Department of Homeland Security
 

National Flood Insurance Program’s Management 

Letter for FY 2012 DHS Consolidated 

Financial Statements Audit 

(Redacted) 

OIG-13-86 April 2013
 
 

 

 

 

 OFFICE OF INSPECTOR GENERAL 

 Department of Homeland Security

Federal Emergency Management Agency 

Anne L. Richards 

Assistant Inspector General for Audits 

 Washington, DC 20528 / www.oig.dhs.gov 

APR 30 2013 

MEMORANDUM FOR: 	 David Miller 

Associate Administrator 

Federal Insurance and Mitigation Administration 

FROM: 

SUBJECT: 	 National Flood Insurance Program’s Management Letter 

for FY 2012 DHS Consolidated Financial Statements Audit 

Attached for your information is our final report, National Flood Insurance Program’s 

Management Letter for FY 2012 DHS Consolidated Financial Statements Audit. This 

report contains observations related to internal control deficiencies that were not 

required to be reported in the Independent Auditors’ Report on DHS’ FY 2012 Financial 

Statements and Internal Control over Financial Reporting. Internal control deficiencies 

that are considered significant deficiencies were reported, as required, in the 

Independent Auditors’ Report, dated November 14, 2012, which was included in the 

DHS FY 2012 Annual Financial Report. We do not require management’s response to 

the recommendations. 

The independent public accounting firm KPMG LLP conducted the audit of DHS’ FY 2012 

financial statements and is responsible for the attached management letter dated 

November 14, 2012, and the conclusions expressed in it. We do not express opinions on 

DHS’ financial statements or internal control, nor do we provide conclusions on 

compliance with laws and regulations. 

Consistent with our responsibility under the Inspector General Act, we are providing 

copies of our report to appropriate congressional committees with oversight and 

appropriation responsibility over the Department of Homeland Security. We will post a 

redacted version of the report on our website. 

Please call me with any questions, or your staff may contact Mark Bell, Deputy Assistant 

Inspector General for Audits, at (202) 254-4100. 

Attachment 
 

KPMG LLP 

Suite 12000 

1801 K Street, NW 

Washington, DC 20006 

November 14, 2012 

Office of Inspector General 

U.S. Department of Homeland Security, and 

Associate Administrator, Federal Insurance and Mitigation Administration 

U.S. Department of Homeland Security Federal Emergency Management Agency 

Washington, DC 

Ladies and Gentlemen: 

We have audited the balance sheet of the U.S. Department of Homeland Security (DHS or 

Department) as of September 30, 2012, and the related statements of net cost, changes in net 

position and custodial activity, and combined statement of budgetary resources for the year then 

ended (referred to herein as the “fiscal year (FY) 2012 financial statements”). The objective of 

our audit was to express an opinion on the fair presentation of these financial statements. We 

were also engaged to audit the Department’s internal control over financial reporting of the 

balance sheet as of September 30, 2012, and the related statements of net cost, changes in net 

position and custodial activity, and the combined statement of budgetary resources for the year 

then ended based on the criteria established in Office of Management and Budget Circular No. 

123, Management’s Responsibility for Internal Control, Appendix A. 

Our Independent Auditors’ Report issued on November 14, 2012, describes a limitation on the 

scope of our audit that prevented us from performing all procedures necessary to express an 

unqualified opinion on DHS’ FY 2012 financial statements and an opinion on DHS’ internal 

control over financial reporting as of September 30, 2012. In addition, the FY 2012 DHS 

Secretary’s Assurance Statement states that the Department was unable to provide assurance that 

internal control over financial reporting was operating effectively at September 30, 2012. We 

have not considered internal control since the date of our Independent Auditors’ Report. 

During our FY 2012 DHS audit, we noted certain matters involving the Federal Emergency 

Management Agency’s (FEMA) National Flood Insurance Program (NFIP) internal control and 

other operational matters that are presented for your consideration. These observations and 

recommendations, all of which have been discussed with the appropriate members of 

management of the named insurance companies (where applicable), FEMA’s Office of the Chief 

Financial Officer, and FEMA’s Federal Insurance and Mitigation Administration and 

communicated through a Notice of Finding and Recommendation, are intended to improve 

internal control or result in other operating efficiencies and are summarized in Exhibit I of this 

letter. These comments are in addition to the material weaknesses and significant deficiencies 

presented in our Independent Auditors’ Report, dated November 14, 2012, included in the FY 

2012 DHS Annual Financial Report. The status of our prior year observations is presented in 

Exhibit II. 

Certain control deficiencies related to FEMA information technology (IT) controls will be 

presented in a separate letter to the DHS Office of Inspector General and the FEMA Chief 

Information Officer, and certain other control deficiencies related to FEMA’s internal controls 

exclusive of our IT findings will be presented in a separate letter to the DHS Office of Inspector 

General and the FEMA Chief Financial Officer. 

KPMG LLP is a Delaware limited liability partnership, 

the U.S. member firm of KPMG International Cooperative 

(“KPMG International”), a Swiss entity. 

 

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

FEMA’s written response to the observations and recommendations identified in this report, 

presented in Exhibit III, has not been subjected to auditing procedures and, accordingly, we 

express no opinion on it. Our auditors’ response is presented in Exhibit IV. 

This report is intended for the information and use of DHS and FEMA management, the DHS 

Office of Inspector General, the U.S. Office of Management and Budget, the U.S. Congress, and 

the U.S. Government Accountability Office, and is not intended to be and should not be used by 

anyone other than these specified parties. 

Very truly yours, 

 

Exhibit I 


I.GBACKGROUNDG

The Federal Insurance and Mitigation Administration of the Department of Homeland Security (DHS) 

Federal Emergency Management Agency (FEMA) manages the National Flood Insurance Program 

(NFIP). Private insurance companies and the Direct Servicing Agent administer the flood insurance 

policies issued through the NFIP. The insurance companies and Direct Servicing Agent write NFIP 

policies, adjust flood claims, process and distribute claim payments to policyholders, and establish and 

maintain loss reserves. The data associated with flood policies and claims are used to calculate estimates 

included in the year-end NFIP financial statements, which are recorded in the year-end DHS financial 

statements. Thus, the precision of the estimates used to reflect actual events is dependent upon the 

accuracy and consistency of the underlying data submitted by the insurance companies and the Direct 

Servicing Agent on a monthly basis. 

II.GINTERNALGCONTROLGDEFICIENCIESGRELATEDGTOGCLAIMSG

A.GG InternalGControlGDeficienciesGandGErrorsGIdentifiedGoverGClai sGPaid

Observation: 

We selected nine insurance companies at which to perform audit procedures over claims paid for the 

periods October 1, 2011, through March 31, 2012, April 1 through June 30, 2012, and July 1 through 

August 31, 2012. For the nine companies selected, we tested a sample of claims paid totaling 434 items 

covering the three testing periods identified above. During this testing, we noted the following internal 

control deficiencies and errors: 

1)	 Based on March 31, 2012, testwork, for one sample item, the date of loss was incorrectly 

reported. 

DateGofGLossG DateGofGLossGPerG

Co an G Polic GNo.G PerGSa leG Clai GFileG

09/07/2011 08/27/2011 

2)	 Based on March 31, 2012, and June 30, 2012, testwork, for six sample items, the insurance 

company did not request a 60-day Proof of Loss waiver. 

March 31, 2012, Testwork Results: 

Da sGBetweenG

DateGofGLossGandG

Co an G Polic GNo.G DateGofGLossG ProofGofGLossG

09/03/2011 69 

10/28/2011 63 

04/25/2011 147 

08/23/2011 83 

08/23/2011 62 

I.1 
 

 

Pa entG �aiverGRe��estG

Co an G Polic GNo.G DateG DateG

12/11/2011 03/02/2012 

02/24/2012 03/13/2012 

 

 

 

(Under)/G

Co an G Polic GNo.G DateGofGLossG Over a entG

08/28/2011 $(3) 

08/28/2011 $10 

 

 

Exhibit I 

June 30, 2012, Testwork Results: 

Da sGBetweenG

DateGofGLossGandG

Co an G Polic GNo.G DateGofGLossG ProofGofGLossG

03/15/2012 70 

3) Based on March 31, 2012, testwork, for two sample items, the insurance company requested a 60­

day Proof of Loss waiver subsequent to the claim payment. 

4) Based on March 31, 2012, testwork, for one sample item, the Proof of Loss modification letter 

was not issued in a timely manner. 

Co an G Polic GNo.G

Pa entG

DateG DateGofGLetterG

12/20/2011 03/02/2012 

5)	 Based on June 30, 2012, testwork, for one sample item, the 60-day Proof of Loss waiver obtained 

referenced the incorrect Proof of Loss. The insurance company issued the claim payment upon 

receipt of improper waiver approval. 

Co an G Polic GNo.G DateGofGLossG Pa entGDateG

08/28/2011 06/15/2012 

6)	 Based on June 30, 2012, and August 31, 2012, testwork, for three sample items, the amount of the 

payment did not agree to the final report. 

June 30, 2012, Testwork Results: 

August 31, 2012, Testwork Results:
 

Co an G Polic GNo.G DateGofGLossG

(Under)G

Pa entG

05/18/2012 $(0.03) 

7) Based on June 30, 2012, testwork, for one sample item, the claim payment was not made timely.
 

Co an G Polic GNo.G ProofGofGLossG Pa entGDateG

02/11/2012 04/17/2012 

I.2 
 

 

Co an G Polic GNo.G DateGofGLossG Overstate entG

04/27/2011 $21,400 

06/12/2010 $30,000 

08/28/2011 $51,196 

Exhibit I 

8)	 Based on June 30, 2012, testwork, for two sample items, the accident month per the sample did 

not match the accident month per the claim file supporting documentation: 

AccidentG

MonthGPerG AccidentGMonthG

Co an G Polic GNo.G Sa leG PerGClai GFileG

March 2012 May 2012 

April 2012 March 2012 

FEMA’s Federal Insurance and Mitigation Administration did not provide adequate oversight to ensure 

claim files were processed and reviewed in accordance with NFIP guidelines before the approval and 

issuance of claim payments. 

Recommendations: 

We recommend that FEMA’s Federal Insurance and Mitigation Administration: 

1) Follow-up with each of the insurance companies to determine if appropriate corrective action has 

been implemented to address the exceptions noted. 

2) Provide increased oversight to insurance companies participating in the NFIP to ensure claim 

files are being processed and reviewed in accordance with NFIP guidelines before the approval 

and issuance of claim payments. 

B.G InternalGControlGDeficienciesGandGInacc�raciesGIdentifiedGoverGClai s'GLossGReservesG

Observation: 

We selected nine insurance companies at which to perform audit procedures over the operating 

effectiveness of controls related to the establishment and maintenance of loss reserves for the periods 

October 1, 2011, through March 31, 2012, April 1 through June 30, 2012, and July 1 through August 31, 

2012. For the nine companies selected, we tested a sample of claims paid totaling 434 items covering the 

three testing periods identified above. We also performed audit procedures over the accuracy and 

completeness of loss reserves established as of March 31, 2012, and August 31, 2012, over all insurance 

companies. As of these dates, we tested a sample of 130 loss reserves reported. During these audit 

procedures, we noted the following loss reserve errors: 

1)	 Based on our March 31, 2012, and August 31, 2012, substantive testwork, for five sample items, 

the insurance company did not close the claim and/or related loss reserve without payment in a 

timely manner, causing reserves to be overstated. 

March 31, 2012, Substantive Testwork Results: 

I.3 
Co an G Polic GNo.G DateGofGLossG Overstate entG

03/12/2009 $46,800 

08/27/2011 $4,000 

 

 

 

 

 

 

Over/(Under)G

Co an G Polic GNo.G DateGofGLossG State entG

06/21/2011 ($29,693) 

08/28/2011 ($52,561) 

04/16/2011 ($17,050) 

09/08/2011 ($4,300) 

11/29/2011 $15,000 

01/20/2012 $1,000 

08/28/2011 ($3,432) 

08/27/2011 ($17,652) 

08/26/2011 ($1,000) 

09/03/2011 ($388) 

08/27/2011 $4,000 

08/28/2011 $8,000 

08/21/2011 $9,102 

08/21/2011 $4,318 

08/23/2011 $1,086 

08/23/2011 $7,773 

08/23/2011 $6,838 

08/26/2011 $3,675 

Exhibit I 

August 31, 2012, Substantive Testwork Results: 

2) Based on our March 31, 2012, control testwork, for one sample item, the insurance company 

established the incorrect type of loss reserve related to the claim transaction. 

Co an G Polic GNo.G DateGofGLossG

CorrectGLossG

ReserveGT eG

10/31/2011 Building 

3)	 Based on our March 31, 2012, control testwork, for one sample item, the insurance company did 

not properly update the loss reserve related to the claim transaction to move reserves from 

Building to Contents, causing Building reserves to be overstated and Contents reserves to be 

understated. 

A o�ntG

I ro erl G

Co an G Polic GNo.G DateGofGLossG ClassifiedG

09/08/2011 $36 

4)	 Based on our March 31, 2012, and June 30, 2012, control testwork and our March 31, 2012, and 

August 31, 2012, substantive testwork, for 35 sample items, the insurance company did not 

properly update the loss reserve related to the claim transaction to reflect claim payments or 

additional adjuster reports, causing reserves to be misstated. 

March 31, 2012, Control Testwork Results: 

I.4 
 

Over/(Under)G

Co an G Polic GNo.G DateGofGLossG State entG

03/07/2012 ($54,000) 

09/07/2011 $55,573 

09/06/2011 $100 

09/07/2011 ($100,000) 

03/08/2012 $12,000 

03/12/2012 $2,000 

03/12/2012 ($10,000) 

08/28/2011 $13,563 

06/13/2008 $32,200 

08/28/2011 $5,000 

09/17/2004 $30,958 

Over/(Under)G

Co an G Polic GNo.G DateGofGLossG State entGG

08/28/2011 $6,203 

08/27/2011 $4,916 

Over/(Under)G

Co an G Polic GNo.G DateGofGLossG State entGG

07/20/2012 ($5,678) 

05/13/2012 $20,000 

09/07/2011 $337 

07/20/2012 $8,001 

Co an G Polic GNo.G DateGofGLossG Overstate entG

08/29/2005 $30,000 

 

Exhibit I 


March 31, 2012, Substantive Testwork Results:
 

June 30, 2012, Control Testwork Results:
 

August 31, 2012, Substantive Testwork Results:
 

5)	 Based on our March 31, 2012, substantive testwork, for one sample item, the insurance company 

incorrectly re-established reserves for a claim that was previously closed without payment, 

causing reserves to be overstated. 

6)	 Based on our March 31, 2012, June 30, 2012, and August 31, 2012, control testwork, for 27 

sample items, the insurance company did not establish a loss reserve related to the claim 

transaction for an Increased Cost of Compliance (ICC) claim or supplemental payment request. 

Payment was not made in a timely manner, causing reserves to be understated. 

March 31, 2012, Control Testwork Results: 

Co an G Polic GNo.G DateGofGLossG

(Under-G

State ent)G

08/29/2011 ($9,771) 

I.5 
(Under-G

Co an G Polic GNo.G DateGofGLossG State ent)G

03/14/2010 ($8,635) 

08/27/2011 ($12,500) 

08/28/2011 ($15,000) 

08/28/2011 ($19,599) 

08/29/2011 ($900) 

08/28/2011 ($22,392) 

08/28/2011 ($1,238) 

08/28/2011 ($2,400) 

08/28/2011 ($119,125) 

08/27/2011 ($12,063) 

08/27/2011 ($9,250) 

08/27/2011 ($3,850) 

08/27/2011 ($3,915) 

08/28/2011 ($2,432) 

08/28/2011 ($2,412) 

08/28/2011 ($1,254) 

08/28/2011 ($14,850) 

08/28/2011 ($2,999) 

08/29/2011 ($14,714) 

06/11/2008 ($1,463) 

08/27/2011 ($472) 

08/27/2011 ($2,330) 

08/28/2011 ($5,816) 

09/08/2011 ($5,791) 

(Under-G

Co an G Polic GNo.G DateGofGLossG State ent)G

08/28/2011 ($30,103) 

08/28/2011 ($2,000) 


 

June 30, 2012, Control Testwork Results:
 

Exhibit I 


August 31, 2012, Control Testwork Results:
 

7)	 Based on our March 31, 2012, control and substantive testwork, we noted that one insurance 

company’s procedures did not require the adjustment of loss reserves based on the final report. 

As a result, for 20 sample items at that company, the insurance company did not update the loss 

reserve related to the claim transaction upon receipt of the final report. 

I.6 
Over/(Under)G

Co an G Polic GNo.G DateGofGLossG State entG

08/21/2011 ($9,982) 

08/27/2011 $5,921 

08/27/2011 ($4,902) 

08/27/2011 $37,132 

08/28/2011 $22,243 

08/28/2011 ($758) 

08/28/2011 ($18,960) 

08/28/2011 $5,512 

08/28/2011 ($2,300) 

08/28/2011 ($3,318) 

08/28/2011 $11,098 

08/30/2011 $3,813 

08/31/2011 $16,637 

09/07/2011 ($936) 

09/08/2011 $10,714 

09/08/2011 $74,122 

09/08/2011 ($1,992) 

09/09/2011 $11,230 

Over/(Under)G

Co an G Polic GNo.G DateGofGLossG State entG

08/28/2011 ($14,471) 

08/27/2011 $12,416 

 

Co an G Polic GNo.G DateGofGLossG Overstate entG

08/28/2011 $1,377 

08/28/2011 $1,247 

08/28/2011 $4 

03/29/2012 $447 

03/30/2012 $336 


 

March 31, 2012, Control Testwork Results:
 

Exhibit I 


March 31, 2012, Substantive Testwork Results:
 

8)	 Based on our June 30, 2012, control testwork, for two sample items, the insurance company did 

not take a prior payment into account when loss reserves were re-established, causing reserves to 

be overstated. 

Co an G Polic GNo.G DateGofGLossG Overstate entGG

08/28/2011 $15,000 

09/08/2011 $7,000 

9)	 Based on our June 30, 2012, control testwork, we noted that the loss reserve system at one 

insurance company autocorrected the loss reserve amount after the examiner correctly entered the 

estimate per the adjuster report. As a result, for six sample items at that company, the loss 

reserve related to the claim transaction was overstated. 

I.7 
 

 

 

 

 

Exhibit I 


Co an G Polic GNo.G DateGofGLossG Overstate entG

05/22/2012 $90 

10) Based on our August 31, 2012, substantive testwork, for one sample item, the examiner was 

unable to produce the adjuster report evidencing the reserve update. 

Co an G Polic GNo.G DateGofGLossG Overstate entGG

09/09/2011 $156,121 

FEMA’s Federal Insurance and Mitigation Administration did not provide adequate oversight to ensure 

the specific and consistent establishment and reporting of loss reserves and subsequent adjustments to the 

loss reserves. 

Recommendations: 

We recommend that FEMA’s Federal Insurance and Mitigation Administration: 

1) Follow-up with each of the insurance companies noted above to determine if appropriate 

corrective action has been implemented to address the exceptions noted. 

2) Provide increased oversight to insurance companies participating in the NFIP to ensure the 

specific and consistent establishment and reporting of loss reserves and subsequent adjustments 

to the loss reserves. 

3) Require insurance companies to update current policies, mandating that loss reserves be 

established for supplemental and ICC claims that will not be paid within a specified time period. 

C.G InternalGControlGDeficienciesGandGErrorsGIdentifiedGoverGPre i� sG�rittenG

Observation: 

We selected nine insurance companies at which to perform audit procedures over the operating 

effectiveness of controls related to premiums written for the periods October 1, 2011, through March 31, 

2012, April 1 through June 30, 2012, and July 1 through August 31, 2012. For the nine companies 

selected, we tested a sample of premiums written totaling 450 items covering the three testing periods 

identified above. We also performed audit procedures over the existence and accuracy of premiums 

written over all insurance companies during the same periods identified above, resulting in a sample of 

premiums written totaling 46 items. During these audit procedures, we noted the following deficiencies 

and errors: 

1)	 Based on our March 31, 2012, and June 30, 2012, control testwork, for two sample items, an 

underwriter did not review and approve the policy in a timely manner: 

March 31, 2012, Control Testwork Results: 

Co an G Polic GNo.G EffectiveG

DateG A rovalGDateG

07/21/2011 12/08/2011 

I.8 
 

Over/(Under)G Co an G Polic GNo.G State entG

($2,016) 

($821) 

$475 

$53 

$43 

($322) 

($1,042) 

$0 

Over/(Under)G Co an G Polic GNo.G State entG

$(941) 

$(401) 

$(9,644) 

$0 

$0 

$0 

$0 

Over/(Under)G Co an G Polic GNo.G State entG

$(542) 

$677 

 

Exhibit I 

June 30, 2012, Control Testwork Results: 

Co an G Polic GNo.G EffectiveG

DateG A rovalGDateG

04/25/2012 06/26/2012 

2)	 Based on our March 31, 2012, June 30, 2012, and August 31, 2012, control testwork and August 

31, 2012, substantive testwork, for 18 sample items, the designated flood zone per the policy 

declaration page did not agree to the FEMA flood maps for the insured property address. 

March 31, 2012, Control Testwork Results: 

June 30, 2012, Control Testwork Results:
 

August 31, 2012, Control Testwork Results:
 

August 31, 2012, Substantive Testwork Results:
 

Co an G Polic GNo.G Over/(Under)G

State entG

$(827) 

I.9 
 

 

 

 

 

Exhibit I 

3)	 Based on our June 30, 2012, and August 31, 2012, control testwork, for two sample items, we 

noted that the insured property address information provided on the policy declaration page was 

insufficient to determine the correct flood zone. 

June 30, 2012, Control Testwork Results: 

Co an G Polic GNo.G Polic GZoneG

AE 

August 31, 2012, Control Testwork Results: 

Co an G Polic GNo.G Polic GZoneG

X 

4)	 Based on our August 31, 2012, control testwork, for one sample item, we noted that the insurance 

company calculated the premium using the incorrect elevation information on the elevation 

certificate. 

Co an G Polic GNo.G ElevationG

RateGUsedG

CorrectG

ElevationGRateG

-5 -4 

FEMA’s Federal Insurance and Mitigation Administration did not provide adequate oversight to ensure 

premiums written were properly approved. Additionally, FEMA’s NFIP Flood Insurance Manual does 

not require all flood zones included in the insurance policy application to be verified by the underwriter. 

Recommendations: 

We recommend that FEMA’s Federal Insurance and Mitigation Administration: 

1)	 Follow-up with each of the insurance companies noted above to determine if they have 

implemented the appropriate corrective action to address the exceptions identified. 

2)	 Provide increased oversight to insurance companies participating in the NFIP to ensure they 

process and review underwriting files in accordance with NFIP guidelines. 

3)	 Revise the NFIP Flood Insurance Manual to require that all flood zones included in insurance 

policy applications are subject to verification by an underwriter through the use of risk-based 

sampling techniques. 

D.G Deficienc GIdentifiedGRelatedGtoGtheGPre arationGandGReviewGofGtheGRetros ectiveGReserveG

Anal sis

Observation: 

The December 31, 2011, retrospective review completed by the third party contractor actuary and 

reviewed by the FEMA Chief Actuary did not include a documented discussion of the large ($1.3 billion) 

redundancy (i.e., the amount estimated in excess of the actual liability) of the actuarial insurance liability 

calculated as of September 30, 2011. 

Although the third party actuary and FEMA Chief Actuary discussed the large redundancy noted in the 

retrospective review of the September 30, 2011, actuarial insurance liability and how the methodology 

used to calculate this liability could be changed to provide a better estimate in the future, it was 

determined that formal documentation of this analysis was not required. 

I.10 
Exhibit I 


Recommendation: 

We recommend that FEMA incorporate a documented comprehensive analysis of all large redundancies 

noted in the actual to estimate comparison of the insurance liability during the retrospective review. 

I.11 

 

Exhibit II 

STATUSGOFGPRIORGYEARGOBSERVATIONS

The status of each observation reported in our letter dated November 11, 2011, to the Office of Inspector 

General, U.S. Department of Homeland Security, and Associate Administrator, Federal Insurance and 

Mitigation Administration, Federal Emergency Management Agency, U.S. Department of Homeland 

Security, is summarized in the table below. For each repeated observation, we provided the current year 

Observation Number and Notice of Findings and Recommendations (NFR) Number. 

Disposition 

2011 Repeat (2012 

Observation Description Closed Observation No./ 

No. NFR No.) 

II.A Internal Control Deficiencies Identified 

over Claims Paid 

II.A/ FEMA 12-07 

and 12-07a 

II.B Inaccuracies in Claims’ Loss Reserves II.B/ FEMA 12-20 

and 12-20a 


 


 

II.1 
Exhibit III
 

MANAGEMENT’S RESPONSE 


r..le o.p"" ••• ,.r II ......... -~ ,;'Y 

8 \I: IOII. DC ..... 71 

FEMA 

MAR 2 1 Z01J 

MEMORANDUM FOR: Anne L. Richard, 

Assistant In51""'tor c;.,n~T1d for Audits 

Office of Inspector General 

fROM: l)avidJ, Kaufman t/lltk;l 

Associalc Administrator for (1-) 

I'olicy, I'rogmm Analysis and Intcmntional A ITai"! 

SUBJECT: FEMA Response to DIG Drnft Repon: "NalPonal Flood 11I.<urtmctl 

Program :s MlmugcmCII/ Lelle' for lhe Fl' 201] DHS COII$olitioled 

Filluildul Swwllem. AI/dpi ". Fo, Offidal U,'c Ollly . DIG Project 

NO. 12-073-AUD-FEMA. 

Thanl )'ou for the opponunity to comment on tnc draft managcmcntlct1cr for (he FY 2012 DHS 

Consolidated Financial Statements Audit. 

It may be hclpful if FEMA and KPMG meelto disc uss tnc opera1ions ortnc NaHonnl Flood 

Insurance Program and walk through me complexities or the government insumnce progrom and 

how it di!Tcrll from" private sector insuroncc program. 

In rC"P"nse to Reserves (a case loss reserve in the pri"alc_sec10r insurance industry is a I iabi!ity 

that represents dollars set ""ide to pay that claim); the case loss '<'!'C .... ·o is the estimate of fut ure 

pa)m.nlS yet to be made on an iooi\'idu~ l claim, and it is a good business practice for the case 

loss =cr.·c to be roouooant by 5- 15%. 

COntrary (0 the priv~tC S(.>(:tor industry. the NFIP setS u loss reSi.TVC attllc end orthe fiscal ycar 

thai is an estimate offu(ure payments yet (0 be made on flood events !hat occurred on or t><:fore 

lhe y"",.-end; (he ca>c loss '<'!;I; .... 'c i. not sho"n on the financi.l slalement. WOOt is carried on 

the finan<ial Sl.atement is a liability on (he balance socel for all c~pec(cd futur<: claims payments, 

indudini payments on claims IMt had not i'e! been reported to the NFIP b)' the end ofthe fi!'Cal 

yenr. This laneT set orduims is kn()1.'.n as Incwre<l Bu( Not Reported (IBNR). Finally. the loss 

rese .... ·e estima1c is a liability on the financial !;!atcmcn1 and dOC'S notlmpacl cash balances. 

III.1
 
Exhibit III
 

FEMA believe5 that the auditor's concerns oyer the CUJTel1t case reserve procedures is misplaced 

since !he case reserves they have analyzed are no! directly rqx>ned on !he financial SUl!ement. 

And while !he loss reserve estimate that is carried on !he financial statement is. in pan, 

infl~ by the case resttveS, the NF1P aetuaries have demonstrated in Mllyses that have been 

shared wi!h prior KPMG auditors that even a large change in the adequacy of !he case loss 

reserves from !he historical pauem hasonly a very small influence on !he yw·end estimated 

loss reserve. Due to !he difTertnccs ofopiniollS on !his maner, FEMA's Claims and Appeals 

Bnwch believes it would be helpful to meet and discuss!hese concerns and issues wi!h KPMO. 

Regarding Underwriting findings, Condition t: IlISlJronce pq/iclts call k InUlldwllhoul prope' 

linuly ' tyinv and Q[JpI"l»al of/he umferwdllngjllts. Im:/I«i/ng app/lcallon OM supporllng 

documentation. The report had identified an error which FEMA has agreed is an error, bin this 

does not mean FEMA ~ts!he practice of allowing polities to be issued without underwriting 

IeYiew and approval. FEMA requires that polities be rated and issued oomctly, the files 

documented as required, and that service be proYide(\ in a timely manner as directed in the 

service guidelines. 

The repon also includes findings listed u Conditions 2 and 3: FEMA·s NFlP Flood Insu,ance 

MornKd dots rIOI ,equlre oli jlood lanes included i" lhe insW"ollCt policy applicol/o" 10 be 

w,lfied by lire U!ldtrwrlfe,. It is importanl to note thaI Companies arc RC]Uired to Yerlfy that !h.c 

version of the Flood Insurance Rale Map (FIRM) used in determining the flood wne for a 

building is !he cum:nllllllp. unless the grandfitthcring rule applies, which penni~ the use of an 

earlier map in determining the flood zone. If the ~fatheri"i role applies, the Company is 

required 10 doc:ument the file to show !hat the building is eligible for gnondfllihcring. 

Companies maintain con~ual ammgements wi!h agents who submit the applications. It is the 

responsibility of the .genllO determine the C(>JTCCt flood crone for the property and to supply !his 

information on the .pplication. In addition, cc.>I1Ipanies arc required 10 obtain flood wne 

detennirurtions to verify flood :wIltS only for Preferred Risk Policies in order to yerlfy the 

building's eligibility for this lower.cost policy. 

FEMA infonncd the auditors that their findings listed wider Conditions I and 2 arc ineorre<.:1 

b.sed OIl the documentations proYide(\ by the writing companies. 

Thank you again for !he opportunity to conunent on 010 Draft Report: ·WaliO/,al Flood 

II'fSW"OIICt Progrom's Mo"ogemenl Ullt' for lhe FY Jon DHSCoIIJ()/idaltd F"inancwl 

Slalemerlts Audll""- For OjJiclol Use Orlly: OIG Project No. n·07]·AUD·FEMA , .. Pleasl!: direcl 

My questions Rgarding this RsponSC to Oary McKeon, FEMA's Chief Audit limon, al 

202-646-1308. 

III.2
 
 

 

Exhibit IV
 

AUDITORS’ RESPONSE
 

FEMA’s response to the draft of this letter discussed our findings related to case reserves. During the 

FY 2012 audit, we received a letter from FEMA’s third party contractor actuary describing the data 

elements to be utilized in computing the actuarial insurance liability estimate as of September 30, 2012. 

This letter, which guided our testing approach related to the insurance liability estimate, included case 

reserves as one of the data elements used in the calculation. Our testing of data elements occurred 

throughout FY 2012. FEMA’s year-end analysis demonstrated that case reserves were not a significant 

factor in the calculation of the insurance liability estimate as of September 30, 2012; we took this 

information into consideration in determining the severity of the conditions identified, which we 

concluded to be control deficiencies, not more severe significant deficiencies. 

In addition, in FEMA’s response, management indicated disagreement with certain conditions cited in 

this letter. 

Regarding Condition C.1 in Exhibit I, FEMA did not provide documentation to support that our 

conclusions for the two sample items cited were incorrect; therefore, we believe that our conclusions are 

accurate based on the evidence provided during the audit. 

Regarding Condition C.2 in Exhibit I, at the time the audit work was performed and the exceptions were 

initially communicated to FEMA and the insurance companies, concerns with the identified exceptions 

were not communicated to us. Subsequently, when FEMA did indicate that certain exceptions may not be 

accurate, FEMA did not provide documentation to support that our conclusions for these sample items 

were incorrect; therefore, we believe that our conclusions are accurate based on the evidence provided 

during the audit. 

IV.1 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OFFICE OF INSPECTOR GENERAL 

Department of Homeland Security 

Appendix A 

Report Distribution 

Department of Homeland Security 

Secretary 

Deputy Secretary 

Chief of Staff 

Deputy Chief of Staff 

General Counsel 

Executive Secretary 

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 

Acting Chief Privacy Officer 

Federal Emergency Management Agency 

FEMA Administrator 

Chief Financial Officer 

FEMA Audit Liaison 

Deputy Associate Administrator for Insurance 

Director, Risk Insurance Division 

Office of Management and Budget 

Chief, Homeland Security Branch 

DHS OIG Budget Examiner 

Congress 

Congressional Oversight and Appropriations Committees, as appropriate 

www.oig.dhs.gov OIG-13-86 
 

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