a

GAO

United States Government Accountability Office

Report to the Ranking Member, 

Committee on Banking, Housing, and 

Urban Affairs, U.S. Senate

August 2009 FLOOD INSURANCE

Opportunities Exist to 

Improve Oversight of 

the WYO Program

GAO-09-455
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

August 2009

FLOOD INSURANCE

Opportunities Exist to Improve Oversight of the WYO 

Program 

Highlights of GAO-09-455, a report to the 

Ranking Member, Committee on Banking, 

Housing, and Urban Affairs, U.S. Senate 

Since 2004, private insurance 

companies participating in the 

Federal Emergency Management 

Agency’s (FEMA) Write-Your-Own 

(WYO) program have collected an 

average of $2.3 billion in premiums 

annually and, of this amount, have 

been paid or allowed to retain an 

average of $1 billion per year. 

Questions have been raised about 

FEMA’s oversight of the program in 

light of the debts FEMA has incurred 

since the 2005 hurricanes. GAO 

placed NFIP on its high-risk list and 

issued several reports addressing the 

challenges the program faces. This 

report addresses the methods FEMA 

uses for determining the rates at 

which WYOs are paid, its marketing 

bonus system for WYOs, its 

adherence to financial control 

requirements for the WYO program, 

and alternatives to the current 

system. To do this work, we 

reviewed and analyzed FEMA’s data 

and policies and procedures and 

obtained the views of select WYOs 

and flood insurance experts. 

What GAO Recommends

GAO makes recommendations to 

improve oversight of the WYO 

program. They include reviewing 

data on WYO companies’ expenses, 

targeting incentive bonuses in line 

with NFIP goals, and providing more 

comprehensive oversight of program 

requirements and procedures. FEMA 

agreed with our recommendations 

regarding NAIC data, the incentive 

structure, and program oversight, but 

not the transparency of WYO 

payments. We continue to believe 

that FEMA could better leverage 

actual expense data. 

FEMA does not systematically consider actual flood insurance expense 

information when it determines the amount it pays the WYO for selling and 

servicing flood insurance policies and adjusting claims. Rather, since the 

inception of the WYO program, FEMA has used various proxies for 

determining the rates at which it pays the WYOs. Consequently, FEMA does 

not have the information it needs to determine (1) whether its payments are 

reasonable and (2) the amount of profit to the WYOs that are included in its 

payments. When GAO compared expense payments FEMA made to six WYOs 

to the WYOs’ actual expenses for calendar years 2005 through 2007, we found 

that the payments exceeded actual expenses by $327.1 million, or 16.5 percent 

of total payments made. Considering actual expense information would 

provide transparency and accountability over payments to the WYOs. 

FEMA has not aligned its bonus structure with its long-term goals for the 

program. The WYOs generally offered flood insurance when requested but did 

not strategically market the product as a primary insurance line. FEMA has 

not set explicit marketing goals beyond a 5 percent goal of increasing policy 

growth each year, and the WYO program primarily rewards companies that 

are new to NFIP for sales increases that may result from external factors, 

including flood events. The Government Performance and Results Act states 

that when results could be influenced by external factors, agencies can use 

intermediate goals to measure contributions to specific goals. Paying bonuses 

based on such intermediate targeted goals could bring the bonus structure 

more in line with FEMA’s goals for the NFIP program. 

FEMA has explicit financial control requirements and procedures for the WYO 

program but has not implemented all aspects of its Control Plan. FEMA 

provides guidance for WYOs that is intended to ensure compliance with the 

statutory requirements for the NFIP and contains checks and balances to help 

ensure that taxpayer funds are spent appropriately. FEMA did most of the 

required biennial audits and underwriting and claims reviews but did not do 

most of the required audits for cause; state insurance department audits; and 

marketing, litigation, and customer service operational reviews. In addition, 

FEMA did not systematically track the outcomes of the various audits, 

inspections, and reviews that it performed for the 10 WYOs included in this 

review of FEMA’s oversight of the program. Because FEMA does not 

implement all aspects of the Control Plan, it cannot ensure that the WYOs are 

fully complying with program requirements. 

Three alternative administrative structures could replace NFIP’s payment 

arrangement with a competitively awarded contract that could lower costs for 

selling and servicing flood insurance policies and administering claims: (1) 

contracting with one or more insurance companies, (2) contracting with a 

single vendor, or (3) contracting with multiple vendors and maintaining the 

WYO network. Each alternative involves trade-offs in terms of the impact on 

the program’s basic operations that would have to be considered. 

View GAO-09-455 or key components.

For more information, contact Orice Williams 

Brown at (202) 512-8678 or 

williamso@gao.gov, or Jeanette M. Franzel 

at (202) 512-2600 or franzelj@gao.gov. 
Page i GAO-09-455

Contents 

Letter 1

Background 3 

FEMA Does Not Systematically Consider WYOs’ Actual Expenses 

When Setting Payment Rates 5 

FEMA Has Not Aligned Its Bonus Structure with Its Long-Term 

Goals for NFIP 6 

FEMA Followed Some but Not All of Its Internal Control 

Requirements and Procedures 7 

Alternative WYO Program Administrative Structures Could Be 

Used to Incorporate Competition into the Payment Process 9 

Conclusions 10 

Recommendations for Executive Action 11 

Agency Comments and Our Evaluation 12 

Appendix I Briefing Slides 19 

Appendix II Scope and Methodology 70 

Appendix III Comments from the Department of Homeland 

Security 73 

Appendix IV GAO Contacts and Staff Acknowledgments 78 

 Flood Insurance 
Abbreviations 

Control Plan FEMA’s Financial Control Plan and Procedures

FEMA Federal Emergency Management Agency 

NAIC National Association of Insurance Commissioners 

NFIP National Flood Insurance Program 

SFHA special high-risk flood hazard area 

ULAE Unallocated Loss Adjustment Expenses 

WYO Write-Your-Own 

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Page ii GAO-09-455 Flood Insurance
Page 1 GAO-09-455

 

United States Government Accountability Office

Washington, DC 20548 

 

August 21, 2009 

The Honorable Richard C. Shelby 

Ranking Member 

Committee on Banking, Housing, 

 and Urban Affairs 

United States Senate 

Dear Senator Shelby: 

Private insurers sell and service policies and adjust claims for the National 

Flood Insurance Program (NFIP) under an arrangement with the Federal 

Emergency Management Agency (FEMA) of the Department of Homeland 

Security. Under this program, known as the Write-Your-Own (WYO) 

program, these companies have collected an average of $2.3 billion in 

premiums annually since 2004 and have been paid or allowed to retain an 

average of $1 billion for each of these years. These WYO companies—

around 90 in 2008—are not only compensated for their services, but are 

also paid a bonus for expanding NFIP’s policy base by increasing the 

number of flood insurance policies they sell. 

As we have previously reported, the amounts WYOs receive for their 

services represent from one-third to two-thirds of the total NFIP premiums 

collected annually, depending on the number of flood claims filed.1

 In 

fiscal year 2006, these payments peaked at more than $1.5 billion, or about 

67 percent of WYO premiums collected, largely because of expenses 

related to the 2005 hurricanes. The amount of payments and bonuses that 

WYOs have received has led to increased scrutiny of FEMA’s oversight of 

these insurance companies and its methods for determining the rates at 

which they are paid. 

At your request, we reviewed FEMA’s oversight of the WYO insurance 

companies that sell and service NFIP policies. Our objectives were to (1) 

assess FEMA’s practice of determining the amounts it pays WYOs for 

selling and servicing flood insurance and adjusting claims; (2) examine 

how FEMA evaluates the effectiveness of its WYO bonus incentive 

1

See GAO, National Flood Insurance Program: FEMA’s Management and Oversight of 

Payments for Insurance Company Services Should Be Improved, GAO-07-1078 

(Washington, D.C.: Sept. 5, 2007). 

 Flood Insurance 
 

structure and determine whether the bonuses it pays reflect actual efforts 

to market flood insurance policies; (3) evaluate the extent to which FEMA 

oversees the WYO companies, including reviewing external audits, 

reinspecting flood claims, and conducting operational reviews; and (4) 

evaluate the advantages and disadvantages of three alternative 

arrangements for selling and servicing flood insurance policies and 

adjusting claims using a competitively awarded contract. 

On June 19, 2009, we briefed your staff on the results of our work. This 

letter summarizes the briefing; the briefing slides are included in appendix 

I of this report. 

To assess FEMA’s method for determining the amounts it pays WYOs for 

their services, we selected a sample of six WYOs that represented 53 

percent of total WYO program net premiums written, 71 percent of total 

WYO program claim losses paid, and 59 percent of total expense payments 

FEMA made to the approximately 90 companies for fiscal years 2005 to 

2007. We compared the payments FEMA made to these companies in 

calendar years 2005 to 2007 with the actual flood insurance expenses the 

companies reported to the National Association of Insurance 

Commissioners (NAIC) for those years. We also interviewed officials from 

FEMA, WYO companies, and NAIC. To address the remaining objectives, 

we selected a sample of 10 WYOs that represented more than 50 percent of 

the flood insurance premiums written in fiscal year 2007, including 

companies of various sizes that incurred different levels of flood losses 

and had different operating models. To assess the extent to which FEMA 

evaluates the effectiveness of its WYO bonus incentive structure, we 

discussed the bonus payment methodology with FEMA and WYO officials 

and reviewed documents relating to the methodology and history of the 

bonus payment system. To assess the extent to which FEMA was 

implementing its oversight requirements for WYOs, we evaluated FEMA’s 

Financial Control Plan Requirements and Procedures (Control Plan) and 

requested and reviewed all documents that were required under the plan, 

and discussed the plan and procedures with appropriate FEMA officials, 

WYO insurers, and other stakeholders. To evaluate the advantages and 

disadvantages of alternatives to the WYO program, we identified three 

possible arrangements, all of which would incorporate a competitive 

feature. We then discussed these alternatives with WYO insurers in our 

sample; FEMA staff; and other stakeholders, such as flood insurance 

vendors and consultants. Appendix II contains a more detailed description 

of our scope and methodology. 

Page 2 GAO-09-455 Flood Insurance
 

We conducted this audit from December 2007 to July 2009 in accordance 

with generally accepted government auditing standards. Those standards 

require that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and conclusions 

based on our audit objectives. We believe the evidence we obtained 

provides a reasonable basis for our findings and conclusions based on our 

audit objectives. 

Because of the catastrophic nature of flooding and the difficulty of 

adequately predicting flood risks, private insurance companies have 

largely been unwilling to underwrite and bear the risk of flood insurance. 

Under NFIP, the federal government assumes liability for flood insurance 

losses and sets rates and coverage limitations, among other 

responsibilities. Since its inception, NFIP, to a large extent, has relied on 

the private insurance industry to sell and service policies, as Congress 

envisioned when it authorized the program in 1968. The authorizing 

legislation provides broad authority for FEMA to work with the private 

insurance industry, and over time, FEMA has utilized several 

arrangements with private insurers, including with companies themselves 

and with a single vendor.2

 Because of customer complaints and stagnant 

policy growth, in 1983, FEMA established the WYO program. According to 

FEMA, the goals of the WYO program are to increase the NFIP policy base 

and the geographic distribution of policies, improve service to NFIP 

policyholders through the infusion of insurance industry knowledge, and 

provide the insurance industry with direct operating experience with flood 

insurance. 

Background 

In 1986—the first year of the WYO program—48 WYO insurance 

companies were responsible for about 50 percent of the more than 2 

million policies in force. As of September 2008, about 90 WYO insurance 

companies accounted for 97 percent of the nearly 5.6 million policies in 

 

2

From 1969 through 1977, the Department of Housing and Urban Development (HUD), 

which administered the NFIP at the time, had an agreement with a consortium of private 

insurers known as the National Flood Insurers Association. Under this agreement, HUD 

reimbursed the association for operating costs and provided an annual operating allowance 

equal to 5 percent of policyholders’ premiums. From 1978 to 1983, a federal contractor—

not an insurance company—sold and serviced policies. 

Page 3 GAO-09-455 Flood Insurance
 

force at that time.3 Because WYOs are not risk-sharing insurers, they are 

not paid an explicit profit percentage or amount.4

Private insurers become WYOs by entering into an arrangement with 

FEMA (the Financial Assistance/Subsidy Arrangement) to issue flood 

policies in their own name. The insurers must have experience in property 

and casualty insurance lines, be in good standing with state insurance 

departments, and be capable of adequately selling and servicing flood 

insurance policies. They must also comply with the provisions of FEMA’s 

Control Plan, which outlines the companies’ responsibilities for program 

operations, including underwriting, claims adjustments, cash management, 

and financial reporting, as well as FEMA’s responsibilities for management 

and oversight. 

WYOs adjust flood claims and settle, pay, and defend all claims arising 

from the flood policies. Insurance agents from these companies are the 

main point of contact for most policyholders. Based on information the 

insurance agents submit, WYOs issue policies, collect premiums, deduct 

an allowance for commission and operating expenses from the premiums, 

and remit the balance to NFIP. In most cases, insurance companies hire 

subcontractors—flood insurance vendors—to conduct some or all of the 

day-to-day processing and management of flood insurance policies. 

When flood losses occur, policyholders report them to their insurance 

agents, who notify the WYO insurance companies. The WYO companies 

review the claims and process approved claims for payment. FEMA 

reimburses the WYO insurance companies from the National Flood 

Insurance Fund for the amount of the claims plus expenses for adjusting 

and processing the claims, using rates that FEMA establishes. Claims 

amounts may be adjusted after the initial settlement is paid if claimants 

submit documentation showing that some costs were higher than 

estimated. 

 

3

Although WYOs handle most flood policies, FEMA still contracts with a company that 

serves as the insurer of last resort when an eligible customer cannot purchase insurance 

from a WYO. The Direct Program services both standard policies and other types, including 

repetitive loss and group policies. 

4

For the purpose of this review, we considered profits to be the difference between the 

amounts paid to the WYO companies and the companies’ actual flood insurance expenses 

on a pretax basis. In determining profits, we excluded miscellaneous other companywide 

income and expenses. 

Page 4 GAO-09-455 Flood Insurance
 

FEMA does not systematically consider actual flood insurance expense 

information when it determines the amount it pays WYOs for selling and 

servicing flood insurance policies and adjusting claims. Since the 

inception of the WYO program, FEMA has used proxies to determine the 

rates at which it pays WYOs. For example, payments for operating 

expenses are determined annually based on the average industry operating 

expenses for five lines of property insurance. WYOs’ actual flood 

insurance expense information has been available since 1997, when the 

companies began reporting the data to NAIC. However, FEMA has not 

systematically considered these data when setting its payment rates, and 

thus does not determine in advance the amounts built into payment rates 

for estimated expenses and profit. Further, FEMA has not, after the end of 

each year, compared the WYOs’ actual expenses to payments it makes to 

the WYOs. Because FEMA does not routinely take WYOs’ actual flood 

expenses into account when calculating payments and does not analyze 

actual payments and WYO flood insurance expenses, it does not have the 

information it needs to determine whether its payments are appropriate 

and how much profit is included in its payments to WYOs. 

FEMA Does Not 

Systematically 

Consider WYOs’ 

Actual Expenses 

When Setting 

Payment Rates 

FEMA has occasionally modified its methods for determining the amount 

of expense payments, but only the last of these modifications, made in 

2008, has taken into account the amount of actual WYO insurance 

expenses. In 2001, FEMA increased its payments to WYOs for servicing 

flood policies by an additional 1 percent of written premiums after some 

WYOs told FEMA that the payment amounts, based on the proxy used, 

were not sufficient to cover their operating expenses. FEMA did not take 

into consideration WYOs’ actual expenses in making these additional 

payments, which continued each year since 2001 and totaled about $25 

million in fiscal year 2007. However, we found that the payments to the six 

WYOs we reviewed exceeded their actual operating expenses even before 

these payments were increased by an additional 1 percent of written 

premiums. FEMA did consider actual flood insurance expenses in 2008 

when it changed its method of paying claims processing expenses. 

Beginning in fiscal year 2008—in response to the significant increase in 

total payments made to WYO companies in fiscal year 2005 and 2006 

following the 2004 and 2005 hurricanes—FEMA changed its method for 

paying claims processing expenses to take into account actual flood 

expense data obtained from a selected number of WYO companies. These 

examples illustrate the benefit of considering actual flood expense data in 

administering the WYO program. 

We recognize that the consistency of WYOs’ reporting to NAIC needs to be 

improved in order for data on the companies’ expenses to be fully utilized. 

Page 5 GAO-09-455 Flood Insurance
 

For example, we found that, among other things, some companies 

reported their flood insurance expenses to NAIC after offsetting them with 

the payments they received from FEMA. We also found that the actual 

expenses of one of the six companies we reviewed included payments 

made under service agreements with an affiliated company that may 

include profit distributions that should not be included in the expense 

amounts considered when setting payment rates. Nevertheless, we were 

able to use NAIC flood insurance data, supplemented with information 

obtained from WYO company officials, to compare the actual flood 

insurance expenses our six selected companies incurred and the payments 

they received for calendar years 2005 through 2007. We found that FEMA’s 

payments exceeded the companies’ actual expenses by $327.1 million, or 

16.5 percent of total payments made. 

Our results highlight the importance of FEMA’s considering actual flood 

expense data in administering the WYO program. In accordance with our 

Standards of Internal Control in the Federal Government, FEMA should 

ensure that its payment rates to WYOs are appropriate by, for example, 

comparing payments with actual flood insurance expenses.5

 Further, 

federal managerial cost accounting standards state that reliable cost 

information is critical to the proper allocation and stewardship of federal 

resources and that actual cost information is an important element agency 

management should consider when setting payment rates.6

FEMA has not aligned its bonus structure for WYOs with its goals for 

NFIP, such as increasing penetration in low-risk flood zones, among 

homeowners without federally-related mortgages in all zones, and in 

geographic areas with repetitive losses and low penetration rates. Instead, 

FEMA uses a broad-based distribution formula that awards a bonus of 0.5 

percent to 2 percent of the premiums collected if WYOs achieve a 2 

percent to 5 percent net growth in policies on an annual basis. This 

formula primarily rewards companies that are new to NFIP, when it is 

easiest to increase the percentage of net policies from a small base. 

Further, we found that most WYOs generally offered flood insurance when 

requested but did not strategically market the product as a primary 

FEMA Has Not 

Aligned Its Bonus 

Structure with Its 

Long-Term Goals for 

NFIP 

 

5

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

(Washington, D.C.: November 1999). 

6

Statement of Federal Financial Accounting Standards (SFFAS) No. 4, Managerial Cost 

Accounting Concepts and Standards for the Federal Government.

Page 6 GAO-09-455 Flood Insurance
 

insurance line. As a result, any sales increases may in fact result from 

external factors that are outside the companies’ control, rather than from 

marketing efforts—factors such as flood events, changes in the housing 

market, and economic developments. For example, sales of flood 

insurance tend to rise after flooding events, and FEMA’s Floodsmart 

media marketing campaign, which also has a goal of increasing flood 

policies by 5 percent annually, may also impact flood insurance sales. 

Moreover, FEMA does not review the WYOs’ marketing plans and 

therefore lacks the information needed to assess the effectiveness of 

either the WYOs’ efforts to increase participation or the bonus program 

itself. 

The Government Performance and Results Act of 1993 requires agencies to 

conduct systematic studies to assess how well programs are working. 

When program results could be influenced by external factors, agencies 

can use intermediate goals to identify the program’s discrete contribution 

to a specific result. Although a study funded by FEMA suggested that the 

agency should focus on increasing market penetration in low-risk flood 

zones, in targeted geographical areas, and in small, special high-risk flood 

hazard areas, FEMA has not set targeted market penetration goals beyond 

its 5 percent goal of increasing policy growth. Having intermediate 

targeted goals could help expand program participation, and linking such 

goals directly to the bonus structure could help ensure that NFIP and WYO 

goals were in line with each other. 

FEMA has explicit financial control requirements and procedures for 

overseeing the WYO program. FEMA’s Control Plan provides guidance for 

WYOs that is intended to ensure compliance with the statutory 

requirements for NFIP and that contains several checks and balances to 

help ensure that taxpayers’ funds are spent appropriately.7

 The plan has 

four major components that include requirements for: (1) monthly data 

and financial reporting, (2) claims reinspections by FEMA’s contractor, (3) 

various audits by independent CPAs, including required biennial audits, 

audits for cause, and state insurance department audits, and (4) triennial 

operation reviews by FEMA staff. FEMA’s Standards Committee is 

FEMA Followed 

Some but Not All of 

Its Internal Control 

Requirements and 

Procedures 

 

7

The WYO program is operating under a Control Plan from 1999, but NFIP has a draft plan 

it began in 2007. The draft revises the Control Plan to no longer require marketing, 

litigation, and customer service operation reviews. The plan had not been finalized as of 

July 2009. 

Page 7 GAO-09-455 Flood Insurance
 

responsible for ensuring that participating companies are complying with 

the requirements. 

For the 10 WYOs in our sample, FEMA followed some but not all of the 

requirements and procedures of the Control Plan and did not 

systematically track the outcomes of the various audits, inspections, and 

reviews. Our review of FEMA’s records for these WYOs showed the 

following: 

• FEMA collected nearly all of the required monthly data submissions. 

• WYOs from our sample whose claims were selected for reinspections were 

reinspected according to the Control Plan’s methodology, and evidence of 

these activities was provided. 

• Biennial audits and underwriting and claims triennial reviews were also 

mostly implemented. FEMA officials said that they focused on claims and 

underwriting reviews because these areas were the most important to 

determining whether claims reimbursements to WYOs were appropriate. 

• Other audits, including audits for cause, state insurance department 

audits, and marketing, litigation, and customer service triennial operation 

reviews, were rarely or never implemented. FEMA officials said that they 

no longer performed marketing, litigation, and customer service 

operations reviews because each of these functions were being reviewed 

by other means. However, FEMA could not provide us with evidence that 

these reviews met the Control Plan’s requirements. 

In addition, we found that WYO compliance with each component of the 

Control Plan was the responsibility of multiple units, and FEMA did not 

maintain a single, comprehensive monitoring system that would allow it to 

ensure compliance with all components of the plan. That is, FEMA did not 

centrally store WYO-specific evaluations, inspections, audits, or reviews 

that were to be performed in accordance with the Control Plan. FEMA 

officials told us that various staff within FEMA or its contractor was 

responsible for ensuring that appropriate documentation of oversight 

efforts were maintained. These officials told us that there was no 

centralized access, either physical or electronic, to all of the 

documentation produced in overseeing WYOs under the Control Plan. 

Systematically tracking compliance with the Control Plan could ensure 

that participating WYOs are collecting appropriate premiums and making 

appropriate claims payments. Since most payments made to WYOs are 

Page 8 GAO-09-455 Flood Insurance
 

based on premiums collected and claims paid, adequate enforcement of 

the Control Plan is important to ensuring that WYOs are being 

compensated appropriately. Because FEMA does not implement all 

aspects of the Control Plan, it cannot ensure that the WYOs are fully 

complying with program requirements. 

FEMA’s current relationship with WYOs facilitates insurance companies’ 

participation in NFIP. But, as previously discussed in this report, this 

relationship is based on a payment structure that may not reflect the 

actual expenses these companies incur. We examined three alternative 

administrative structures that could replace NFIP’s payment arrangement 

with a competitively awarded contract that could lower costs for selling 

and servicing flood insurance policies and administering claims: 

• contracting with one or more insurance companies, 

• contracting with a single vendor (similar to the NFIP Direct program), or 

Alternative WYO 

Program 

Administrative 

Structures Could Be 

Used to Incorporate 

Competition into the 

Payment Process 

• contracting with multiple vendors and maintaining the WYO network. 

Each of these alternatives has advantages and disadvantages in terms of 

the potential impact on the basic operations of administering flood 

insurance policies and adjusting claims, as well as on FEMA’s oversight of 

the program and its contractors. For example, contracting with one or 

more insurance companies might lower FEMA’s costs for the program 

through competitive bidding. But most insurance company officials we 

spoke to said that they did not want to be federal contractors because of 

the regulations that would apply and emphasized that they had agreed to 

participate in the WYO program only because it was not based on an 

explicit federal contract. Further, contracting with a single vendor, as 

FEMA does under the current NFIP Direct program, might be less 

expensive but would almost completely eliminate insurance companies’ 

participation and their network of insurance agents. Experts we spoke 

with also pointed out that using a contractor to administer the flood 

program failed in the early 1980s due to the contractor’s lack of 

experience in administering insurance policies. Finally, contracting with 

multiple vendors to service flood policies would allow FEMA to keep the 

WYO network and might make oversight more effective because FEMA 

would have a contractual relationship with significantly fewer companies. 

But experts we spoke to said that this structure would encroach on WYOs’ 

ability to use a subcontractor to administer their flood line. Flood 

Page 9 GAO-09-455 Flood Insurance
 

consultants, vendors, and trade groups we spoke to were more receptive 

to exploring an alternative structure using multiple vendors. 

Given the significant risk exposure to the federal government, it is 

imperative that FEMA carry out its stewardship responsibilities by 

effectively and efficiently overseeing the WYO program and the more than 

90 participating insurance companies. FEMA has taken some steps to 

address these issues, including taking into consideration the actual 

expenses of a selected number of WYOs before changing its method for 

paying claims expenses and preparing a revised draft of its Control Plan, 

which had not been updated since 1999. Additional opportunities exist for 

FEMA to improve its oversight of the WYO program and ensure that 

payments to the participating insurance companies are based on actual 

company expenses, thereby improving the program’s cost-effectiveness. 

However, our review demonstrates the following: 

Conclusions 

• FEMA sets rates for paying WYOs for their services without knowing how 

much of its payments actually cover expenses and how much goes toward 

profit. Specifically, it does not determine in advance the amounts built into 

the payment rates for estimated expenses and profit; annually analyze the 

amounts of actual expenses and profit in relation to the estimated 

amounts used in setting payment rates; or consider the results of the 

analysis of payments, actual expenses, and profit in evaluating the 

methods for paying WYOs. Moreover, it does not have a sound basis for its 

practice of paying WYOs an additional 1 percent of written premiums for 

operating expenses. As a result, FEMA does not have the information it 

needs to determine whether its payments to WYOs are reasonable. 

• FEMA has not tied its bonus structure to the long-term strategic goals for 

the program. As a result, it cannot be assured that the WYO program is 

achieving its intended goals in the most cost-effective manner. Moreover, 

FEMA does not collect the information on the WYOs’ marketing efforts, 

which is needed to determine whether the companies’ marketing efforts 

are aimed at helping to promote increased participation among targeted 

groups and in targeted areas in line with NFIP goals. 

• FEMA has not consistently implemented all aspects of its current Control 

Plan and does not systematically track WYOs’ compliance with the plan’s 

requirements. As a result, FEMA cannot ensure that the WYOs are fully 

complying with NFIP requirements, including oversight of the various 

payments that depend on accurate premiums collected and appropriate 

claims made. 

Page 10 GAO-09-455 Flood Insurance
 

To provide transparency and accountability over the payments FEMA 

makes to WYOs for expenses and profits, we recommend that the 

Secretary of Homeland Security direct the Under Secretary of Homeland 

Security, FEMA, to 

Recommendations for 

Executive Action 

• determine in advance the amounts built into the payment rates for 

estimated expenses and profit; 

• annually analyze the amounts of actual expenses and profit in relation to 

the estimated amounts used in setting payment rates; 

• consider the results of the analysis of payments, actual expenses, and 

profit in evaluating the methods for paying WYOs; and 

• in light of the findings in this report, immediately reassess the practice of 

paying WYOs an additional 1 percent of written premiums for operating 

expenses. 

To increase the usefulness of the data reported by WYOs to NAIC and to 

institutionalize FEMA’s use of such data, we recommend that the 

Secretary of Homeland Security direct the Under Secretary of Homeland 

Security, FEMA, to 

• take actions to obtain reasonable assurance that NAIC flood insurance 

expense data can be considered in setting payment rates that are 

appropriate, including identifying affiliated company profits in reported 

flood insurance expenses, and 

• develop comprehensive data analysis strategies to annually test the quality 

of flood insurance data that WYOs report to NAIC. 

If FEMA continues to use the WYO bonus program, we recommend that 

the Secretary of Homeland Security direct the Under Secretary of 

Homeland Security, FEMA, to improve it by considering the use of more 

targeted marketing goals that are in line with FEMA’s NFIP goals. 

To improve oversight of the WYO program and compliance with program 

requirements, we recommend that the Secretary of Homeland Security 

direct the Under Secretary of Homeland Security, FEMA, to 

• consistently follow the Control Plan and ensure that each component is 

implemented; 

Page 11 GAO-09-455 Flood Insurance
 

• ensure that any revised Control Plan include oversight of all functions of 

participating WYOs, including customer service and litigation expenses; 

and 

• systematically track insurance companies’ compliance with and 

performance under each component of the Control Plan and ensure 

centralized access to all the audits, reviews, and data analyses performed 

for each participating insurance company under the Control Plan. 

We received written comments on a draft of this report in a letter from the 

Department of Homeland Security’s Director, Departmental GAO/OIG 

Liaison Office, which is reproduced in appendix III. FEMA concurred with 

our recommendations regarding (1) the usefulness of the data that WYOs 

report to NAIC, (2) the alignment of the bonus structure with long-term 

NFIP goals, and (3) the oversight of the WYO program. First, the letter 

noted that FEMA would work with NAIC to improve the quality of the 

flood expense data that WYOs report and would include the data as an 

additional item in determining the annual WYO expense allowance. 

Second, the letter stated that FEMA planned to examine the incentive 

bonus prior to making arrangements with WYOs for 2010 and 2011. FEMA 

said that this examination is to include an assessment of the incentive’s 

effectiveness in increasing policies; the need for such an incentive; and 

possible alternatives to it, including identifying target markets where 

penetration is low and providing incentives for increasing policies in those 

markets only. Third, FEMA concurred with our recommendations 

regarding WYO program oversight, although it stated that the litigation, 

marketing, and customer service reviews were no longer included in the 

revised Control Plan because they were completed in other ways. Given 

the newness of these changes, this review did not include an assessment 

of FEMA’s compliance with these alternative methods or their robustness 

relative to the Control Plan. Finally, the letter stated that FEMA had 

implemented new processes to improve the monitoring of WYOs’ 

compliance with the Control Plan and would continue to look for ways to 

improve oversight in the future. While the letter did not provide details 

about the new monitoring processes, we are encouraged by these new 

steps and will be following up on these activities in our ongoing work. 

Agency Comments 

and Our Evaluation 

FEMA did not concur with our recommendations on improving the 

transparency and accountability of payments made to WYOs, specifically 

our recommendation that FEMA consider WYOs’ actual expenses and 

profits when setting its payment rates. In its response, FEMA provided its 

views on issues that it believes impacted our analysis and the conclusions 

Page 12 GAO-09-455 Flood Insurance
 

we drew from our work. Also, FEMA discussed why it does not consider 

actual flood insurance expense information. We disagree with FEMA’s 

assertion that the issues it raised resulted in our reaching misleading 

conclusions, and we continue to recommend that when setting payments 

rates, FEMA should consider actual flood insurance expenses and the 

profits that result from its payments to WYO companies. 

Specifically, FEMA stated that our review was limited to only six 

companies, which FEMA believes are the low-cost operators for the five 

other lines of insurance used to determine the WYO expense allowance. 

FEMA stated that it seems reasonable that these companies would also 

have some of the lowest flood operating expenses and, therefore, 

conclude that the results of our analysis can be expected to significantly 

understate the operating expenses of the WYO companies as a whole. Our 

analysis of the expenses and profits of these companies, which 

represented 53 percent of total net premiums written, 71 percent of total 

claims losses paid, and 59 percent of total expense payments made by the 

WYO program for fiscal years 2005 to 2007, demonstrates the importance 

of information that FEMA does not have about actual expenses and profits 

that it was paying—information that we consider critical for making 

decisions regarding the proper administration of NFIP. 

FEMA stated that we did not perform a review of the stability of the 

federal flood expenses because the results for other years were not 

available to us. FEMA also stated that a review of the stability of federal 

flood expenses would show the inadvisability of reaching any conclusions 

from just 1 year of data and that basing compensation on a single year of 

data is always questionable, especially since our analysis, and the 

adjustments and assumptions we made in conducting our analysis, have 

not been vetted. However, our analysis showed that variances in profit 

over the 3 years we reviewed were caused by, among other things, 

variations in the expenses incurred to adjust and pay claims losses that 

also fluctuated from year to year. Moreover, we recognize that setting 

payments based on a single year of data may not be appropriate. Our 

recommendation that FEMA consider actual flood insurance expenses and 

profits in setting payment rates would not limit FEMA’s consideration of 

actual expenses and profits to a single year of data. We anticipate that 

FEMA would annually perform an analysis of actual expenses and profits 

for the current year, and then incorporate that result into its analysis of 

these data covering the number of years that may be appropriate in the 

view of FEMA management. The results of the longitudinal analysis would 

be used to evaluate the rates being used and to determine in advance if a 

change to the rates is needed. Moreover, we agree that time should be 

Page 13 GAO-09-455 Flood Insurance
 

allowed for others, such as the WYO companies and NAIC, to weigh in on 

the methodology for analyzing payments to the WYOs and their actual 

flood expenses. Importantly, however, any adjustments we made to the 

flood expenses reported by the WYOs for the purpose of our analysis were 

the result of information we obtained from and numerous discussions with 

WYO company officials. 

FEMA stated that actual expenses will be as much of a lagging indicator as 

the current methodology that uses A.M. Best numbers. FEMA also stated 

that even if actual expense data is considered to be completely reliable, by 

the time NFIP could use it to lower expense ratios, about 2 to 3 years 

would have lapsed. FEMA uses the average expenses for five lines of 

property insurance other than the federal flood line for setting the 

operating expense payment rate. We recognize that considering WYOs’ 

actual flood expenses will be a lagging indicator of the costs to service 

flood insurance policies. However, it will be a better indicator than 

FEMA’s current methodology precisely because it will not reflect the trend 

of expenses for other lines of property business. Importantly, data now 

used to set payment rates based on other lines of business are subject to 

events and market forces that affect their expense ratios, but which are 

not relevant to the WYO program. Our recommendation that FEMA use 

actual flood expenses to set payment rates would differ from its current 

methodology in one important aspect: actual expenses and not a proxy 

would be used to set those rates. 

FEMA stated that our analysis assumes that actual WYO company 

expenses are stable, which FEMA concludes could yield misleading 

results. FEMA also stated that during the last 5 years insurance companies 

have managed to significantly reduce their operating expenses in other 

lines, and suspects that many of those efficiency gains also made it into 

companies’ flood insurance operations. Our analysis was not based on any 

assumptions about the trends in WYO company expenses, in general, or 

flood expenses, in particular. Rather, we analyzed the actual flood 

expenses of selected companies over a 3-year period and compared the 

payments to the companies’ actual flood expenses. As previously 

indicated, we observed fluctuations from year to year in actual flood 

expenses—in particular, expenses for adjusting and processing claims. 

Our recommendation that FEMA consider actual flood expenses and profit 

when setting payment rates will move FEMA from not knowing 

(“suspecting”) the trend in actual flood expenses to considering those 

trends when setting rates, and not continuing to utilize proxies of other 

lines of business and the trends in those other lines that may not be 

Page 14 GAO-09-455 Flood Insurance
 

relevant to the WYO program. Whether actual expenses are stable or 

otherwise is not relevant. 

FEMA stated that while we acknowledge in the body of our report that the 

years we reviewed—2005 to 2007—included the heaviest loss years in the 

history of the program and that these years are not indicative of typical 

years for loss adjustment expenses, we do not carry these caveats forward 

to our conclusions. FEMA stated that this results in a significant distortion 

of the expense reimbursement to WYO companies for the loss adjustment 

expenses. We did consider the unusually high losses in 2005 and 2006 

when reaching our conclusion that FEMA sets rates for paying WYOs for 

their services without knowing how much of its payments cover expenses 

and how much is for profit. An analysis of actual expenses over time 

would enable FEMA to identify and correlate trends in actual WYOs’ flood 

expenses to flood events and related claims losses. In fact, such an 

analysis could have helped FEMA to determine before the hurricanes of 

2004 and 2005 that its method for paying claims processing expenses 

would result in significant payments in excess of actual expenses in heavy 

loss years. 

FEMA also stated that it addressed the problem that led to outsized WYO 

compensation by changing how WYOs are paid for claims processing 

expenses—referred to as Unallocated Loss Adjustment Expenses (ULAE). 

As support, FEMA cited the fact that WYOs’ compensation for ULAE 

would have been $29 million less and $267 million less in fiscal years 2005 

and 2006, respectively, and would have been $9 million more in 2007. This 

would have been a combined decrease of $287 million for the 3 years had 

this new payment schedule been in place then. Further, FEMA said that 

had the new payment schedule been in place in those years, it is likely that 

most, if not all, of the $155 million in profit from claims adjusting and 

processing that we reported for the six companies we reviewed would 

disappear. Prior to 2008, FEMA paid WYOs 3.3 percent of claim losses 

incurred for claims processing expenses. Beginning in 2008, FEMA began 

paying the WYOs 1 percent of net premiums written and 1.5 percent of 

claim losses incurred for their claims processing expenses. Our analysis 

showed that for the years 2005 to 2007 FEMA paid the six WYOs in our 

analysis profits of $327.1 million, including $155.2 million for claims 

adjusting and processing expenses, without knowing the actual flood 

expenses of any of these companies. FEMA’s statements that it is not clear 

how much of its “savings” would have been borne by the six WYOs we 

reviewed and that FEMA can only speculate as to the effect the change 

would have on the companies’ profit support our finding that FEMA does 

not know how much of its payments are for actual flood expenses and 

Page 15 GAO-09-455 Flood Insurance
 

how much are for profit. Our point is that FEMA should know how much it 

is paying for expenses and for profit. 

In our judgment, considering actual expenses and profit in setting payment 

rates would result in a fair and equitable treatment of policyholders and 

the WYO companies over time, as well as serve to better protect the 

interests of taxpayers who ultimately bear the risk of losses from the WYO 

program. In discussing why it does not consider actual flood insurance 

expenses in setting payment rates, FEMA said that the WYO flood 

insurance program is based on companies’ applying their normal business 

practices to NFIP and that these practices are bound to vary from 

company to company, and that it would be impossible for NFIP to 

accurately calculate actual expenses for 90 companies. FEMA also said 

that because of these two factors, and the fact that in the early years of the 

program actual flood insurance expenses of the companies’ were not 

available, the decision was made to use information on other lines of 

insurance business from A. M. Best as a proxy in setting rates for 

payments to NFIP companies. FEMA also stated that even now, when 

some WYOs’ flood insurance expense information is available, FEMA is 

not certain how accurate this information is, and that its management is 

skeptical that using actual flood insurance expenses, as GAO 

recommends, would yield lower payment rates than would result from the 

proxies that the program uses to set payment rates. FEMA further stated 

that it will work with NAIC to improve the quality of the flood expense 

data. 

We agree that business practices will vary among the participating 

companies and we agree with FEMA’s statement that actual flood 

insurance expenses of WYOs were not readily available 25 years ago, when 

the program started. However, the National Association of Insurance 

Commissioners (NAIC) began requiring that companies report financial 

information on their federal flood insurance business in 1997. Therefore, 

continuing to use other lines of business as proxies for setting WYO 

program payment rates is no longer necessary. Moreover, continuing with 

the same practice without assessing the reasonableness of the payments 

made to WYOs by comparing those payments to the WYOs’ actual 

expenses does not provide sufficient justification or accountability for 

hundreds of million of dollars in federal program expenses. 

We are encouraged by FEMA’s statement that, in the future, it will 

consider actual flood insurance expenses WYOs report to NAIC as an 

additional item when determining the annual WYO expense allowance, 

which is intended to cover the companies’ operating, marketing, and 

Page 16 GAO-09-455 Flood Insurance
 

administrative expenses. While this is a positive step, given the changes in 

the program and available information, we continue to recommend that 

FEMA consider all categories of expenses when setting payment rates, 

including payments for commissions, claims adjusting, and other claimsrelated expenses. Consideration of all categories of actual flood insurance 

expenses reported by WYOs in setting payment rates for these expenses, 

as well as the profits that the program pays to the companies for their 

participation in NFIP, is necessary for FEMA to know whether its 

payments to the WYOs are reasonable. 

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution of this report until 30 

days from the report date. At that time, we will provide copies to the 

Chairman of the Senate Committee on Banking, Housing, and Urban 

Affairs; the Chairman and Ranking Member of the Senate Committee on 

Homeland Security and Governmental Affairs; the Chairman and Ranking 

Member of the House Committee on Financial Services; the Chairman and 

Ranking Member of the House Committee on Homeland Security; and 

other interested committees. We are also sending a copy of this report to 

the Secretary of Homeland Security and other interested parties. In 

addition, the report will be available at no charge on our Web site at 

http://www.gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

Page 17 GAO-09-455 Flood Insurance
 

If you or your staff has any questions about this report, please contact 

Orice Williams Brown at (202) 512-8678 or willamso@gao.gov, or Jeanette 

M. Franzel at (202) 512-2600 or franzelj@gao.gov. GAO staff who made 

major contributions to this report are listed in appendix IV. 

Sincerely yours, 

Orice Williams Brown 

Director, Financial Markets 

 and Community Investment 

Jeanette M. Franzel 

Managing Director, Financial 

 Management and Assurance 

Page 18 GAO-09-455 Flood Insurance
Appendix I: Briefing Slides 

Page 19 GAO-09-455

Appendix I: Briefing Slides 

1

Opportunities Exist to Improve Oversight of the 

WYO Program 

Senate Committee on Banking, Housing,

and Urban Affairs

June 19, 2009

 Flood Insurance 
Appendix I: Briefing Slides 

2

Overview

• Objectives

• Summary of Findings

• Background

• Scope and Methodology

• Discussion of Findings and Recommendations

Page 20 GAO-09-455 Flood Insurance
Appendix I: Briefing Slides 

3

Objectives 

Our objectives were to: 

• Assess the Federal Emergency Management Agency’s (FEMA) practice of 

determining the amounts it pays write-your-own (WYO) companies for selling 

and servicing flood insurance and adjusting claims.

• Examine how FEMA evaluates the effectiveness of its WYO bonus incentive 

structure and whether bonuses paid reflect actual efforts to market flood 

insurance policies.

• Evaluate the extent to which FEMA oversees the WYO companies, including 

collecting external audits, reinspecting flood claims, and conducting 

operational reviews.

• Evaluate the advantages and disadvantages of three alternative arrangements 

for selling and servicing flood insurance policies and adjusting claims using a 

competitively awarded contract.

Page 21 GAO-09-455 Flood Insurance
Appendix I: Briefing Slides 

4

Summary of Findings

• FEMA does not systematically consider the WYO companies’ actual flood expenses when it determines the amount it pays the companies. Consequently, FEMA does not have the information it needs to determine (1) whether its 

payments are appropriate and (2) the amount of profit to the WYO companies that are included in its payments.1

• FEMA’s bonus program lacks the necessary information to evaluate the incentive’s effectiveness, and the bonus that FEMA pays WYO companies does not reflect the agency’s marketing priorities. 

• FEMA followed some but not all of the WYO oversight requirements for the 10 insurance companies in our sample and did not systematically track the 

outcomes of the audits, inspections, and reviews. 

• Three alternative arrangements—each with advantages and disadvantages— could replace FEMA’s current payment structure: a competitively awarded contract with either an insurance company, a single vendor, or a group of vendors. If it decides to make a change, Congress would have to balance the advantages and disadvantages of each option, particularly in regard to cost, oversight, and program coverage.

1For the purpose of this review, we considered profits to be the difference between the amounts paid to the WYO companies 

and the companies’ actual flood insurance expenses on a pretax basis.

Page 22 GAO-09-455 Flood Insurance
Appendix I: Briefing Slides 

5

Background

• Congress established the National Flood Insurance Program (NFIP) in 1968 to 

provide homeowners and businesses with insurance coverage against flood 

damage as an alternative to costly disaster assistance. As of September 2008, 

NFIP had 5.7 million policies in force. 

• The WYO program, which was established in 1983, is administered by FEMA 

and as of September 2008, had about 90 participating insurance companies, 10 

of which collect approximately 80 percent of NFIP’s premium revenue.

• In FY 2008, the WYO program administered 97 percent of FEMA flood insurance policies. The remaining 3 percent were administered under the 

NFIP Direct program, which is run by a federal contractor. 

• The federal government assumes the liability for the insurance coverage and sets rates and coverage limitations, among other responsibilities.

• WYOs sell and service flood insurance policies and adjust and pay claims on FEMA’s behalf; in turn, FEMA pays the companies for their services. 

• FEMA annually enters into arrangements with WYO companies that set forth the 

roles and responsibilities of the federal government and the participating 

insurance companies, including the services the WYO companies will provide 

and the basis for the amounts the government will pay the companies for 

providing those services.

Page 23 GAO-09-455 Flood Insurance
Appendix I: Briefing Slides 

6

Background

• Effective oversight of the WYO program depends on having accurate premiums 

and claims information to ensure that participating insurance companies are 

complying with program requirements.

Figure 1: WYO Program Requirements

Subsidy arrangement FEMA $

Financial control plan

WYO

FEMA Policy

holder WYO

Accurate

expense payments

calculations depend

on accurate premium

and claim information

Expense payments

Premiums Premiums

Claims Claims

$

$

$

$

Source: GAO analysis.

Page 24 GAO-09-455 Flood Insurance
7

Background

• As noted in our 2007 report, WYO payments ranged from $695 million in FY 

2004 to almost $1.6 billion in FY 2006, the year most of the Hurricane Katrina 

payments were made.2

• In most years, WYOs receive between 30 and 40 percent of the total flood 

insurance premiums they collect, but the companies received more as a result of 

the 2004 and 2005 hurricanes.

Figure 2: Amounts Paid to WYOs in Dollars and as a Percentage of Premiums, 

FY 2004 through 2008

2GAO, National Flood Insurance Program: FEMA’s Management and Oversight of Payments for Insurance Company Services Should Be Improved, GAO-07-1078 (Washington, D.C.: Sept. 5, 2007). 

Page 25 GAO-09-455 Flood Insurance
8

Background

0.5 – 2 percent of net written premium.

Actual expenses incurred (e.g., litigation, engineering, and 

appraisal).

3.3 percent per claim losses incurred.

From $60 to $1,250 in flat fees for claims up to $50,000; fees for 

claims over $50,000 are based on a percentage of the claim loss,

beginning at 3 percent and declining to 2.1 percent for claim 

losses of more than $250,000.

16.2 percent, 15.8 percent, and 15.2 percent of net written 

premium in fiscal years 2005, 2006, and 2007, respectively.

15 percent of net written premium. 

Basis for calculating the payment, per the FY 2007 subsidy 

agreement

Incentive bonuses None

Additional adjusting and None

other expenses

Established in 1983 based on loss adjustment 

expense data for other lines of insurance and 

remained unchanged through 2007. Beginning in 

2008, FEMA changed its payment rate for these 

expenses.

Claims processing 

expenses

Determined periodically based on information FEMA 

collects from independent adjusting firms on their cost 

of adjusting losses in other lines of insurance 

business.

Claims adjustment 

expenses

Determined annually based on the average industry 

operating expenses for five lines of property 

insurance, as reported by A.M. Best. 

Operating expenses

Established in 1983 after consultations with industry 

representatives and have not changed since.

Commission expenses

Types of payments Proxy to determine payment

Source: FEMA

Table 1: Types of Payments Made to WYO Companies

Page 26 GAO-09-455 Flood Insurance
9

Background

• Homeowners who have mortgages from federally-regulated lenders and whose 

properties are located in participating communities that are identified as being 

in special high-risk flood hazard areas (SFHAs) are required to purchase flood 

insurance.

• Most home and business owners with properties in participating communities 

are eligible to purchase flood insurance, even if their properties do not lie in 

SFHAs or do not carry a mortgage.

• According to a February 2006 Rand Corporation study, about 50 percent of 

homeowners inside SFHAs and less than 1 percent of homeowners outside 

SFHAs have flood insurance policies. 

Figure 3: Market Penetration in Special Flood Hazard Areas

Page 27 GAO-09-455 Flood Insurance
10

Background

• FEMA’s Financial Control Plan Requirements and Procedures (Control Plan) is 

designed to oversee participating insurance companies and ensure that they 

are implementing the WYO program in accordance with NFIP regulations. 

Figure 4: Four Major Components of the Control Plan

Page 28 GAO-09-455 Flood Insurance
11

Scope and Methodology

• To assess FEMA’s practice for determining the amount that it pays WYO companies, we compared the payments FEMA made to six WYO companies to 

the actual expenses that the companies reported to the National Association of Insurance Commissioners (NAIC) for calendar years 2005–2007.3 These six 

companies represent 53 percent of total WYO program net premiums written, 71 

percent of total WYO program claim losses paid, and 59 percent of total expense payments FEMA made to the approximately 90 companies for fiscal years 2005-2007. We also interviewed FEMA officials, WYO company officials, and NAIC officials. We did not audit the financial information the companies 

submitted to FEMA, NAIC, or us. We reviewed this information and performed 

other procedures, including converting FEMA’s fiscal year WYO data to calendar year amounts, to ensure that the data were sufficiently reliable for our purposes. 

• To evaluate the effectiveness of its WYO bonus incentive structure and 

determine whether bonuses paid reflect actual efforts to market flood insurance 

policies, we discussed the bonus payment methodology with FEMA staff, WYO companies, and other stakeholders and reviewed documents relating to the methodology used to make the bonus payments.

3NAIC is an organization of state insurance regulators that, among other things, issues financial reporting requirements and

guidance for insurance companies. Property and casualty insurance companies must submit an annual statement, including

separate amounts for federal flood insurance, to NAIC. Companies must also prepare audited financial statements and 

reconcile amounts in those statements with the annual statement.

Page 29 GAO-09-455 Flood Insurance
12

Scope and Methodology

• To evaluate the extent to which FEMA oversees the WYO companies, we tested 

FEMA’s compliance with aspects of the Control Plan. In so doing, we discussed 

procedures with appropriate FEMA staff, requested and reviewed all the 

documents that are required under the plan, and discussed these requirements 

with the WYO companies and other stakeholders. We also selected a sample of 

10 WYO companies that represented approximately 50 percent of the flood 

insurance premiums written in fiscal year 2007, including companies of various 

sizes that incurred different levels of losses and had different operating models 

(e.g., vendor usage). We used a data collection instrument to facilitate our 

review of the required documents for the 10 WYOs selected. 

• As requested, we identified three possible alternatives that would incorporate a 

competitive feature. To evaluate the advantages and disadvantages of these 

alternatives to the WYO program, we discussed the alternatives with FEMA 

staff; the WYO companies in our sample; and other stakeholders, such as flood 

insurance vendors and consultants.

Page 30 GAO-09-455 Flood Insurance
13

Objective 1: FEMA Does Not Consider Actual Expenses 

When Paying WYO Companies

• Since the inception of the WYO program, FEMA has used various proxies to 

determine the amounts it pays WYO companies. FEMA officials stated that 

proxies were initially used in part because actual flood insurance expense data 

were not readily available.

• Without considering actual expense data, FEMA does not have the information it 

needs to determine whether its payments are appropriate. Further, FEMA does 

not have the information it needs to determine the amount of profit to the 

insurance companies that is included in its payments.

• For the purposes of this review, we considered profits to be the difference 

between the amounts paid to the WYO companies and the companies’ actual 

flood insurance expenses on a pretax basis. The companies report their flood 

insurance expenses to NAIC, along with the expenses for their other property 

and casualty lines of business.4 Our calculation of the companies’ pretax profit 

will not equal the pretax profit for the flood line of business the companies 

reported to NAIC because, among other things, the NAIC amounts include 

allocations of miscellaneous other companywide income and expenses.

4 For the purposes of our analysis, we adjusted the flood insurance expenses that our selected WYO companies reported to 

NAIC to assist in comparing expense payments made by FEMA to the WYO companies’ actual expenses. 

Page 31 GAO-09-455 Flood Insurance
14

Objective 1: FEMA Does Not Consider Actual Expenses 

When Paying WYO Companies

• In accordance with on our Standards of Internal Control in the Federal 

Government, FEMA should ensure that its payment rates to WYO companies are appropriate by, for example, comparing payments to actual flood insurance 

expenses.5

• Further, federal managerial cost accounting standards state that reliable cost information is critical to the proper allocation and stewardship of federal resources and that actual cost information is an important element for agency management to consider when setting payment rates. 6

5GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). 6Statement of Federal Financial Accounting Standards (SFFAS) No. 4, Managerial Cost Accounting Concepts and Standards 

for the Federal Government.

Page 32 GAO-09-455 Flood Insurance
15

Objective 1: NAIC Provides Information on WYO 

Companies’ Actual Flood Insurance Expenses

• In response to a request by FEMA, in 1997 NAIC began requiring that 

companies report financial information on their federal flood insurance business 

as part of their annual filings.

• However, FEMA continued its practice of not systematically considering the actual historical flood insurance expense data that WYO companies submitted to 

NAIC when setting its expense payment rates. FEMA also did not consider this 

data after the fact, to compare payments it had made to companies’ actual 

annual expenses for the year or to evaluate its payment methodologies.

• We recognize that the consistency of WYOs’ reporting to NAIC needs to be improved in order for the benefits of the data to be fully realized. For example, 

we noted that, among other things, some companies reported their flood 

insurance expenses to NAIC after offsetting them with the payments they 

received from FEMA. However, we were able to use NAIC flood insurance data, 

supplemented with information obtained from WYO company officials, to 

compare actual flood insurance expenses that our selected companies incurred 

and the payments they received. 

Page 33 GAO-09-455 Flood Insurance
16

Objective 1: FEMA Has Made Some Changes to Its 

Methods for Paying WYO Companies

• Since 1983, FEMA has occasionally modified its methods for determining the amount of expense payments for certain WYO expenses. But in making these 

changes, FEMA has not considered the amount of actual flood insurance 

expenses incurred by the WYO companies, with one exception—a 2008 change in the method for paying claims processing expenses. 

• FEMA also did not systematically consider actual flood insurance expenses in deciding to continue to increase the amount of operating expense payments by 1 percent of written premiums in each year since 2001. 

• FEMA instituted this increase after some WYO companies told FEMA that their actual expenses to service flood insurance policies exceeded the industry 

average for the five lines of property insurance other than flood that are used as 

a proxy to set this payment rate. These five lines of property insurance are fire, 

allied lines, farmowners multiple peril, homeowners multiple peril, and 

commercial multiple peril (nonliability portion). 

• FEMA's decision increased operating expense payments to the WYO companies in 2001 and each year since; in fiscal year 2007, the additional 1 percent of written premiums was about $25 million. However, we found that the payments to the WYO companies we reviewed exceeded their actual operating expenses before these additional payments.

Page 34 GAO-09-455 Flood Insurance
17

Objective 1: FEMA Has Made Some Changes to Its 

Methods for Paying WYO Companies

• FEMA did consider actual flood insurance expenses in making a 2008 change in 

its method of paying claims processing expenses. 

• In response to the significant increase in total payments made to WYO 

companies in fiscal years 2005 and 2006 after Hurricane Katrina, beginning in 

fiscal year 2008, FEMA began paying claims processing expenses that took into 

account actual flood expense data obtained from a selected number of WYO 

companies.

• FEMA estimated that its claims processing payments for all WYO companies 

would have been reduced by approximately $300 million for the period 2005 and 

2006 had this new methodology been in effect.

• These examples of operating and claims payments that exceeded WYO 

expenses illustrate the need to consider annual actual flood expense data in 

administering the WYO program.

Page 35 GAO-09-455 Flood Insurance
18

Objective 1: FEMA’s Expense Payments to WYOs 

• FEMA pays WYO companies to sell and service flood insurance policies and to adjust claims. FEMA also pays WYO companies bonuses for achieving certain marketing goals. 

• FEMA expense payments to WYO companies are determined by applying various proxies to either premiums written or claim losses (see table 2). 

• The increase in claim losses paid in fiscal year 2006 caused a significant increase in 

payments to WYO companies for adjusting and paying those claims (see table 3).

Table 2: WYO Program Net Written Premium, Claim Losses Paid, and Expense Payments to WYO Companies, 

Fiscal Years 2005 to 2007 (unaudited)

(Dollars in millions)

$793.8

74.7

$868.5

$738.2

805.8

$1,544.0

$652.6

329.6

$982.2

Expense payments to WYO companies

-- based on net written premium

-- based on claim losses

Total

Claim losses paid $2,691.5 $16,091.7 $897.7

Net written premium $1,940.5 $2,288.2 $2,535.4

FY05 FY06 FY07 Category 

Source: NFIP financial statements.

Page 36 GAO-09-455 Flood Insurance
19

Objective 1: FEMA’s Expense Payments to WYOs

Table 3: Types of Expense Payments Made to WYO Companies, Basis for Payments, and Amounts Paid, 

Fiscal Years 2005 to 2007 (unaudited)

(Dollars in millions)

0.5–2 percent of net written premium 39.0 44.3 20.0 b Incentive bonuses

Total $ 982.2 $1,544.0 $ 868.5

Additional adjusting expenses Actual expenses incurred 6.4 6.9 12.8 c

Claims processing expenses 3.3 percent per claim losses incurred 236.7 376.5 26.2

From $60 to $1,250 in flat fees for claims up to $50,000; fees 86.5 422.4 35.7

for claims over $50,000 are based on a percentage of the 

claim loss, beginning at 3 percent and declining to 2.1 

percent for claims losses of more than $250,000

Claims adjustment expenses

16.2 percent, 15.8 percent, and 15.2 percent of net written 322.5 350.7 393.5

premium in fiscal years 2005, 2006, and 2007, respectively a

Operating expenses

Commission expenses 15 percent of net written premium $ 291.1 $ 343.2 $ 380.3

Types of payments Basis for payments FY05 FY06 FY07

Amounts paid

Source: NFIP financial statements. 

Notes: GAO calculations of commissions and operating expenses are derived from written premiums net of refunds and expense allowance amounts reported in the NFIP 

financial statements.

a Operating expense amounts include miscellaneous expenses incurred of $8.2 million, ($10.8) million, and $8.1 million for fiscal years 2005, 2006, and 2007, respectively.

b Incentive bonus amounts represent bonus expenses accrued during the year in which WYO companies earned them. Bonuses are paid in the fiscal year following the year in 

which they are earned. Bonuses paid in fiscal years 2005, 2006, and 2007 were $31.6 million, $21.4 million, and $44.6 million, respectively.

C Additional adjusting expenses include engineering, adjuster, litigation, and appraisal expenses.

Page 37 GAO-09-455 Flood Insurance
20

Objective 1: FEMA’s Payments to Six WYO Companies 

Exceeded Their Actual Flood Expenses

• We compared FEMA’s payments to six WYO companies to the companies’ 

actual flood expenses for the 3 calendar years 2005, 2006 and 2007. 

• The total payments FEMA made to the six companies we tested exceeded the 

companies’ actual expenses reported to NAIC (as adjusted) by $327.1 million. 

This profit, or excess of payments over expenses, represented 16.5 percent of 

the payments made to those companies for the 3-year period ending 

December 31, 2007.

• The significant profit in 2006 (see table 4) was primarily attributable to payments 

the companies received to process claim losses incurred as a result of the 2005 

hurricanes. In 2007, total payments declined primarily because of reduced claim 

losses. These factors, combined with the companies’ adjustments to their loss 

adjustment expenses reported to NAIC, contributed to payments in excess of 

expenses for 2007.

• Amounts representing profit distributions should be excluded from WYO 

company expenses for FEMA’s purpose of considering actual expenses when 

setting payment rates. For example, we found that the actual expenses of one of 

our six WYO companies included payments of over $30 million made in 2007 

under service agreements with an affiliated company. It is not known what 

portion of these payments represent expense and profit distributions between 

the affiliated companies. Excluding affiliated company profits would increase the 

profit-excess of payments over expenses shown in table 4.

Page 38 GAO-09-455 Flood Insurance
21

Objective 1: FEMA’s Payments to Six WYO Companies 

Exceeded Their Actual Flood Expenses

Table 4: Total Expense Payments, Total Reported Expenses (as Adjusted), and Total Profit – Excess of 

Payments over Expenses, for Six Selected Companies, Calendar Years 2005 to 2007

(Dollars in millions)

16.5% d Total $1,982.8 $1,655.7 $327.1

19.4% c 802.2 647.0 155.2

Claims adjusting and processing 

expenses

n/a 50.2 b Incentive bonuses 50.2

10.8% a Commission and operating expenses $1,130.4 $1,008.7 $121.7

Profit – excess of 

payments over 

expenses (%)

Profit – excess of 

payments over 

expenses ($)

Reported expenses 

Types of payments Expense payments per NAIC, adjusted 

Source: GAO analysis of WYO companies’ data.

a Profit (excess of payments over commissions and operating expenses) for calendar years 2005, 2006, and 2007 was 11.6 percent, 9.9 percent, and 10.9 

percent, respectively.

b Reported WYO company expenses attributable to marketing activities are not separately identifiable.

c Profit for calendar years 2005, 2006, and 2007 was 9.1 percent, 74.5 percent, and (24.0) percent, respectively. Variances in the profit ratio per year are caused 

by differences in the nature and amount of claim losses, the amount of expenses to adjust and pay these losses, and differences between when companies 

recognize actual expenses and when they are paid for those expenses.

d Total profit for calendar years 2005, 2006, and 2007 was 11.6 percent, 28.2 percent, and 13.4 percent, respectively.

Page 39 GAO-09-455 Flood Insurance
22

Objective 1: Recommendations

• To provide transparency and accountability over the payments FEMA makes to 

WYO insurance companies for expenses and profit, we recommend that the 

Secretary of Homeland Security direct the Under Secretary of Homeland 

Security, FEMA, to:

• determine in advance the amounts built into the payment rates for estimated 

expenses and profit;

• annually analyze the amounts of actual expenses and profit in relation to the 

estimated amounts used in setting payment rates;

• consider the results of the analysis of payments, actual expenses, and profit 

in evaluating the methods for paying WYOs; and

• in light of the findings in this report, immediately reassess the practice of 

paying WYOs an additional 1 percent of written premiums for operating 

expenses.

Page 40 GAO-09-455 Flood Insurance
23

Objective 1: Recommendations (continued)

• To increase the usefulness of the data reported by WYO companies to NAIC 

and to institutionalize FEMA’s use of such data, we recommend that the 

Secretary of Homeland Security direct the Under Secretary of Homeland 

Security, FEMA, to:

• take actions to obtain reasonable assurance that NAIC flood insurance 

expense data can be considered in setting payment rates that are

appropriate, including identifying affiliated company profits in reported flood 

insurance expenses; and

• develop comprehensive data analysis strategies to annually test the quality of flood insurance data that WYO companies report to NAIC. 

Page 41 GAO-09-455 Flood Insurance
24

Objective 2: FEMA Has Made Bonus Payments 

to WYO Companies

• First begun in 1989, WYO marketing bonuses were discontinued in 1991 after FEMA 

could not evaluate whether policy growth was due to WYOs’ efforts, flood events, the economy, or the mandatory purchase requirement.

• In 1995, FEMA restarted a new bonus program to allow WYOs to make up for a 2 percent reduction in the subsidy arrangement expenses (from 32.6 percent to 30.6 percent of premiums collected).

• FEMA regulations stated that the bonus was to be determined based on whether WYOs 

met marketing goals set each year.

• FEMA has maintained an overall goal for the WYO bonus and for its current Floodsmart 

media marketing campaign of increasing flood policies by 5 percent annually.

• FEMA has administratively set a distribution formula that awards a bonus of 0.5 percent to 2 percent of the premiums retained if WYOs achieve a 2 percent to 5 percent net growth in policies.

Figure 5: Timeline of FEMA’s Bonus Programs

Page 42 GAO-09-455 Flood Insurance
25

Objective 2: Bonuses Have Fluctuated Over Time

• In 2005, following a record storm season, 60 percent of the WYOs received over $21 million in bonus payments.

• In 2006, the year after Hurricane Katrina, payments more than doubled, with 67 of 88 WYOs receiving almost $45 million in bonuses, and 59 receiving the largest possible bonus.

• In 2007, bonuses paid were closer to the 2005 figure, with about 60 percent of WYOs receiving bonuses.

• In 2008, bonuses dropped to $9.2 million, with about 40 percent of WYOs receiving bonuses, reflecting a worsening economy and lower policy retention.

Figure 6: Bonus Payments Made to WYOs, Fiscal Years 2005 through 2008

Note: Percentages may not total 100% due to rounding.

Page 43 GAO-09-455 Flood Insurance
26

Objective 2: External Factors Affect Sales of Flood 

Insurance Policies

• FEMA and WYO officials agreed that other factors outside of the control of the 

WYOs may have accounted for changes in the number of flood policies, including

• consumer awareness after a flood event,

• FEMA’s Floodsmart marketing program, 

• housing market expansion/contraction, and

• economic growth/recession.

• WYO bonuses have generally tracked flood losses.

Figure 7: WYO Bonuses Earned and Flood Losses

Page 44 GAO-09-455 Flood Insurance
27

Objective 2: Bonuses Benefit Mostly Newer 

and Smaller WYOs

• FEMA and WYO officials also agreed that the bonus formula favored newer WYOs with fewer flood insurance policies.

• For example, in FY 2008: 

• Of the nine WYOs collecting premiums of $100 million or more (74 percent of premiums written), four qualified for a bonus, and none qualified for the top (2 percent) bonus. These nine WYOs 

average 19 years selling flood insurance.

• The 22 WYOs that received the top (2%) bonus accounted for less than 3 percent of all premiums. Nine had premiums of less than $1 million, and 10 had premiums of between $1 million and $10 million. The largest WYO receiving the top bonus had $14.2 million in premiums. These 22 WYOs averaged 6 years selling flood insurance.

Figure 8: FY 2008 Premiums Written and Bonuses Received by WYO Size

Page 45 GAO-09-455 Flood Insurance
28

Objective 2: FEMA Has Not Evaluated WYOs’ 

Marketing Efforts

• FEMA’s bonus distribution formula is based on the number of net new policies 

the WYOs sell. Moreover, FEMA has not tied the bonuses to WYOs’ actual 

marketing efforts.

• FEMA’s regulations state that the purpose of the premium withheld by WYOs 

(including an adjustment for the bonus) is in part to pay them for marketing 

expenses. 

• However, external factors such as recent flood events can help drive sales of 

flood insurance. FEMA does not take such factors into account.

• Further, FEMA has not evaluated the bonus since it was reinstated in 1996 or 

evaluated the feasibility of using a more targeted strategy.

• Under the Government Performance and Results Act of 1993, systematic 

studies should be conducted periodically or on an ad hoc basis to assess how 

well a program is working. The studies are often conducted by experts external 

to the program, either inside or outside the agency, as well as by program 

managers. When program results could be influenced by external factors, 

agencies can use intermediate goals to measure the discrete contribution to a 

specific result.

Page 46 GAO-09-455 Flood Insurance
29

Of the 10 WYOs that we reviewed:

• Only one WYO had submitted a marketing plan, and for only one year.

• FEMA officials had conducted only one marketing operational review, as 

required by their policies and procedures.

• Most WYOs did not consider the flood insurance bonus as critical to their 

company marketing strategy.

• Some WYOs generally offered flood insurance when requested but did not 

strategically market the product as a primary insurance line. 

• One of the WYOs we spoke with said that they received FEMA’s 

performance bonus even though they did no marketing at all. They

explained that they get all of their new business from those mortgage 

lenders that require flood insurance.

• Also, FEMA’s NFIP Direct program, which responds only to policy 

inquiries and does not market its services, would have qualified for the 

top bonus in 2006 if it were eligible for FEMA’s bonus program. 

Objective 2: FEMA Has Not Evaluated WYOs’ 

Marketing Efforts (cont’d)

Page 47 GAO-09-455 Flood Insurance
30

• FEMA does not have an explicit goal beyond the 5 percent annual 

increase in policies.

• The February 2006 Rand Corporation study, part of a multivolume study 

of NFIP funded by FEMA, suggested that FEMA

• assess strategies to increase market penetration among homes that 

are not subject to the mandatory purchase requirement;

• develop a marketing strategy to increase penetration in certain 

geographical areas, particularly noncoastal communities in SFHAs;

• limit the effects of policy growth on loss variability by focusing efforts 

to increase market penetration outside the southeastern part of the 

country and the Gulf States; and 

• address the low market penetration rates in communities with fewer 

than 500 homes in SFHAs.

Objective 2: A FEMA-Funded Study Has Suggested 

Marketing Goals for NFIP

Page 48 GAO-09-455 Flood Insurance
31

• As currently established, the WYO program primarily rewards companies that 

are small or new to NFIP for sales increases that may result from external 

factors.

• The bonus would be more effective if FEMA established more targeted WYO 

goals in line with its NFIP goals, such as increasing penetration in low-risk flood 

zones, among homeowners without federally backed mortgages in all zones, 

and in geographic areas with repetitive losses and low penetration rates.

Recommendation

• To improve the WYO marketing bonus program should FEMA decide to continue 

it, we recommend that the Secretary of Homeland Security direct the Under 

Secretary of Homeland Security, FEMA, to consider using more targeted 

marketing goals that are in line with FEMA’s NFIP goals. 

Objective 2: Recommendation

Page 49 GAO-09-455 Flood Insurance
32

Objective 3: FEMA Uses Four Major Oversight Tools

• FEMA’s Control Plan includes a variety of tools for overseeing WYO companies, but FEMA has not used these controls consistently.

• The Control Plan is designed to ensure that WYOs are complying with the requirements of the flood program—including assessing whether premiums 

received and claims payments disbursed are accurate—through 

• monthly data reporting, with participating WYO companies submitting signed certifications that are evaluated by FEMA’s contractor;

• claims reinspections performed by FEMA’s contractor;

• various audits by independent CPAs, including required biennial audits, audits for cause, and state insurance department audits; and

• triennial operation reviews performed by FEMA staff. 

• FEMA has also established a Standards Committee, composed of insurance company representatives and FEMA officials, to oversee the performance of 

WYO companies under the Control Plan. 

Page 50 GAO-09-455 Flood Insurance
33

Objective 3: FEMA Did Not Implement All 

Oversight Requirements 

• FEMA implemented some but not all of the requirements and procedures of the

Control Plan.

Figure 9: FEMA’s Compliance with the Control Plan for the 10 WYOs in GAO’s Sample

aFEMA officials told us that they were revising the Control Plan and no longer performed marketing, litigation, and customer service operation reviews. 

Page 51 GAO-09-455 Flood Insurance
34

Objective 3: FEMA Consistently Collected, Evaluated, and 

Reported WYO Policy and Claims Data Submissions

Our review of FEMA’s records for the 10 WYOs in our sample showed that FEMA had

collected nearly all of the required monthly data submissions.

• The Control Plan requires that FEMA collect policies, claims data, and financial statements from participating WYO companies each month.7

• FEMA documents that we reviewed showed that the agency had collected over 90 percent of the required monthly data submissions, financial statements, and signed certifications for the 10 companies in our sample. 

Our analysis also showed that FEMA had evaluated most of the monthly submissions 

for data errors and financial inconsistencies for the 10 companies in our sample.

• FEMA documents we reviewed showed that the agency had evaluated nearly 90 percent of the required monthly data submissions and financial statements, for the 10 companies in our sample. 

• FEMA regularly found errors in the companies’ submissions, but none of these errors 

were above FEMA’s tolerance threshold, which FEMA officials identified as errors 

that are 6 months old. 

• FEMA also consistently found financial inconsistencies in each submission but did not 

assess these variances to determine whether they were above the tolerance threshold.

FEMA documents we reviewed also showed that the agency had consistently reported

and summarized WYO performance under the monthly submissions component of the Control

Plan, including tracking errors, describing the causes of these errors, and logging

follow-up done on WYO companies.

7FEMA uses a contractor to manage the data collection, evaluate the data for errors and inconsistencies, and follow up with companies as needed. 

FEMA hired a new contractor for FY 2009 to perform these tasks, and FEMA officials said that processing would change from monthly to daily by fall 

2009. 

Page 52 GAO-09-455 Flood Insurance
35

Objective 3: The Claims Reinspection Program Is Consistent 

With the Control Plan

• The Control Plan requires that FEMA inspect claims payments on a sample of 

policies for large flood events. FEMA’s contractor uses flood insurance adjusters 

to visit recently damaged properties and assess whether insurance company 

adjusters have accurately determined claims. 

• According to the Control Plan, FEMA is to select files from those companies that have filed more than 400 claims for a single large flood event. 

• Of the 10 WYO companies in our sample, FEMA officials said that 3 of them were subject to claims reinspection based on the selection methodology in the Control Plan. Using FEMA's flood insurance database, we verified that FEMA accurately applied the selection methodology, and FEMA provided evidence that 

claims reinspections were performed on these three WYO companies.

Page 53 GAO-09-455 Flood Insurance
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Objective 3: FEMA Reinspected a Limited Number of Claims 

Files for Our Sample

Of the 11,998 flood claims filed in FY 2007 by the 10 WYOs in our sample, FEMA identified 1,539 claims, 

or about 13 percent of the total, that were eligible for reinspection according to the methodology in the 

Control Plan.

• These eligible claims represent about 15 percent, or $31.2 million of the $210.2 million in claims paid in FY 2007. 

• FEMA reported that it actually reinspected 243 (about 16 percent) of the eligible claims. We found that this number represented about 2 percent of the total claims (11,998) filed for these 10 companies in FY 

2007.

We also confirmed that FEMA implemented a previous GAO recommendation to select claims files at

random as part of their claims operation reviews. With the claims operation reviews, FEMA can potentially 

evaluate the accuracy of those claims files that were not selected for reinspection. 

Figure 10: Claims Reinspections for FY 2007 for the 10 WYOs in GAO’s Sample

Page 54 GAO-09-455 Flood Insurance
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Objective 3: FEMA Did Not Collect All the Audits Required in 

the Control Plan

• FEMA collected some but not all of the required biennial audits for the 10 

companies in our sample. 

• FEMA did not perform any audits for cause or collect any state insurance 

department audits on these 10 companies.

Table 5: Biennial Audits Collected from GAO’s WYO Sample between Fiscal Years 

2000 and 2007

2

Few biennial audits collected

Number of companies in our sample for which FEMA collected biennial audits for 

less than one third of the years we reviewed

6

Some biennial audits collected

Number of companies in our sample for which FEMA collected biennial audits for 

one-third to two-thirds of the years we reviewed

2

Most biennial audits collected

Number of companies in our sample for which FEMA collected biennial audits 

covering two-thirds or more of the years we reviewed

0

Complete set of biennial audits collected

Number of companies in our sample for which FEMA had a full set of biennial audits 

covering the period of review

Page 55 GAO-09-455 Flood Insurance
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Objective 3: Starting in 2006, FEMA Began Consistently 

Collecting Biennial Audits

• In response to findings that FEMA had failed to consistently enforce the biennial 

audit requirement, FEMA officials told us that they had exempted some 

companies from this requirement after the 2005 hurricane season.

• The officials said that they had exempted those companies that said that they 

were overwhelmed with administering flood claims after the 2005 hurricane 

season. 

• Starting in fiscal year 2006, however, we found that FEMA consistently collected 

the biennial audits from the 10 insurance companies in our sample. 

Page 56 GAO-09-455 Flood Insurance
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Objective 3: FEMA Focused on Underwriting and Claims 

Operation Reviews

0 0 9 9 10

Number of companies in our sample 

that did not undergo any operation 

reviews for the period

1 2 1 1 0

Number of companies in our sample 

that had 1 or more operation reviews

missing for the period

9 8 0 0 0

Number of companies in our sample 

that had a complete set of operation 

reviews for the period

Litigation Customer 

Service Underwriting Claims Marketing

While FEMA conducted nearly all of the required underwriting and claims reviews 

between FY 2000 and FY 2007, it conducted almost none of the marketing, 

customer service, and litigation reviews.

Table 6: Operation Reviews for GAO’s Sample of 10 WYOs between FY 2000 and FY 

2007

Page 57 GAO-09-455 Flood Insurance
40

Objective 3: FEMA Focused on Underwriting and Claims 

Operation Reviews

Nearly all of the operation reviews FEMA conducted involved underwriting and

claims.

• FEMA officials said that they focused on claims and underwriting reviews because these areas were the most important to determining whether 

participating insurance companies were collecting appropriate premiums and making appropriate claims payments. 

FEMA officials said that they no longer performed marketing, litigation, and

customer service operation reviews because each of these functions were being

reviewed by other methods.

• Litigation: FEMA officials said that they collected the data to ensure correct 

litigation payments to insurance companies but did not do operation reviews 

for these cases. 

• Customer Service: FEMA officials said that they relied on state insurance 

departments to report to them any deficiencies in customer service from 

participating companies. 

• Marketing: FEMA officials said that companies were already incentivized to 

market flood insurance under the bonus program and that as a result, 

FEMA no longer needed to perform operation reviews to ensure that the 

companies were actually marketing flood polices.

Page 58 GAO-09-455 Flood Insurance
41

Objective 3: FEMA’s Draft Control Plan Removes Three 

Operation Review Requirements

FEMA officials provided a draft Control Plan showing that the agency would no

longer require the marketing, litigation, and customer service operation reviews.

• We reviewed the draft Control Plan and found that FEMA had not replaced the litigation and customer service operation reviews with the information that they 

said that they had collected in lieu of these reviews.

• FEMA officials said that they collected information on all payments made for litigation expenses and approved those that were for more than $5,000. 

However, their draft Control Plan did not include this oversight requirement. 

• In addition, FEMA staff said that they relied on the various state insurance departments to report deficient customer service, but their draft Control Plan 

did not include this review as a component of WYO oversight. 

• Furthermore, because FEMA did not obtain any state insurance department audits on the 10 WYOs in our sample, we could not determine whether this 

information was being collected from the states for any of the WYO 

companies. 

• If FEMA views the Control Plan as its primary oversight tool, key components should be included in the plan to help ensure that WYOs are fully complying with 

program requirements.

• However, if FEMA establishes a bonus program that is more in line with its own marketing goals, FEMA will be able to measure WYO marketing efforts annually 

and may not need a separate marketing operation review.

Page 59 GAO-09-455 Flood Insurance
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Objective 3: The Standards Committee Focused on Data 

Submissions and Operation Reviews

• The Standards Committee met at least twice a year to discuss WYO performance under the Control Plan.

• Our review of committee minutes found that the discussions centered largely on monthly data reporting and claims and underwriting operation reviews.

• The committee did not discuss results from claims reinspections, biennial audits, audits for cause, or state insurance department audits.

Figure 11: Topics of Discussion at Standards Committee Meetings, October 2003 to 

March 2008

Page 60 GAO-09-455 Flood Insurance
43

Objective 3: FEMA Implemented Three Previous GAO 

Recommendations on Oversight

Table 7: Assessment of FEMA’s Implementation of Previous GAO Recommendations 

Relating to the Control Plan

Implemented

FEMA’s March 2009 draft Control Plan changes the methodology to reflect this 

recommendation and FEMA documentation showed that the agency is currently 

selecting statistically representative sample of files to review. 

Implemented

FEMA’s March 2009 draft Control Plan changes the methodology to reflect this 

recommendation, and FEMA documentation showed that the agency is currently 

selecting statistically representative sample of files to review. 

Implemented

As of FY 2006, FEMA had consistently collected the biennial audits from the 10 

WYOs in our sample. Furthermore, as of FY 2008 FEMA is using a tracking 

schedule to document audits received and those reviewed by FEMA staff. 

Partially implemented

FEMA’s March 2009 draft Control Plan changes the file selection methodology to a 

random selection, but selects only from a population that fits a certain criteria of 

over 400 claims per a single event. For our sample of 10 WYOs, we found that this 

eligible population represented a small portion (13 percent) of all claims filed in FY

2007. 

Status of recommendation

FEMA should draw statistically 

representative samples of files for 

underwriting reviews.1

Underwriting 

operation reviews

FEMA should draw statistically 

representative samples of files for 

claims reviews.1

Claims operation 

reviews

FEMA should conduct and review 

biennial audits. Biennial audits 2

FEMA should draw a statistically 

representative sample of files for 

claim reinspections.1

Claims reinspections

Previous GAO 

recommendation

Oversight component 

of the Control Plan

1 See 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). 

2 See GAO, National Flood Insurance Program: FEMA’s Management and Oversight of Payments for Insurance Company Services Should Be Improved, GAO-07-1078 (Washington, 

D.C.: Sept. 5, 2007). 

Page 61 GAO-09-455 Flood Insurance
44

Objective 3: FEMA Does Not Systematically Track or Centrally 

Maintain Reports, Inspections, Audits, and Reviews

FEMA tracks WYOs’ compliance with each component of the Control Plan but does 

not have a single, comprehensive monitoring system. 

• As of FY 2008, FEMA was tracking biennial audits and the results of its internal 

reviews of these audits.

• As of FY 2009, FEMA tracked underwriting and claims operation reviews and 

the results of these reviews.

FEMA does not centrally store WYO-specific evaluations, inspections, audits or 

reviews performed under the Control Plan.

• FEMA officials said that various staff within FEMA or their contractor manage 

the documentation of oversight performed on participating WYO companies. 

For example, FEMA’s underwriting staff manage the underwriting operation 

reviews and store the resulting documentation.

• The officials told us that there was no centralized access, either physical or 

electronic, to all the documentation produced in overseeing the WYOs under 

the Control Plan.

Page 62 GAO-09-455 Flood Insurance
45

Objective 3: Recommendations

• Because FEMA does not implement all aspects of the Control Plan, it cannot ensure that the WYOs are fully complying with program requirements.

• Compliance with the Control Plan also ensures that participating WYO companies are being compensated appropriately according to the regulations. 

• In addition, because FEMA does not systematically track and centrally store all required evaluations, inspections, audits, or reviews, FEMA management cannot have timely access to all documentation in order to help ensure that it is effectively overseeing the 90-plus participating insurance companies. 

Recommendations

To improve oversight of the WYO program and compliance with program 

requirements, we recommend that the Secretary of Homeland Security direct the 

Under Secretary of Homeland Security, FEMA, to

• consistently follow the Control Plan and ensure that each component is implemented;

• ensure that any revised Control Plan includes oversight of all functions of participating WYOs, including customer service and litigation; and

• systematically track insurance companies’ compliance with and performance under each component of the Control Plan and ensure centralized access to all 

the audits, reviews, inspections, and data analyses performed for each 

participating insurance company under the Control Plan.

Page 63 GAO-09-455 Flood Insurance
46

Objective 4: Alternatives to the Current WYO Program Would 

Involve Competitive Bidding

We identified three alternatives to FEMA’s current payment arrangement. Competition among firms could ensure that FEMA is incorporating the private sector into the flood program in a more cost-effective manner. 

Alternative 1: FEMA contracts with one or more insurance companies.

• FEMA would solicit bids or proposals for a contract—not an arrangement—with one or more insurance companies to sell and service flood polices and adjust claims. 

Alternative 2: FEMA contracts with one vendor.

• FEMA would solicit bids or proposals for a contract with a flood insurance vendor, as opposed to an insurance company, to service flood polices. This alternative is similar to 

the NFIP Direct program.

• FEMA’s contractor would sell flood insurance policies only through independent insurance agents, excluding those agents that have contractual relationships to sell policies for only one insurance company. 

Alternative 3: FEMA contracts with multiple vendors and maintains the WYO network. 

• FEMA would solicit bids or proposals for contracts from multiple flood insurance vendors to service flood polices. 

• Insurance companies that want to sell flood insurance would contract with one or more of 

these vendors to service flood policies sold by insurance company agents. 

• Since FEMA would pay vendors to administer the flood policies, participating insurance companies would not incur any operational expenses for their flood line. However, FEMA would pay the insurance companies a sales bonus for performance.

Page 64 GAO-09-455 Flood Insurance
47

Objective 4: Alternatives to the Current WYO Program Would 

Involve Competitive Bidding

Figure 12: Alternatives to FEMA’s Current Payment Structure.

Insurance company(ies)

(1 or more on contract) or

or

Current 

WYO program 1) One or more insurers 2) Contract with single vendor 3) Contract with multiple vendors

FEMA FEMA FEMA

Alternatives

Insurance companies (90+)

Flood vendors (~10)

Independent and

dependent agents

Claims

adjusters

Arrangement

based

Policyholders (5.5 million) Policyholders Policyholders Policyholders

Insurance

companies

(90+)

Flood vendors (~10)

Independent and

dependent agents

Claims

adjusters

FEMA

Independent

agents only

Claims

adjusters

Flood vendor(s) (optional) Flood vendor (1 on contract)

Insurance company’s

agents and adjusters

Contract

based

Contract

based

Contract

based

(plus oversight)

Bonus $

Source: GAO.

Page 65 GAO-09-455 Flood Insurance
48

Objective 4: Each Alternative Has Advantages and 

Disadvantages

-- A competitive process may or may not reduce the price per policy.

-- The direct relationship between the insurance industry and FEMA is 

severed, so FEMA might be less likely to incorporate insurance industry 

input.

-- Participating insurance companies would be required to use a vendor, 

even if they did not currently use one. 

-- Incorporates competition, potentially leading to lower costs. 

-- Incorporates insurance industry; maintains the current 

network of insurance companies and their sales force.

-- Removes the need to pay WYOs for servicing and claimsrelated expenses. 

-- Makes oversight easier because FEMA has a contractual 

relationship with significantly fewer companies.

Alternative 3: 

FEMA contracts with 

multiple vendors and 

maintains the WYO 

network

-- The insurance industry is not directly involved.

-- The sales network is restricted to independent agents. 

-- A Direct program failed in the early 1980s because the vendor did not 

have the industry expertise—including long-standing relationships with 

agents and adjusters—to provide competent service to policyholders.

-- Independent agents may prefer to sell through insurance companies 

that they have a relationship with rather than through a vendor.

-- Incorporates competition, potentially leading to lower costs. 

-- Makes oversight easier, with one company to oversee.

-- Improves administrative efficiency because flood vendors 

service most flood policies for the WYOs.

Alternative 2:

FEMA contracts with 

one vendor

-- A competitive process may or may not reduce the price per policy.

-- Insurance companies may not want to be federal contractors.

-- It minimizes the number of insurance companies by reducing the

number of agents, limiting choice for consumers. 

--Insurers may not offer presence in all states and territories.

-- Incorporates competition, potentially leading to lower costs. 

-- Incorporates insurance industry.

-- Makes oversight easier because fewer companies are 

involved.

Alternative 1: 

FEMA contracts with 

one or more 

insurance companies

-- Insurers are compensated per a schedule of fees rather than under a 

competitively awarded contract.

-- FEMA has not consistently been able to oversee the large number of 

WYO companies.

-- WYOs typically resort to using vendors to conform to the terms of the 

program, and FEMA does not have direct oversight of these vendors.

-- Incorporates insurance industry; maximizes the number of 

companies and agents selling flood insurance and the number 

of claims adjusters.

-- Offers presence in all states and territories.

-- Has increased participation in the program since 1983 by 

3.7 million polices.

Current program:

WYO program

Advantages Disadvantages Alternative 

structures

Table 8: Advantages and Disadvantages of Alternative WYO Structures

Page 66 GAO-09-455 Flood Insurance
49

Objective 4: Experts Had Similar Views on the Three 

Alternatives

Most WYOs said that they did not want to be federal contractors because they did 

not want to conform to requirements such as labor laws.

• As a potential cost savings, WYO officials said that the federal government 

should pass legislation to explicitly prohibit local governments from charging 

premium taxes on flood insurance premiums. 

FEMA officials that administer the WYO program were generally not receptive to 

the alternative payments structures and proposed another alternative for 

compensating WYOs.

• FEMA officials said that insurance companies did not want to become federal 

contractors (alternative 1), that using a single vendor would likely result in fewer 

agents selling flood insurance, and that the hybrid approach would sever the 

long-standing relationship between FEMA and the insurance industry. 

• FEMA officials stated that in the past, they had considered various alternative 

approaches, including a pure premium approach to reimbursing the insurance 

companies that would authorize the WYOs to charge any price per policy to 

cover their expenses. This price would be above a minimum amount that FEMA 

identified as necessary to cover expected flood claims (the pure premium) and 

would allow the insurance companies to compete on price. 

Page 67 GAO-09-455 Flood Insurance
50

Objective 4: Experts Had Similar Views on the Three 

Alternatives

Flood consultants, vendors, and trade groups were more receptive to exploring the 

third alternative (FEMA contracts with multiple vendors).

• For example, one vendor we spoke to emphasized the need for multiple vendors 

in FEMA’s contract so that participating insurance companies could have a 

choice in determining which vendor to use, depending on their needs. 

Page 68 GAO-09-455 Flood Insurance
51

FEMA Comments

• We provided a draft of this presentation to FEMA for its 

review and they agreed with the content.

Page 69 GAO-09-455 Flood Insurance
Appendix II: Scope and Methodology Appendix II: Scope and Methodology 

WYO Expenses To assess FEMA’s practice of determining the amounts it pays to WYO 

insurance companies for their services without considering the 

companies’ actual expenses, we compared the payments FEMA made to 

six WYO companies to the companies’ actual flood insurance expenses. 

Insurance companies report flood insurance expense data in annual 

statements that are submitted to NAIC, which also include expenses for 

the companies’ other property and casualty lines of business. The six 

WYOs we selected wrote flood insurance policies whose premiums totaled 

approximately 53 percent of the total WYO program premiums in fiscal 

year 2007. Our sample is not a representative sample of all WYOs, so the 

results of our analysis cannot be generalized to the universe of WYOs. 

We reviewed NAIC and FEMA flood financial information to assess the 

reliability of the information for our purposes. Because FEMA’s payments 

to WYOs are determined by applying various proxies to premiums written 

or claim losses, we identified differences between the written premiums 

and claim losses that the companies reported to FEMA and NAIC. We 

obtained from WYO company officials explanations of these differences 

and determined that they would not significantly impact the companies’ 

flood expenses. Further, to review the payments and expenses for the six 

companies selected, we 

• converted FEMA’s fiscal year WYO payment data to calendar year 

amounts for comparison to calendar year actual expenses reported to 

NAIC; 

• recalculated the expense payments reported by the six WYOs to FEMA on 

a test basis, using the written premium and claim losses incurred amounts 

the WYOs reported to FEMA and FEMA’s payment rates, all without 

exception; and 

• interviewed officials of the WYOs regarding their flood operations, 

accounting for and assignment of expenses to the flood line, and reporting 

of flood line data to NAIC. 

To assist in comparing actual expenses to the expense payments, we 

adjusted the WYOs’ reported flood expenses in cases where, for example, 

companies offset their expenses incurred with the payments they received 

from FEMA. We found that the data the six companies submitted to NAIC 

and FEMA were, as adjusted by us, sufficiently reliable for our purposes. 

For the purposes of this audit, we considered profits to be to the 

difference between the amounts paid to the WYO companies and the 

Page 70 GAO-09-455 Flood Insurance
Appendix II: Scope and Methodology 

companies’ actual flood expenses on a pretax basis. In determining profits, 

we excluded miscellaneous other companywide income and expenses. 

We did not audit the financial data the six WYOs submitted to FEMA, 

NAIC, or to us. However, the federal flood financial information the 

companies submitted to NAIC was included in financial statements 

prepared in accordance with statutory accounting principles that were 

audited by independent certified public accounting firms, which expressed 

unqualified opinions for those years covered by our review. We compared 

amounts in the audited financial statements for calendar year 2005 to 2007 

to amounts the companies reported in their annual statements for earned 

premiums, losses incurred, and underwriting and loss adjustment 

expenses incurred for all lines of property and casualty insurance. The 

differences we identified did not significantly impact our analysis. Further, 

the federal flood financial information the companies submitted to FEMA 

was included in biennial financial statements prepared in accordance with 

generally accepted accounting principles that were also audited by 

independent certified public accounting firms who expressed unqualified 

opinions. We reviewed the audited biennial financial statements for four of 

the six companies that had submitted separately audited statements to 

FEMA. The differences we identified did not significantly impact our 

analysis. 

Marketing and Bonuses To evaluate the extent to which bonus payments to WYOs for increasing 

the number of flood policies they sell were based on WYOs’ actual 

marketing efforts, we discussed the bonus payment methodology with 

FEMA staff, WYOs, and other stakeholders and reviewed documents 

relating to the methodology used to make the bonus payments. We 

analyzed the bonus payments and evaluated the extent to which they 

could be attributed to the marketing efforts of WYOs or to other external 

factors, such as flood events and economic conditions. To determine 

whether the existing bonus formula benefited WYOs with fewer policies 

and years in NFIP, we compared those WYOs by size and year in the 

program to those receiving top bonuses. 

For the 10 WYOs that we selected to interview, we identified those that 

had submitted marketing plans or undergone a marketing operations 

review. We also asked whether the bonus was a major factor in their 

marketing efforts and whether they considered flood insurance to be a 

primary insurance line. 

Page 71 GAO-09-455 Flood Insurance
Appendix II: Scope and Methodology 

Program Oversight To evaluate FEMA’s compliance with the Control Plan, we discussed 

procedures with appropriate FEMA staff, requested and reviewed all the 

documents that were required under the plan, and discussed these 

requirements with the WYOs and other stakeholders. To address FEMA’s 

oversight of the WYOs, we selected a sample of 10 WYOs that 

administered over 50 percent of the flood insurance policies written for 

the year 2007. Our sample included companies that covered the spectrum 

of WYOs—for instance, they differed in size based on premiums written, 

losses incurred, and overall rank in market share and included companies 

that did and did not use a vendor. 

We used a data collection instrument to review the required documents for 

the 10 WYOs selected for our review. Our data collection instrument 

included the four major components of FEMA’s Control Plan: (1) monthly 

data and financial reporting ; (2) claims reinspections performed by 

FEMA’s contractor.; (3) various audits by independent CPAs, including 

required biennial audits, audits for cause, and state insurance department 

audits; and (4) triennial operation reviews performed by FEMA staff. We 

used the 1999 Control Plan that was being used at the time of our review 

NFIP has a draft plan that it began developing in 2007. 

Alternative Administrative 

Structures 

In consultation with congressional staffers, we identified three possible 

alternatives that would incorporate a competitive feature. To evaluate the 

advantages and disadvantages of the three alternatives to the WYO 

program, we discussed the alternatives with staff within GAO; the WYOs in 

our sample; FEMA staff; and other stakeholders, such as flood insurance 

vendors and consultants. 

We conducted this audit from December 2007 to July 2009 in accordance 

with generally accepted government auditing standards. Those standards 

require that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and conclusions 

based on our audit objectives. We believe the evidence we obtained 

provides a reasonable basis for our findings and conclusions based on our 

audit objectives. 

Page 72 GAO-09-455 Flood Insurance
Appendix III: Comments from the Department Appendix III: Comments from the of Homeland Security 

Department of Homeland Security 

Page 73 GAO-09-455 Flood Insurance 
Appendix III: Comments from the Department 

of Homeland Security 

Page 74 GAO-09-455 Flood Insurance
Appendix III: Comments from the Department 

of Homeland Security 

Page 75 GAO-09-455 Flood Insurance
Appendix III: Comments from the Department 

of Homeland Security 

Page 76 GAO-09-455 Flood Insurance
Appendix III: Comments from the Department 

of Homeland Security 

Page 77 GAO-09-455 Flood Insurance
Appendix IV: 

A

GAO Contacts and Staff 

cknowledgments 

Page 78 GAO-09-455

Appendix IV: GAO Contacts and Staff 

Acknowledgments 

Orice Williams Brown, (202) 512-8678 or willamso@gao.gov

Jeanette M. Franzel, (202) 512-2600 or franzelj@gao.gov

In addition to the contacts named above, the following individuals made 

key contributions to this report: Andrew E. Finkel (Assistant Director), 

Robert Owens (Assistant Director), Grace Haskins (Analyst-in-Charge), H. 

Donald Campbell, Emily Chalmers, Tony Eason, Fredrick Evans, Jeffrey 

Isaacs, Scott McNulty, Marc Molino, Roberto Pinero, Paul Revesz, and 

Carrie Watkins. 

 Flood Insurance 

GAO Contacts 

Staff 

Acknowledgments 

(250452) 
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