable as noted above was provided directly by each WYO Company and 

the Servicing Agent, and does incorporate their respective impact on the level of year-end 

hurricane/fooding activity. Again, there is no trending or analytic judgment applied to these data 

estimates. 

Only remainig non-material 
 line items are the only estimates based upon historical trends which 

are consistent year over year and applied by the NFIP third party service provider. Only in these 

isolated data estimates is quantifiable historical trending applied. Analysis (or judgment as 

referred in the management letter) of these non-material items is applied to elimate nonrecuring values. More important, these line items do not var with the impact of any year-end 

huricane/flooding activity. 

1.13 
________________________________________________________________________ 

Report Distribution 

Department of Homeland Security 

Secretary 

Deputy Secretary 

Chief of Staff for Operations 

Chief of Staff for Policy 

Acting General Counsel 

Executive Secretariat 

Director, GAO/OIG Liaison Office 

Assistant Secretary for Office of Policy 

Assistant Secretary for Office of Public Affairs 

Assistant Secretary for Office of Legislative Affairs 

Chief Financial Officer 

DHS GAO/OIG Audit Liaison 

Federal Emergency Management Agency 

Acting Administrator 

Chief Financial Officer 

FEMA Audit Liaison 

Director of Mitigation Division 

Chief of Risk Insurance 

Office of Management and Budget 

Chief, Homeland Security Branch 

DHS OIG Budget Examiner 

Congress 

Congressional Oversight and Appropriations Committees, as 

appropriate 
ADDITIONAL INFORMATION AND COPIES 

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fax your request to (202) 254-4305, or visit the OIG web site at www.dhs.gov/oig. 

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